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USD spikes lower overnight but then reverses losses. GBP and EUR both lower after briefly hitting fresh 2018 highs

By Nick Parsons

There were lots of news headlines and wire stories to read through before we could even begin to write this morning’s commentary. The reason for this is that although the US Dollar is either stronger or unchanged against every major currency than it was at Tuesday’s New York close, there was a brief spike lower (if it hadn’t been brief, it wouldn’t have been called a spike!) in the early hours of the morning in Sydney which took it to a fresh low for 2018.

There was a 60 pip jump in EUR/USD and a 40 pip jump in GBP/USD which was entirely unexplained by any news story or headline. Within an hour, both moves had been reversed but this explains any confusion our clients may have if they read stories about a fresh high for GBP/USD but see that the exchange rate is actually lower. Putting into context what appears in the real world of foreign exchange to be quite a volatile move, this was a 0.35% jump. In the unreal world of cryptocurrencies, Bitcoin yesterday fell 26%...

After CPI figures yesterday showed the first fall in the annual rate since June last year, there is nothing on today’s economic calendar. At midnight the Royal Institution of Chartered Surveyors will released its excellent monthly report on the UK residential property market but until then, the main interest will probably be political as all parties pick over the carcass of Carillion at Prime Minister’s Question Time.

Ahead of this, the pound opens in London this morning at USD1.3775, AUD1.7325 and NZD1.9020.

Tuesday was on track to be first day in a week that the US Dollar index actually managed to rally. On Monday it had tumbled to an intra-day low of 89.98 - the lowest since December 19th 2014 – closing down around half a point on the day and more than 2 points below last Thursday’s high. Yesterday, its index against a basket of major currencies held on to a 90 ‘big’ figure across all three time-zones but lost around 25 pips in the last couple of hours to end on its lows around 90.05.

As mentioned in the GBP commentary, the USD had a spike lower around 01.00GMT which took it down to 89.93. It has subsequently recovered these gains to stand at 90.30; pretty much at the mid-point of yesterday’s entire trading range.

If foreign exchange markets were volatile, so too were US equities. As physical markets played catch-up with futures after their holiday closure on Monday, so the 26,000 milestone for the DJIA was duly passed in the New York morning; just 8 trading days after it first reached 25,000. What is interesting in the price action, however, is that the index failed to hold on to 26k and from 10.40am Eastern Time in the US, it moved back on to a 25k handle and then erased all its prior gains to end down on the day. Moreover, the VIX measure of equity market volatility jumped to a 5-week high of 12.1 even as a research note from Morgan Stanley observed that, “over the last two weeks investors have bought the 2nd largest amount of S&P 500 futures since at least 2010, while at the same time net holdings of S&P 500 calls are the highest and the net holdings of S&P 500 puts are the lowest since at least 2010”.

There’s not much economic data scheduled today but plenty of Fed-speak, both written and verbal. The Federal Reserve releases its Beige Book summary of economic conditions whilst Evans and Mester are talking on the economy, monetary policy and communication.

The US Dollar index opens in London at 90.30 whilst US 10-year bonds are 2bp higher in yield at 2.54%.

 

The EUR ended Tuesday a touch higher against the USD, even though it had been lower than Monday’s close for all but the last hour of trading in New York. It touched a session low in the European afternoon of USD1.2205 before rallying around 60 pips into the close at 1.2265. Overnight in Sydney – as we’ve already mentioned – it jumped to a fresh 2018 high of 1.2303 before falling 60 pips to be lower now than it was at the New York close. There is still no plausible explanation for the earlier spike but it should be taken as a warning about the scope for a pick-up in volatility more generally.

On Monday evening we saw the interview with the Head of Estonia’s Central Bank. When asked for his own comments on ending QE in September this year, Bundesbank President Jens Weidmann told the Frankfurter Allgemeine Zeitung newspaper, “I would hold that appropriate from today’s point of view.”

We’ve been highlighting for the last few days, the lack of any push-back from ‘ECB sources’ after the bombshell dropped last Thursday. Shortly after Mr Weidmann’s comments, yesterday evening, we finally got it. According to a Reuters story, “three sources on or close to the ECB’s policy-making Governing Council said any fundamental change to the guidance was likely to come only later, with the March meeting, when policymakers get updated economic forecasts, seen as a more likely option. ‘We need more thorough analysis before making any change,’ one of the sources said”.

