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US Government shutdown underway but USD so far unharmed. ECB Council Meeting on Thursday is the big event of the week.

By Nick Parsons

The Pound had a very good week, even though incoming economic data was generally soft and there has been no progress at all in Brexit negotiations. It opened last Monday morning around USD1.3730 and made a whole series of fresh 2018 highs during the week. In the immediate aftermath of the EU referendum back on June 23rd 2016, GBP had fallen from 1.48 to 1.32 so there is no obvious point of technical resistance to cap the current up-move. Chart specialists will point to the February 2016 low around 1.3850 and the low in April that year of 1.4080 as possible hurdles but investors have been piling in to a currency which looks fundamentally inexpensive and has plenty of positive momentum. A quiet session in Asia overnight has seen GBP/USD in a range from 1.3760-90.

The week ahead begins very quietly in terms of market-moving economic releases though Prime Minister Theresa May will be at the World Economic Forum in Davos, Switzerland where she is scheduled to meet with US President Donald Trump. A Downing Street spokesman said the bilateral meeting would take place "in the margins" of the forum, though no further details were made public.

On Wednesday we get the latest month unemployment and average earnings numbers and on Friday it’s the Q4 GDP numbers where consensus looks for a +0.4% q/q increase compared to the +0.5% rise which the Bank of England appears to have penciled in.

The British Pound opens in London this morning at USD1.3865, AUD1.7355 and NZD1.9050.

The actual numbers show that the USD index against a basket of major currencies fell only 0.2% over the course of the week, even though it felt much worse than that. The pattern of trade was such that the USD index made four fresh lows on four different days at 89.99, 89.96, 89.92 and 89.89 which all gave rise to a flurry of Press headlines about the drop. But, just reading through the actual index levels, we can see that only one-tenth of a point separated all four. Sometimes it’s important to look at the scale on the charts rather than to rely on the headlines alone. After its rally on Friday, the USD opens around the mid-point of last week’s range around 90.30.

Last week brought yet another good set of economic numbers. The previous week had seen higher core inflation and retail sales numbers. On Wednesday, industrial production surged +0.9% in December as very cold weather at the end of the month boosted demand for heating. Thursday, we learned that weekly jobless claims decreased by 41k to 220k; their lowest level since February 1973 and the biggest weekly biggest drop since April 2009.

At midnight on Friday, the US government began to shut down; the first time ever that a party which controls the White House, Senate and House of Representatives has overseen a government shutdown. It is the 19th such occasion in the last 40 years. Four of these 19 have lasted just one day with the longest in 1995 lasting 21 days. During the last government shutdown in October 2013, 850,000 federal workers were furloughed, equal to nearly 40% of the government workforce. The shutdown lasted for 16 days, triggered by a disagreement over Obamacare. According to Standard & Poor’s, it cost the economy $24 billion.

The US Dollar index opens in London at 90.30 whilst US 10-year bonds are 1bp higher in yield at 2.64%.

 

The euro ended the week just 20 pips higher than its starting point last Monday of USD1.2200. On Wednesday morning in Sydney the USD had a very quick spike lower which lifted the EUR to 1.2302; a fresh high for 2018 which was entirely unexplained by any news story or headline. Given the changed regulatory environment these days in wholesale FX markets, there was no chat around what client flows may have triggered it. It is as much of a mystery now as it was at the time. By the end of the week, after some fairly blunt verbal intervention from ECB Council members, EUR/USD was back down at 1.2220.

The main event of the week ahead is of course Thursday’s ECB Council Meeting. After a totally unexpected shift in language in its summary of the last meeting, the big question is whether President Draghi will attempt to dial back market expectations around an actual shift in interest rate policy. He has form on this: at a meeting in Sintra, Portugal on June 27th last year, he spoke of a strengthening and broadening recovery in the Eurozone but then spent the last 2 months up to the Jackson Hole gathering in late August trying to undo the impact of his words on the euro exchange rate.

Ahead of the ECB meeting, we have the German ZEW survey on Tuesday and then the preliminary Eurozone ‘flash’ PMI surveys on Wednesday and the ifo survey on Thursday morning.

