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US stocks hit new record highs. GBP and EUR both lower after reaching fresh 2018 peaks. FX markets becoming much more volatile

By Nick Parsons

It is not quite yet at Bitcoin levels of randomness and volatility, but the British pound yesterday evening had another totally unexplained surge and reversal with no incoming news at all to support it. Having rallied from a low in early European trading of USD1.3760, the GBP was chased up to another fresh 2018 peak of 1.3837 just before London traders headed for home. By the time they got to their front doors, GBP/USD had added another cent to a post-referendum high of 1.3930, yet by bedtime, it was back down at 1.3810 and has been pretty steady through the Asian session.

Overnight, the Royal Institution of Chartered Surveyors released its always excellent monthly report on the UK residential property market. The headlines showed the UK housing market continued to display a lack of momentum in December, with buyer interest edging lower whilst changes to Stamp Duty for first time buyers are having little immediate effect.

In December, activity in the UK housing market continued to drop. After new buyer enquiries came close to stabilising in November, 15% more respondents noted a decline in demand (as opposed to an increase) in the month of December. Furthermore, when contributors were asked whether they have seen an increase in first time buyer enquiries following changes to Stamp Duty in the Autumn Budget, an overwhelming majority of 86% across the UK said they hadn’t.

Agreed transactions also fell at the national level with 13% more respondents reporting a decline in volumes over the month. Significantly, Scotland, Northern Ireland and the North East region were the only areas to suggest stronger transactions, whereas sales trends were either flat or negative across the rest of the UK. It could be a very long Winter for Estate Agents.

Ahead of this, the pound opens in London this morning at USD1.3815, GBP/EUR1.1335 and AUD1.7345.

Wednesday was a day of many parts for the US Dollar. Its index against a basket of major currencies tumbled to a 2018 low in Sydney of 89.93, recovered by lunchtime in Europe to 90.43 then lost half a point to another fresh low of 0.8990 in the New York afternoon before rallying 40 pips to 90.30.

The volatility in FX was replicated across asset classes. A 367 point intra-day plunge in the DJIA on Tuesday was partially reversed by the close and on Wednesday the futures market added another 300 points to be back on a 26k handle and a fresh all-time record high.

All these wild price swings have come against a background where the US economy continues to perform very well. After last week’s higher core inflation and retail sales numbers, industrial production surged +0.9% in December as the unseasonably cold weather at the end of the month boosted demand for heating. For all of 2017, industrial output rose 1.8% the first increase since 2014.

According to the Federal Reserve Beige Book released at 2 pm in Washington, the US economy and inflation expanded at a modest-to-moderate pace from late November through the end of 2017, while wages continued to push higher. “Most districts said that wages increased at a modest pace… A few districts observed that firms were raising wages in a broader range of industries and positions since the previous report… Firms in some districts noted an ability to increase selling prices. Retailers in some districts reported modest price increases and there were reports of rising home prices across the country,”.

The US Dollar index opens in London at 90.45 whilst US 10-year bonds are 3bp higher in yield at 2.59%.

 

The EUR underperformed the USD for much of the day on Wednesday and after a yo-yo session in New York, it finished in bottom spot in our one-day performance table. As the GBP, AUD and NZD recovered in the European morning, the EUR instead fell further to hit 1.2203 by lunchtime. It recovered to a high of USD1.2275 in New York but overnight in Asia has been down to 1.2165.

In an interview with Italy’s La Repubblica newspaper, ECB Vice President Vitor Constancio said “I am concerned about sudden movements which don’t reflect changes in fundamentals… Looking at fundamentals, inflation declined slightly in December.” The next ECB Governing Council meeting is on January 25th and Constancio signaled little prospect of a change in the guidance on policy at that gathering, saying officials should be careful not “choke off growth too soon.”

As if to reinforce the message, ECB council member Francois Villeroy de Galhau said, “The only question is how long it will take to meet our inflation target. On this issue, the recent evolution of the exchange rate is a source of uncertainty which requires monitoring with regard to its possible downward effects on imported prices.”

All these ECB comments, whether anonymous or on the record, have had some effect. The EUR opens in Europe this morning at USD1.2200 and GBP/EUR1.1335.

