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EUR extends gains against GBP after ECB shock. USD steady at lower levels ahead of CPI figures today.

By Nick Parsons

The GBP had a classic day of two halves on Thursday; weak in the morning after the publication of the BoE Credit Conditions Survey (see below) but then rallying hard against the USD – but not the AUD, NZD or EUR - during the London afternoon. The pound hit a fresh 2018 low of 1.3461 just before the ECB lit a fire under the EUR but by the close of business in Europe it had gained more than three quarters of a cent to a high of 1.3547. Overnight in Asia it extended these gains to just below 1.3560.

The Bank of England Quarterly Survey of Credit Conditions for Q4 2017 was perhaps more encouraging from a regulatory perspective than in terms of the economic outlook as it shows some behavioural changes on the part of both borrowers and lenders. Lenders reported that the availability of secured credit to households was unchanged in the three months to mid-December 2017 and expected no change over the next three months to mid-March 2018. The availability of unsecured credit to households was reported to have decreased again in Q4, such that reductions were reported in all four quarters of 2017. Lenders expected a significant decrease in Q1. Credit scoring criteria for granting total unsecured loan applications tightened again in Q4, and lenders expected them to tighten significantly further in Q1.

On the demand side, lenders reported that household demand for secured lending for remortgaging increased significantly in Q4. At +49, the net percentage balance suggested the largest quarter-on-quarter change in demand for this type of lending since the falls reported in early 2009. While demand for credit card lending was reported to be broadly unchanged in Q4, demand for other unsecured lending was reported to have fallen significantly. This is the first material reported fall in demand for either component of unsecured lending since the fourth quarter of 2015.

Good news, then, from a financial stability perspective, but maybe not so good in terms of driving the UK economy forward into 2018. There are no other economic statics this Friday and the pound opens in London this morning at USD1.3555, AUD1.7185 and NZD1.8700.

The last 48 hours have been a pretty wild ride for the US Dollar. ‘Fake news’ from China had seen it fall sharply then erase all its losses before the ECB’s bombshell (see below) hit the foreign exchange market on Thursday and sent the USD tumbling once more. Having recovered from 91.60 to a high in London of 92.17, the US Dollar Index against a basket of major currencies fell sharply throughout the New York session to end the day back down at 91.50. Overnight in Asia it has been down to 91.44 before recovering back to last night’s close.

As well as the ECB news, the USD was not helped by a very soft set of US PPI figures. The Labor Department said its producer price index for final demand slipped 0.1% last month. That was the first drop in the PPI since August 2016 and followed two straight monthly increases of 0.4%. In the 12 months through December, PPI rose 2.6% after accelerating to 3.1% in November. There isn’t a perfect – or even a very good – correlation between PPI and CPI on a monthly basis. Indeed, if there was, there’d be no need to publish CPI figures separately or for markets ever to worry about them: all the fresh information value would be in the PPI.

We’ve said before that the FX market reaction is often to shoot first and ask questions later so it would have been a brave analyst who stood up in the middle of a busy dealing room to announce that the PPI figures didn’t matter. The market has passed its verdict that soft PPI means expectations for CPI today should be lowered. That’s probably a wrong assumption but we’ll see this afternoon. Consensus expectations are for a +0.2% m/m gain to leave the annual rate of CPI inflation at 2.1%. Separate but simultaneously released numbers on December retail sales are expected to show both the headline and core (ex-autos) measures rose 0.4% on the month.

The US Dollar index opens in London at 91.48 whilst US 10-year bonds are back at 2.54% from 2.59% earlier in the week.


The euro was quietly trading in the USD1.1940’s in the European morning on Thursday, caught between the usual opposing forces of very strong economic data and worries about German politics. Then, at lunchtime, the ECB released its usually bland account of the last monetary policy meeting of the Governing Council. Buried deep in the report, the ECB dropped a bombshell on to financial markets. Bear with us here please as it’s a bit technical…

The ECB said, “The language pertaining to various dimensions of the monetary policy stance and forward guidance could be revisited early in the coming year. In particular, as progress was made towards a sustained adjustment in the path of inflation, the relative importance of the forward guidance on policy rates would increase... From this perspective, the Governing Council’s forward guidance framework would evolve naturally, in line with the established sequencing between the APP and interest rate guidance. It was suggested that the Governing Council’s communication should be adjusted gradually over time to avoid sudden and unwarranted movements in financial conditions.”