Today brings the final reading on Eurozone CPI in December. Consensus looks for the preliminary numbers to be unchanged with headline CPI at 1.4% y/y and the core (ex-food & energy) measure at 0.9%. The EUR opens in Europe this morning at USD1.2220 and GBP/EUR1.1270.

The Aussie Dollar has not been immune to the effects of the US Dollar’s spike lower and subsequent recovery overnight. AUD/USD slipped to USD0.7940 in the New York morning on Tuesday before recovering around 25 pips to close at 0.7965. During the Sydney morning session today, however, the pair jumped to a high of 0.7993; the highest since September 20th before falling almost half a cent during the rest of the Asia shift to be barely 10 pips above Tuesday’s low of 0.7939.

Certainly, some of the gloss has been taken off precious metals and other industrial commodities. As we write, gold is than $10 off its recent $1343 peak but silver yesterday was down 1.3% and palladium lost just over 3%. Elsewhere, base metals were all lower with losses extended to as much as 2.9% for nickel. Copper dropped 2.2% to $7,054 on the London Metal Exchange Tuesday; the biggest drop since December 5th. The metal rose 7.2% in December, capping the biggest annual gain in eight years, but prices are down 2.6% so far in 2018.

The big number to watch locally will be tomorrow’s employment report. Consensus expectations are for a 15,000 increase in December employment after a huge 61,600 increase in November. Last time around, full-time employment increased 41,900 to 8,501,900 and part-time employment increased 19,700 to 3,901,100 although the unemployment rate remained steady at 5.4%. It is generally estimated that, over time, around 14-15k new jobs per month are enough to keep pace with demographic change and leave the unemployment rate steady though this doesn’t always hold for every individual month’s data.

The AUD opens in Europe this morning at USD0.7950 with GBP/AUD at 1.7320.

After being the strongest currency in the first week of the New Year 2018, then the weakest in the second week, the Canadian Dollar has been very steady over the first half of this third week. Indeed, for the last 36 hours USD/CAD has traded sideways in a 50 pip range from just 1.2405 to 1.2555. The big event, of course, is this afternoon’s Bank of Canada interest rate decision.

In a Reuters poll earlier this week, just eight of 31 analysts surveyed said they expect the BoC to hold rates steady at 1.0% at today’s policy meeting. 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.

Over the past 25 years, Canada’s main policy rate has been on average around 25bp higher than the US rate. At the moment it’s 0.375 percentage points below, so there could be some catching up to do. The Bank of Canada estimates its so-called neutral rate - which allows the economy to run neither too hot nor too cold - at about 3%. The Federal Reserve sees its neutral rate at 2.75%, according to the median estimate in their most recent projections in December.

As the seemingly interminable wait to the BoC meeting at 3pm UK time finally comes to an end, the Canadian Dollar opens in London this morning at USD1.2450 and GBP/CAD1.7145.

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 ended Tuesday back at the bottom of the performance table. Having reached the dizzy heights of US 73 cents, it slipped back at one point almost 50 pips from Monday’s 0.7313 high. It didn’t really get caught up in the USD spike overnight but has continued to slide lower to end the Asia session around 0.7240; it’s lowest since Friday afternoon.

New Zealand commodity prices dropped again in December. The ANZ commodity price index fell 2.2% and was up just 3% year-on-year. In New Zealand Dollar terms, however, the index fell a punchy 3.3% m/m as the Kiwi’s trade-weighted index rose 2.7% during the month. ANZ noted that, “this was the largest fall in world and local prices since the current upward cycle in commodity prices began in early 2016”.

The latest Global Dairy Trade (GDT) auction yesterday showed a 4.9% gain but this comes after ANZ’s survey showed very large falls in December as an upswing in global milk supply placed downward pressure on all product prices. Cheese prices fell 11% in the month, butter was down 10% while whole milk powder fell 2.2%.

The Kiwi Dollar opens in Europe this morning at USD0.7245 with AUD/NZD at 1.0975 and GBP/NZD1.9020.