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US Dollar hits fresh 37-month low. Ninth day of gains for GBP/USD ahead of average earnings numbers. Eurozone PMI’s due.

By Nick Parsons

The pound was up and down in very erratic fashion on Tuesday. It peeped above USD1.40 very early in the European morning then fell all the way back to 1.3925 before then jumping almost a full cent to a fresh 2018 high of 1.4018. This was the highest since the EU referendum on June 23rd 2016; 410 trading days ago. Overnight in Asia it has traded as high as 1.4047 and though the GBP is up against the USD and CAD, it is pretty flat against the EUR, AUD and NZD.

The latest monthly CBI survey of 369 manufacturers published yesterday morning revealed that optimism about both business conditions and export prospects improved at an above-average pace. Growth in manufacturing output and domestic and export orders all picked up, compared with the previous three-month period. Stocks also continued to grow robustly: for example, inventories of finished goods stocks rose at the fastest pace since October 2013. Employment grew at the fastest pace since July 2014 over the last three months, with further growth expected next quarter. However, skill shortages are high on firms’ agendas, with the number of firms citing skilled labour as a factor likely to limit output over the next three months the highest for more than four decades. And overall capacity pressures are biting hard: the proportion of firms with spare operating capacity was the lowest in 29 years.

Whilst much of the government still seems to be away in Davos, today 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 expected in its November Quarterly Bulletin.

The British Pound opens in London this morning at USD1.4025, AUD1.7500 and NZD1.9045.

The USD rose from the start of the government shutdown at midnight on Friday then fell pretty much from the moment Senate Democratic leader Chuck Schumer announced that his party would support a short-term spending measure to the government through February 8th. Early on Tuesday, its index against a basket of major currencies bounced from 89.98 in Sydney to a best level of 90.21 in the London morning. From then on, however, it was downhill all the way to a fresh 37-month low of 89.77 and overnight in Asia it has traded as low as 89.50.

In part some of the weakness of the US Dollar is political and reflects international investors’ distaste for President Trump’s ‘America First’ policy. Whereas a year ago the USD was rallying in anticipation of what it would mean for growth in what looked like one of the few rapidly-expanding parts of the world, today there’s plenty of choice. Indeed, the IMF has just upgraded its world GDP forecast to 3.9%; the best since the GFC.

On Monday President Trump announced tariffs on imported solar panels and washing machines in his first major move to level a global playing field he says is tilted against American companies. The juxtaposition of this with the new CPATPP (see New Zealand for details) is quite striking and it will be very interesting to see which version of Mr Trump is on display at Davos later this week.

In economic data, the Philly Fed non-manufacturing survey tumbled fully 10 points from 29.4 to 19.5 whilst the Richmond Fed's Manufacturing Survey slumped in January to just 14 having been at a record high of 30 as recently as November. Later today, we’ll get existing home sales for December and Markit’s ‘flash’ estimate of their PMI indices which will probably be ignored unless they’re soft; in which case they could well be used as another excuse to sell USD.

The US Dollar index opens in London at 89.60 whilst US 10-year bonds are down 2bp in yield at 2.62%.

 

Tuesday was a good day for the euro - and a less good one for those ECB Council members who were talking it down last week. EUR/USD rose to a best level during the day of 1.2294; the highest in almost a week. Overnight in Asia it has been up further to 1.2324; the strongest level since December 2014.

The first piece of good economic news was a very upbeat German ZEW Survey. According to their Press release, “The latest survey results reveal an optimistic outlook for the German economy in the first six months of 2018. With 95.2 out of 100 points, this is the most positive assessment of the current economic situation since the introduction of the survey in December 1991. Private consumption, which was the most important driver of economic growth in 2017, is likely to continue to stimulate growth in the coming six months according to the survey participants. The assessment of the global economic environment in Europe and the USA is also much more favourable than it was at the end of 2017.”

Second, was the European Commission’s Eurozone consumer confidence measure which rose to 1.3 points from 0.5 points in December, well above market consensus of an increase to 0.6. This is the highest level of the indicator since August 2000. The highest ever level of the index, which dates back to 1985, was the 2.1 points hit in May 2000.