In plain English, the ECB had previously stuck with a public view that there is no need to change forward guidance on interest rates for some considerable time and that a change in interest rates would not come until well after the end of QE (or the Asset Purchase Programme as it is formally known). Indeed, the interest rate market was still not fully pricing an ECB rate hike until early 2019. But, if it is now saying it will need to alter its guidance, then the FX and interest rate markets jumped to the logical conclusion that this is the precursor to a shift in ECB interest rate policy. Hence, the EUR jumped from 1.1940 to a high of 1.2050 and to joint top of the one-day leader board with the NZD.

It will be interesting to see if they now follow through with the usual tactic of sending out “ECB sources” to try to push back against these new market expectations… For now, the EUR opens in Europe this morning at USD1.2060 and GBP/EUR1.1235.

AUD/USD rose more than 40 pips on Thursday but could still only make it to third place on the one-day performance table behind the NZD (yet again!) and the EUR. After an early boost locally from retail sales figures which took it from USD0.7840 to 0.7875, it then traded pretty much sideways until late in the New York afternoon when it reached a fresh 14-week high of 0.7895; the best since late September. Overnight in Asia it has marginally extended these gains to just a couple of pips below 79 cents.

The AUD was quite resilient in the face of latest Chinese trade data which showed a big slowing of imports last month. China’s exports for the full year rose 7.9%, the fastest rate since 2013, while imports gained 15.9%, the best since 2011. For December exports rose 10.9% from a year earlier, beating analysts’ forecast of a 9.1% increase whilst imports grew at a slower pace of 4.5%. That left the country with a trade surplus of $54 billion for the month, the highest since January 2016.

As well as the strength of domestic economic data the AUD has also been given a boost from higher gold prices. The yellow metal is up $11 per ounce over the past 24 hours to $1328; the highest since September 15th 2017, whilst silver, platinum and aluminium have all registered gains. AUD/USD hasn’t been on a US 80 cents big figure since September 20th but given the foreign exchange market’s love of round numbers, this is the level which will be increasingly talked about now.

The AUD opens in Europe this morning at USD0.7885 with GBP/AUD at 1.7185.

The Canadian Dollar has had a very poor week so far week as investors start to question whether a lot of good news is already ‘in the price’ and whether a rate hike at next week’s’s BoC monetary policy meeting really is a done deal. USD/CAD touched a low of 1.2375 last Friday but was up at 1.2585 on Thursday. The catalyst for this latest sell-off was concern over the renegotiation of the North American Free Trade Agreement (NAFTA) between the United States, Canada and Mexico.

A report by the Reuters news agency on Wednesday afternoon, citing two government sources, and picked up immediately by all the Canadian newspapers and TV channels said that 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 and during the presidential campaign, called it the "worst trade deal in the history of the country."

In a new world of media engagement and direct communications with an audience, it is increasingly difficult to separate fact from fiction, and to determine what is real and what is fake news. The NAFTA story’s sources are no doubt genuine, but their motives are unknown. Was it intended merely to extract further concessions or a genuine warning about future progress? After all, a NAFTA 6-month termination letter from President Trump could just be an elaborate bluff to gain negotiation leverage. We simply don’t know.

Amidst all the continued uncertainty, the Canadian Dollar opens in London this morning at USD1.2535 and GBP/CAD1.6990.

At the risk of repeating ourselves once more, the New Zealand Dollar was again top of the one-day performance table on Thursday and has now occupied this spot for five of the past six trading days. This time, however, it had to share the honours with the euro. The Kiwi reached a high in the New York afternoon of USD0.7255; the highest since September 26th when it was just beginning its post-Election slide all the way down to 0.6800 in late November. Overnight in Asia it extended gains to 0.7270 but subsequently slipped around 20 pips.

Given that the remarkable rally in the NZD has come without the support of any fresh incoming economic news (apart from Wednesday’s QV house prices), November building permits data were never likely to be a big market mover. Nonetheless, Statistics New Zealand always provide a fascinating amount of detail in their economic releases and they are an endless source of information and entertainment for your author. We know that not only did November’s numbers show an 11% m/m increase after 10% drop in October, but that within the total of 3,262 new dwellings there were 1,870 houses, 577 townhouses, flats, and units (the highest number on record), 272 retirement village units and 543 apartments (a 9-year high).

The Kiwi Dollar opens in Europe this morning at USD0.7255 with AUD/NZD at 1.0875 and GBP/NZD1.8680.