The EUR opens in Europe this morning at USD1.2225 and GBP/EUR1.1340.

Last week, the Australian Dollar hit 80 US cents for the first time since September but stopped just 20 pips short of what would have been its best level in 32 months. Friday’s high was USD0.8035 whilst the high back on September 12th last year was 0.8052. It ended in New York on Friday around 0.7985 but after a very brief move to a high of 0.8001 overnight in Sydney, has been on a 79 cents handle throughout the Asian session.

World commodity prices have certainly help lift the AUD, as too has the very low level of volatility across asset classes which makes the currency’s yield advantage more attractive. In the one-month period to the middle of the week, gold had risen almost $100 per ounce to $1,242 per ounce; an increase of almost 9%. Over the same period, aluminium was up 13% and platinum was 12% higher. Coal has been steady recently but was still up more than 30% from last Summer.

The week ahead kicks off slowly then gets even slower with the Australia day holiday on Friday January 26th; the day the commander of the First Fleet, Captain Arthur Phillip, rowed ashore at Sydney Cove, raised the Union Jack and proclaimed British sovereignty over part of the continent in 1788. Whatever the rights and wrongs of an increasingly controversial holiday, it is sure to be celebrated in some style as it conveniently starts a long, warm Summer weekend.

There are no top-tier economic data releases locally this week, with nothing at all today then the ANZ Roy Morgan weekly consumer confidence numbers on Tuesday and the Westpac leading index and skilled vacancies numbers on Wednesday. The first RBA meeting of the new year is still more than a fortnight away and the currency is more likely to be moved by news from the US and Davos, Switzerland than by anything at home.

The AUD opens in Europe this morning at USD0.7985 with GBP/AUD at 1.7350.

Last week’s trading in the Canadian Dollar was completely dominated by Wednesday’s first Bank of Canada monetary policy meeting of the year. In line with the majority expectation, BoC 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. After the dust settled, USD/CAD spent the next 48 hours firmly bounded by the immediate post-BoC range of 1.2385-1.2470 but in the very last hour of trading in New York on Friday moved up to end the week at 1.2500.

The sixth round of talks on renegotiating the North American Free Trade Agreement, or NAFTA, is due to take place in Montreal from January 23-29th. In its Statement announcing the rate hike, BoC said the future of NAFTA was the most significant downside risk the economy faced. Canada sends about 75 percent of its exports to the United States.

As well as the progress of the talks, currency traders will also be waiting Thursday’s November retail sales data and Friday’s CPI numbers. They’ll be keeping an eye too on energy prices after WTI crude last week hit a fresh 3-year high of $64.75 before ending the week around $63.50 per barrel.

The Canadian Dollar opens in London this morning at USD1.2485 and GBP/CAD1.7305.

The volatility in the New Zealand Dollar continues. Of the six major currencies we follow closely here, its position on the one-day performance charts over the past week was first, last, second, first equal and last equal. On Monday, NZD/USD got back on a US 73 cents big figure for the first time since the day after the General Election back in late September and was up over 5 cents from the November 8th low. On Wednesday it hit a best level for the week just under USD.7330 and closed in New York on Friday at 0.7275.

Perhaps the biggest surprise overnight is that the NZD hasn’t moved at all from this level, although today is a partial holiday in New Zealand. Wellington Anniversary Day is celebrated on the Monday nearest to January 22nd and commemorates the arrival of the first settler ship to New Zealand in 1840. The settlers named the town they founded Wellington, in honour of the first Duke of Wellington, who had been victorious at Waterloo some 25 years earlier. Auckland has its own holiday next Monday, January 29th.

After last Friday’s disappointment of the manufacturing PMI survey, Tuesday brings the performance of services index. The main focus of the week, though, will be Thursday’s quarterly CPI numbers which consensus estimates will be around +0.4% q/q and 1.9% y/y. The RBNZ’s published forecast is one-tenth lower on both measures.

The Kiwi Dollar opens in Europe this morning at USD0.7280 with AUD/NZD at 1.0975 and GBP/NZD1.9045.