Before the key ECB meeting on Thursday, we have the preliminary Eurozone ‘flash’ PMI surveys later today and the ifo survey on Thursday morning. In Davos, German Chancellor Angela Merkel, French President Emmanuel Macron and Italian Prime Minister Paolo Gentiloni are all scheduled to give speeches.

The EUR opens in Europe this morning at USD1.2315 and GBP/EUR1.1390.

Tuesday was a day in which the Australian Dollar struggled to hold on to US 80 cents, falling to a low around 0.7960 during the London morning and not regaining 0.8000 until just before the close in New York. Overnight as the USD struggled, AUD/USD has been up to 0.8022 though this is still below yesterdays high of 0.8024 and Friday’s best of 0.8036.

There have been contradictory readings on the Australian economy over the last 24 hours. The latest ANZ-Roy Morgan Australian Consumer Confidence index released yesterday fell 3.3% to 119.4 this week following three consecutive strong reports. The fall was broad based, with views towards current finances leading the pullback. The current finances sub-index fell a sharp 9.1% to 104.7, partially unwinding gains over the previous three weeks. In comparison, views towards future finances fell a more modest 2.2%, following a 0.2% decline in the week prior.

By contrast, this morning’s Westpac leading index was very strong. the six month annualised growth rate - which indicates the likely pace of economic activity relative to trend three to nine months into the future - jumped from +0.66% in November to +1.41% in December. Westpac noted, “This is a very strong above trend reading and, following the solid results in October and November, points to solid above trend growth in the early part of 2018.” They also cautioned, however, that “there are still key negatives around housing, household incomes and the consumer which are likely to challenge the sustainability of any upswing in 2018.”

The AUD opens in Europe this morning at USD0.8015 with GBP/AUD at 1.7500.

USD/CAD was up and down as much as all the USD-based currency pairs on Tuesday but finally settled around 1.2435 having ranged from 1.2430-1.2490 in the Northern Hemisphere trading day. As the USD has remained pressured throughout the Asian session, so USD/CAD has moved lower with the pair testing last Friday’s low of 1.2403 but still holding above the immediate post-BoC low last Wednesday of 1.2375.

The day began with news of an earthquake with a magnitude of 7.9 on the Richter scale 250km off the coast of Alaska and a tsunami alert was issued for the entire west coast of Canada and the United States as far south as Los Angeles. Fortunately, this failed to materialise as feared and though there was localised damage, it was a mercifully short-lived scare.

Much of Prime Minister Justin Trudeau speech to the World Economic Forum in Davos focussed on gender inequality and the benefits to be derived from hiring, promoting & retaining women. On more immediately market-sensitive issues, he said, “We’re working very hard to make sure that our neighbour to the south recognizes how good NAFTA is and that it has benefited not just our economy but his economy and the world economy.” He also said the new Trans-Pacific trade deal would create “well-paying middle-class jobs for decades to come” even though it did not involve the United States.

Next up for CAD currency traders will be Thursday’s November retail sales data and Friday’s CPI numbers. As for energy prices, WTI crude is back up to $64.50 per barrel, within touching distance of last week’s 3-year high of $64.75.

The Canadian Dollar opens in London this morning at USD1.2410 and GBP/CAD1.7410.

On Tuesday, the NZD gained against every one of the major currencies we follow here. During the Asian session it rose to USD0.7344; its best level at any point since the election. By late afternoon in Europe it had extended these gains to a high around 0.7360; the best since September 20th and less than half a cent shy of a fresh 6-month high. Overnight in Asia it has touched a best level of USD0.7370.

The Kiwi’s strong performance came after news that New Zealand, along with 10 other nations, has agreed to the new formation of the Trans-Pacific Partnership (TPP). The Pacific trade pact was abandoned by US President Trump and the 11 remaining members reached a deal on a revised agreement, with the nations to work toward signing the deal by early March, according to Singapore’s government. The deal has been renamed the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, and its trade Minister enthused that, “The CPTPP will enhance trade among countries in the Asia-Pacific, resulting in more seamless flows of goods, services, and investment regionally.”

The main focus for the rest of the week 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 USD0.7325 with AUD/NZD at 1.0895 and GBP/NZD1.9080.