The Aussie Dollar certainly had an interesting session in the Northern Hemisphere on Wednesday. At the London opening, it was down to 0.7945 but then was bought steadily and persistently through the European day and in the New York afternoon had regained all its prior losses and more to be back on US 80 cents for the first time since September and on to an intra-day high of 0.8021. Within a few hours, it had lost three-quarters of a cent to 0.7955.

Overnight the big news locally is the Australian labour market report. According to the Australian Bureau of Statistics (ABS), employment rose by a seasonally adjusted 34,700, beating consensus expectations of a 15,000 increase. Employment has now increased in each of the past 15 months, which equals the longest consecutive streak on record. One more positive month in January, would be the longest uninterrupted period of jobs growth since the survey began in 1978.

Full-time employment increased 15,100 to 8,518,900 in December and part-time employment increased 19,500 to 3,921,800. The ABS noted that, "Full-time employment has now increased by around 322,000 persons since December 2016, and makes up the majority of the 393,000 net increase in employment over the period," It was the fastest growth over a calendar year on record, and the second fastest over any 12-month period, only beaten by a 409,300 increase in August 2005.

For all the positive headlines, the AUD was strangely unmoved. It had twice surged on absolutely nothing during the day yet an extremely good labour market report gave it no lift whatsoever. Perhaps it was news that the unemployment rate however rose to 5.5% from 5.4%. This was due to much stronger labour-force participation which might indicate some further spare capacity in the labour market and therefore a lack of wage pressure.

The AUD opens in Europe this morning at USD0.7975 with GBP/AUD at 1.7355.

It had been a long wait but the Bank of Canada finally put the market out of its misery yesterday. In line with the majority expectation, it raised rates 25bp to 1.25%. The initial reaction in FX markets was the usual mix of algorithm-driven stop-loss and stop-entry orders as the headlines flashed across the screens. Your author was watching a tick-chart of prices and in the space of less than 20 seconds, USD/CAD moved up from 1.2420 to 1.2540, down to 1.2375 and back to 1.2500.

The main points from the BoC Statement were that, “Recent data have been strong, inflation is close to target, and the economy is operating roughly at capacity. However, uncertainty surrounding the future of the North American Free Trade Agreement (NAFTA) is clouding the economic outlook.” On the domestic economy, “Consumption and residential investment have been stronger than anticipated, reflecting strong employment growth. Business investment has been increasing at a solid pace, and investment intentions remain positive. Exports have been weaker than expected although, apart from cross-border shifts in automotive production, there have been positive signs in most other categories”.

Looking forward, “consumption and residential investment are expected to contribute less to growth, given higher interest rates and new mortgage guidelines, while business investment and exports are expected to contribute more. The Bank's outlook takes into account a small benefit to Canada's economy from stronger US demand arising from recent tax changes. However, as uncertainty about the future of NAFTA is weighing increasingly on the outlook, the Bank has incorporated into its projection additional negative judgement on business investment and trade.”

The two mentions of NAFTA in the Statement and the sentence that “some continued monetary policy accommodation will likely be needed to keep the economy operating close to potential” mean we should probably characterize the BoC move as a ‘dovish hike’; hence the volatility as the headlines were released.

The Canadian Dollar opens in London this morning at USD1.2445 and GBP/CAD1.7230.

Top of the pile Monday, back at the bottom Tuesday, and up again to second place on Wednesday – just a normal pattern for the Kiwi Dollar! From a low of 0.7237 at the start of business in London, it then moved steadily higher and on the second USD collapse of the day in the New York afternoon, the NZD broke US 73 cents once more, on its way to a fresh 2018 high of USD0.7330. As with the other major currencies, though, this jump was reversed as quickly as it had developed and the pair fell back to 0.7260 in early Sydney trading.

Overnight, NZD has been down to 0.7247 before a 40 pip rally into the London open, albeit there was no fresh news locally in New Zealand to explain either the drop or the subsequent rebound. As we go to print with this morning commentary, China’s delayed fourth-quarter GDP figures have just been released. These showed annual growth was unchanged from the 6.8% pace seen in Q3; a tenth higher than consensus estimates. Ordinarily, these figures might offer some support to an export-dependent currency such as the New Zealand Dollar but its volatility has been so great over the last 4-5 weeks that the data sometimes doesn’t seem to matter.

The Kiwi Dollar opens in Europe this morning at USD0.7280 with AUD/NZD at 1.0935 and GBP/NZD1.8975.