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US recovers all its losses after China calls bond buying story “fake news”. GBP is weakest of the major currencies

By Nick Parsons

The GBP was notably weak early on Wednesday, hitting a fresh 2018 low of USD1.3486 before jumping more than half a cent on the Chinese comments about buying US bonds (see US Dollar). Even after reaching 1.3555, the pound couldn’t sustain these gains and spent the rest of the day falling back to the low 1.35’s to leave it the worst performing currency on the day. Overnight in Asia it has fallen once more, and is down against all the major currencies we track here, though it has not yet broken down through yesterday’s low against the USD.

It took the UK Government almost 18 months after the referendum to discuss in Cabinet what it wants the post-Brexit landscape to be. It has never set out properly what a “bold and imaginative” deal might actually look like. Yet, Chancellor Philip Hammond in Berlin yesterday complained that, “Since the referendum . . . there has been a marked asymmetry between the enthusiasm expressed by certain third countries to pursue future trade deals with the UK and the relative silence from Europe on what the EU wants our future relationship to look like.” We might well imagine there’ll be some push-back against these comments from the EU side…

Whilst politicians are focusing efforts on gaining access to the Eurozone for UK banks and financial companies post-Brexit, today we’ll see what’s been happening to the supply of – and demand for – bank credit at home in the UK. The Bank of England releases its Quarterly Survey of Credit Conditions at 9.30 this morning; an always very useful and comprehensive guide to the state of the economy and the banking sector.

There are no other economic statics this Thursday and the pound opens in London this morning at USD1.3495, AUD1.7135 and NZD1.8745.

The Dollar has had a very lively 24 hours. On Wednesday, it was slammed lower in the European morning after reported comments that officials that who are reviewing China's FX holdings have recommended slowing or halting buying of US Treasuries. The USD index was sold down to a low of 91.60 before recovering to 92.00 in the New York afternoon.

The Chinese comments said that US government bonds are becoming less attractive relative to other assets and that trade tensions with the US may provide a reason to slow or stop buying American debt. We said yesterday in our Sydney morning commentary that, “Of course, there is no way of knowing the status of the comments: whether they are a genuine sign of an imminent policy shift or merely a diplomatic response to the US Administration’s talk of tightening restrictions on China’s exports.”

Overnight, China’s State Administration of Foreign Exchange (SAFE) has put out a statement saying, “"We are also aware of the news through some media reports. We think the report might have cited wrong sources or may be fake news… China has always managed its forex reserves investments in accordance with the principle of diversification, to ensure the overall safety of FX assets, to maintain and increase their value. Like other investments, FX reserves investments in U.S. treasuries is managed in a professional way according to market conditions and investment needs. China’s FX reserves management department is a responsible investor both for the FX reserves and for the market in which it participates. China’s investments have promoted the stability of international financial markets and the preservation and appreciation of China’s foreign exchange reserves.”

Whether it was “fake news” or not, one lasting effect of the fiasco is to remind international investors and the US Administration of the financial power of China. The US Dollar index is now back where it was 24 hours ago at 92.08 and US 10-year bonds are back at 2.53% having hit 2.59% yesterday. On the domestic economic calendar in the US today, we have weekly jobless claims and December’s producer price index.


The EUR had a poor day on Monday, slumping to the bottom of the one-day performance table despite further upbeat survey indicators. Yesterday, also, it shrugged off a very solid set of German industrial numbers as markets continue to fret about the political situation in Germany. EUR/USD slipped to a 2018 low of USD1.1919; its lowest since December 28th and has only recovered around 10 pips of its losses in the overnight session in Asia.

Aside from the political concerns which we’ve been flagging up over the past few days, the interest rate differential between core European bonds and their US equivalents is now beginning to weigh on the Single European Currency. As mentioned above, 10-year US Treasuries hit a 10-month high of 2.54% yesterday but their German equivalents were up only 2.5bp to 0.45%. For sure this is still well above the December lows of 0.30% but the differential with the United States is back over 200bp at the 10-year maturity.

For the moment, annual CPI inflation in the euro zone remains stubbornly low at 1.4%, or just 1.1% when volatile food and energy prices are stripped out. This is well below the ECB’s target of an inflation rate of close to but just under 2 percent. Though ECB Council member Ewald Nowotny said in an interview published on January 2nd that QE could end in 2018 if the euro zone economy continues to grow strongly and on Sunday, the Bundesbank’s Jens Weidmann said the ECB should set a date to end QE, the market is still not fully pricing a rate hike until early 2019. Strong economic data are certainly helping the EUR but the yield differential is now creating quite a headwind for the exchange rate against the US Dollar.

