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GBP a touch weaker ahead of CPI data and on fresh Brexit news. USD steadies after Monday’s sharp drop.

By Nick Parsons

It’s quite unusual to begin a commentary on the GBP by noting that it is lower than last night’s closing levels. On Friday, the British Pound traded at USD1.35, 1.36 and 1.37. Yesterday it moved on to 1.38 around the middle of the European morning but after a quick half a cent pullback, then went on to a best level in New York around 1.3815. Overnight, with a somewhat steadier US Dollar, GBP/USD is around 25-30 pips lower at 1.3785.

This morning, the Guardian newspaper says, “Theresa May has been hit by a double Brexit blow”. A document on Michel Barnier’s demands for the transition period, leaked to the paper, reveals that the EU plans to insist on the free movement of people throughout the transition period and the inclusion of people moving to the UK before 31 December 2020 in the terms of an agreement on rights for nationals from the rest of Europe post-Brexit. The UK had at one time wanted the agreement on citizens to be limited to people who moved to the UK before 29 March 2017, when Theresa May triggered Article 50.

Perhaps more seriously, the Guardian report claims that, “repeated representations have been made to EU officials by Oslo over their fears that an overly generous offer to the UK will fuel calls in Norway to renegotiate its ties with the bloc, according to senior diplomatic sources. Norway makes larger financial contributions to the EU per capita than the UK and accepts free movement of people in order to have access to the single market. But it has no decision-making role in Brussels’ institutions. A senior official said: “The Norwegians are following this very closely to make sure that we are not giving the UK a much more favourable deal.”

Back to the UK economy, today brings the inflation numbers. The annual rate of CPI inflation was 3.1% in November 2017, up from 3.0% in October; it was last higher in March 2012. The consensus for December is that the annual rate might slip back a tenth to 3.0% as seasonal promotions and discounting at Christmas offset a continued increase in petrol prices. Ahead of this, the pound opens in London this morning at USD1.3785, AUD1.7300 and NZD1.8930.

On Friday, the USD broke below last year’s September 7th low of 91.00; taking the index down to its lowest level in more than 3 years at 90.50. Having been steady in the Asia session and opened in London around 90.45, the Dollar’s index yesterday tumbled to 89.98; the lowest since December 19th 2014. Overnight it has steadied a little and is clinging – just – to an index level of 90.

It is another one of those periods when the dollar is falling because it is falling: momentum itself is one of the biggest drivers of the price. Certainly, there was nothing in last week’s numbers – core CPI greater than expected and a stronger than consensus retail sales report – that would have knocked the Fed off its tightening bias or suggested that growth expectations needed to be revised lower. The market-derived probability for a 25bp hike at the March FOMC meeting has gone up from 67% a week ago to 73% now and there’s a tiny chance (2%) of a surprise hike at the January 31st meeting.

Cash equity markets were closed yesterday for the Martin Luther King holiday but futures on the S+P 500 index rose around 7 points whilst DJIA futures advanced 150 points or 0.6%. On January 4th, the Dow Jones Industrial Average jumped past 25,000 for the first time ever and by the close of business that day it had made the fastest run ever to a fresh 1000-point milestone. The jump from 24,000 to 25,000 took 23 trading days. The move in the futures market to 26,017 has taken 8 days!

The US Dollar index opens in London at 90.05 whilst US 10-year bonds are 1bp lower in yield at 2.54%.

 

It is only a week ago that the euro was trading down at a 2018 low of USD1.1918 and here we are up more than 3 ½ cents from that level after a surge beginning on Thursday lunchtime extended into a third day. The EUR opened in London yesterday morning around USD1.2210 then subsequently added another half a cent, largely on the absence of any attempt from monetary officials to express discomfort with its current level or pace of appreciation.

In an interview with the Börsen-Zeitung in Germany, ECB Governing Council member Ardo Hansson said that that many eurozone countries are badly prepared for interest rate hikes in the euro area. The head of the central bank of Estonia made it very clear that the European Central Bank (ECB) is in the process of normalizing its ultra-loose monetary policy and could not take account of individual countries. Hansson said the bond-buying program should be ended after September 2018 if there were no nasty surprises: "If growth and inflation are more or less in line with the projections, it would certainly be conceivable and appropriate to end the purchases after September. Why not?... The last step to zero is not a big deal anymore. You do not have to do a lot of fine-tuning. I think we can go to zero in one step without any problems.” As for the euro, the appreciation of the single currency “is not a threat to the inflation outlook up to now, and one shouldn’t overdramatize it.”

ECB Council Member and Bundesbank President Jens Weidmann is speaking along with his colleague Benoit Coeure at an IMF conference on Thursday and it will be interesting if they share the same hard-line stance as their Estonian colleague.