The EUR opens in Europe this morning at USD1.1930 and GBP/EUR1.1335.

The Australian Dollar wasn’t having a great day on Wednesday, languishing in the low 78’s for much of the Asian session and London morning before rallying in line with all the other major currencies on the reported Chinese comments about buying of US Treasury bonds The Aussie was then able to benefit in two ways: firstly from the weakness of the US Dollar, and second from a rise in gold prices from $1313 to $1318. It hit a high of USD0.7861 late in the London morning before subsequently easing back a little in New York. Overnight, the AUD has printed a fresh high of USD0.7878 - its best level since October 18th – after a very punchy set of retail sales figures.

Australian retail turnover rose 1.2% in November 2017 after a 0.5 per cent rise the previous month. This was way ahead of consensus expectations for a more modest +0.4% m/m gain. The Australian Bureau of Statistics noted, “rises were led by the household goods (4.5%) and other retailing industries (2.2%). Seasonally adjusted sales in both these industries are influenced by the release of the iPhone X and the increasing popularity of promotions in November, including Black Friday sales." There were also rises for clothing, footwear and personal accessory retailing (1.6%) and cafes, restaurants and takeaways (0.4%) Department stores fell (-1.1%) whilst food was unchanged in the month.

After news earlier this week of higher job vacancies and strong recent readings on employment, we’d wondered if it was time for consumers to dip into their pockets and actually spend some cash. They certainly did so in November and the detailed figures show they did so from their computers or smartphones: Online retail turnover contributed 5.5% to total retail turnover in original terms. This is the largest contribution to total retail turnover from online sales in the history of the online series.

The AUD opens in Europe this morning at USD0.7875 with GBP/AUD at 1.7135.

After its great start to the New Year 2018, the Canadian Dollar has not done quite so well this week as investors start to question whether a lot of good news is already ‘in the price’ and whether a combination of two very good employment reports and a very upbeat Q4 Business Outlook Survey really does mean that a rate hike at next Wednesday’s BoC monetary policy meeting is a done deal. USD/CAD touched a low of 1.2375 last Friday but after touching a high of 1.2490 in Europe yesterday, it then surged late in the New York afternoon to a high of 1.2578.

One other factor complicating the outlook is the progress or otherwise of talks on a renegotiation of the North American Free Trade Agreement (NAFTA). A report by the Reuters news agency on Wednesday afternoon, citing two government sources, said Canada is increasingly convinced that President Donald Trump will soon announce the United States intends to pull out of NAFTA. President Trump has long called the 1994 treaty a bad deal that hurts American workers.

According to the Reuters report, “the US negotiating team has set proposals that have alarmed their Canadian and Mexican counterparts. Among the most divisive are plans to establish rules of origin for NAFTA goods that would set minimum levels of U.S. content for autos, a sunset clause that would terminate the trade deal if it is not renegotiated every five years, and ending the so-called Chapter 19 dispute mechanism”. A White House spokesman said “there has been no change in the president’s position on NAFTA”. Officials are due to hold a sixth and penultimate round of negotiations in Montreal from January 23-28.

The Canadian Dollar opens in London this morning at USD1.2555 and GBP/CAD1.6935.

Once again, the New Zealand Dollar was top of the one-day performance table on Wednesday and has topped the table for four of the past five trading days. The flightless bird reached a high in the London morning of USD0.7216; the first time it has been on a US 72 cents big figure since way back on October 1st. Later in the day it was back on 71 cents and overnight in Asia it has fluctuation in a fairly tight range either side of USD0.7200.

The first NZ private sector numbers of the year of relevance to foreign exchange markets were out overnight. Data from government valuer Quotable Value (QV) on Thursday showed its residential property price index rose 6.6% year-on-year last month, picking up pace from the 6.4% rise in November. The robust growth in the final two months of the year was in stark contrast to a slowdown from the middle of the year as sentiment was dampened by uncertainty over an election in September, which brought in a new Labour-led government. “This was partly due to buyers delaying purchasing until the election result was decided and may also have been in part due to some buyers racing to purchase before the new foreign buyers’ ban,” said QV.

The new government has vowed to shake up the property market and introduce a ban on foreign homebuyers in the first few months of 2018 although the RBNZ has announced it will ease back its macro-prudential mortgage lending curbs at the start of 2018. House prices in Auckland are up only 0.5% over the past 12 months though the QV index is now 61.6 percent above the market’s previous peak in late 2007.

The Kiwi Dollar opens in Europe this morning at USD0.7165 with AUD/NZD at 1.09210 and GBP/NZD1.8870.