The EUR opens in Europe this morning at USD1.2270 and GBP/EUR1.1245.

The Australian Dollar managed to extend its recent gains in Monday’s Northern Hemisphere trading and ended up joint strongest of the major currencies we track here, along with the NZD. More than half its rise against the US Dollar had already taken place before London arrived at work; AUD/USD had risen from around 0.7910 at the Sydney open to 0.7950 by the time the first Europeans got to their desks. As the rising EUR continued to pressure the USD index, so the AUD rose to an intra-day high in New York of 0.7975; the highest since September 21st.

Aside from the general weakness of the US Dollar after the ECB’s pre-announcement of a change of forward guidance later in the year, the main driver of the Australian Dollar was continued strength in the gold price. The yellow metal began last week at $1318 per ounce and after dipping to $1309 on Wednesday, it then rose persistently and virtually without correction up to a high of $1337 on Friday; the highest since September 10th 2017. Yesterday, gold added another $5 to $1342 to be up $33 in just four trading sessions.

In a week which will be dominated locally by the December employment report on Thursday, there’s still plenty of second and even third tier data to keep the statistics enthusiasts occupied. Earlier today we saw monthly motor vehicle sales; the final time the Australian Bureau of Statistics publishes this series. In December there were a seasonally-adjusted 36,339 passenger vehicles registered, 42,240 SUV’s and 25,164 ‘other vehicles’ to give a total of 103,743. This was a 0.2% increase m/m and a 4.5% rise y/y.

The ABS also released figures on dwelling approvals. These showed 21,055 units were approved; an 11.7% monthly increase and a 17.1% y/y gain. This was driven largely by high-rise apartments in Victoria which jumped 38% after a 21% rise in October, while the rest of Australia was relatively flat, down 2.0% in the month following October’s 8.3% drop.

The AUD opens in Europe this morning at USD0.7965 with GBP/AUD at 1.7325.

Having gone from being the strongest currency in the first week of the New Year 2018 to the weakest in the second week, the Canadian Dollar has been very steady over the first few sessions of this third week. Indeed, for the last 24 hours USD/CAD has traded sideways in a 40 pip range from just 1.2407 to 1.2547.

Market expectations about the Bank of Canada have swung quite a bit. Back in December, a January rate hike was only a 50-50 call. After the second strong monthly employment report, the probability of a 25bp hike jumped to 90% but after the uncertainties over what changes to NAFTA might mean, it was back down to just 60%. Yesterday it was back at 85%. In a Reuters poll on Monday, just eight of 31 analysts surveyed said they expect the BoC to hold rates steady on Wednesday as it waits for inflation to pick up and to see how the next round of NAFTA negotiations later this month proceed.

The median forecast in the Reuters poll is for one rate increase apiece in the third and fourth quarters, bringing the benchmark to 1.75 percent by the end of 2018. Analysts predict another hike in the first quarter of 2019. Economic growth is expected to average 2.2 percent this year, slightly higher than the 2.1 percent forecast in the previous poll in October. Expectations for 2019 were unchanged at 1.8 percent.

Amidst all the continued uncertainty, the Canadian Dollar opens in London this morning at USD1.2430 and GBP/CAD1.7140.

Given its recent volatility, it should come as little surprise that having been in joint top spot with the Aussie Dollar on Monday, the NZD is overnight back at the bottom of the performance table. This comes after a pretty downbeat Quarterly Survey of Business Optimism published by the New Zealand Institute of Economic Research (NZIER) which has conducted a comprehensive quarterly survey of business opinion - known as the QSBO - ever since 1961.

This latest QSBO shows a sharp drop in business confidence following the General Election, with a net 11 percent of businesses expecting economic conditions to deteriorate over the first half of 2018. Business confidence had fallen in the previous quarter ahead of the General Election, and it appears uncertainty over new Government policies have made businesses even more downbeat. The decline is more modest when it comes to businesses’ own demand. A net 10 percent of businesses reported a lift in own trading activity in the December 2017 quarter, an easing from the net 13 percent in the previous quarter. As the NZIER puts it, “Businesses may be worried about the outlook for the New Zealand economy under the new Labour-led Government, but for now this is not reflected in demand in their own business”.

The decline in business confidence was broad-based across the sectors, with retailers and manufacturers particularly downbeat. However, the pessimism was not reflected in activity indicators. Domestic sales remain solid in the retail and manufacturing sector. The building sector also reported solid output and new orders. Across the regions, the pessimism was evident in the urban regions including Auckland, Wellington and Canterbury. In particular, a net 33 percent of Wellington businesses expected a worsening in economic conditions over the coming months.

The Kiwi Dollar opens in Europe this morning at USD0.7280 with AUD/NZD at 1.0925 and GBP/NZD1.8925.