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USD slammed lower after officials welcome weaker dollar. GBP surge continues, ECB meeting today keenly awaited for clues.

By Nick Parsons

Wednesday was a genuinely dramatic day in global FX markets; January 24th 2018 will be remembered as the day in which US Treasury Secretary Steve Mnuchin stated on the record that, “Obviously a weaker dollar is good for us as it relates to trade and opportunities.” It is always easier to talk a currency down than to talk it up – as a host of former finance ministers and central bankers around the world can readily testify – and investors were quick to sell the US Dollar. It already had got off to the worst start to any New Year since 2003 and yesterday was its worst daily drop in 10 months.

The pound continued its remarkable run which has seen GBP/USD rise for 10 consecutive days without breaking the previous day’s low. From the day the ECB dropped its bombshell about possibly changing the language around forward guidance of monetary policy on January 11th, (ironically in an attempt to smooth market volatility) GBP/USD has risen almost 9 cents; its biggest 10-day gain since June 2009.

By teatime in London yesterday, the pair hit 1.4227; the highest since the EU referendum on June 23rd 2016. The 230 pip (1.6%) rally was the biggest one-day gain seen in GBP/USD since 17 January 2017, 264 trading days earlier. As Context Analysis pointed out, “the 3.4 cent (2.5%) rally seen in GBP/USD so far this week marks the strongest start to a week in the 83 weeks since June 2016”. Overnight, the pound has moved higher still and as we write has just hit 1.43.

There’s a pause on the UK data calendar today, then tomorrow 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 USD1.4275, AUD1.7650 and NZD1.9390.

In these first 3½ weeks of 2018, the USD index against a basket of major currencies has now fallen over 3 per cent; its worst start to any year since 1987. Wednesday was the worst day in 10 months for the USD which fell against every major currency and most of the world’s minor ones too. It opened at a 37-month low around 89.70 before the US Trade and Treasury Secretaries unleashed their own particular brand of Alpine diplomacy at the WEF in Davos. Less than 12 hours later, the USD index was on an 88 ‘big figure’ and opens this morning down at a fresh low of 88.50.

Though Treasury Secretary Steve Mnuchin initially stuck to a familiar script that, “longer term the strength of the dollar is a reflection of the strength of the U.S. economy and the fact that it is and will continue to be the primary currency in terms of the reserve currency," he went on to say that, “Obviously a weaker dollar is good for us as it relates to trade and opportunities.”

Speaking alongside the Treasury Secretary, Commerce Secretary Wilbur Ross only inflamed the situation by saying that "Trade wars are fought every single day… a trade war has been in place for quite a little while, the difference is the U.S. troops are now coming to the rampart." This prompted Jack Ma, head of China’s Alibaba to say, “It’s so easy to launch a trade war, but it’s so difficult to stop the disaster of this war. Don’t use trade as a weapon, use trade as a solution to solve problems”. The mood hardly improved when Ross called China’s 2025 technology strategy a “direct threat” and hinted at action against Beijing, stirring fears of a genuine trade war.

President Donald Trump himself said last August that, “the dollar is getting too strong” and the currency world will be watching to see if he aligns with or distances himself from this talk of trade war when he gives his own keenly-awaited Davos speech.

The US Dollar index opens in London at 89.50 whilst US 10-year bonds are up 2bp in yield at 2.64%.

 

The euro couldn’t quite match the strength of the British Pound but it had another strong day on Wednesday, rising to USD1.24 for the first time since December 2014. Overnight it has extended the rally to 1.2450.

Whilst the ECB worries about whether EUR strength will hinder progress towards its inflation objective by weighing down on the cost of imported raw materials and forcing exporters into more cost-cutting to remain internationally competitive, it seems to be doing no harm at all to the broader Eurozone economy.

Yesterday’s ‘flash’ PMI surveys were remarkably upbeat. The headline Eurozone PMI rose to 58.6 in January, up from 58.1 December and its highest since June 2006. An acceleration of service sector growth to the fastest since August 2007 was partly countered by a slowdown in manufacturing output growth, though the latter remained very buoyant. The latest three months have seen the strongest factory output increase since 2000.

In Davos, German Chancellor Angela Merkel and French President Emmanuel Macron both did the ‘vision thing’, most especially Ms Merkel who reminded delegates that 2018 marks the 100th anniversary of the end of the first world war. The political actors a century ago ‘sleepwalked’ into a crisis, Merkel said. “This generation born after the second world war will have to prove they have learned the lessons of history. That means remaining committed to multilateralism, working together to solve problems”.

Today is the first ECB Council Meeting of the year, with President Draghi giving his regular Press Conference at 1.30pm London time. Given the very strong upward momentum in the Eurozone economy, it is very hard to see how he can credibly warn against currency strength and argue for negative interest rates to be maintained until well into next year. This won’t stop him trying and he is a past master at finding new turns of phrase to keep markets where he wants them. It should be a fascinating but potentially very volatile afternoon.

The EUR opens in Europe this morning at USD1.2420 and GBP/EUR1.1495.

As the US Treasury and Commerce Secretaries pulled the rug from under the USD on Wednesday, the Aussie Dollar traded up to a high of USD0.8080; taking it above last September’s peak and to the best level since January 2015 when it was around three-quarters of the way through its multi-year decline from an all-time high around USD1.10 to just 70 cents. The weakness of the USD also gave a substantial boost also to commodity prices. Gold was up $11 to $1352 per ounce. Aluminium and zinc rose almost 1%, silver was up 2.2%, copper was 3.3% higher and nickel surged 5.7%.

According to an article in The Australian today, the country is expected to see an increase in income of up to 1% of GDP from the new Comprehensive and Progressive Agreement for Trans-Pacific Partnership, which would reduce 98% of all tariffs between member countries. The sectors that stand to benefit the most are beef, dairy, sugar, grain, seafood, manufactured goods, and services industries. The Australian Meat Industry Council has backed the deal, claiming it will create greater opportunities for the red meat industry. To cite just a couple of examples, Canada and Mexico currently have import tariffs of 25% on beef but these will be reduced to zero over the next 10 years. Mexico has pledged to abolish its 115% tariff on barley within 5 years and its 67% tariff on wheat within 10 years.

The AUD opens in Europe this morning at USD0.8090 with GBP/AUD at 1.7645.

As the USD has tumbled, so USD/CAD has moved lower. Yesterday it fell below the immediate post-BoC low of 1.2375 and went on to an intra-day low of 1.2320; its weakest in exactly 4 months. When quoted the ‘other’ way round, then once USD/CAD hit 1.2345 the Canadian Dollar moved on to US 81 cents for the first time since September. Overnight in Asia, USD/CAD has extended losses to just below 1.23 though it needs to reach 1.2195 to be back on 82 cents.

Just as all negotiators like to claim victory, there was no shortage of Canadians lining up to take credit for the CPATPP. International Trade Minister François-Philippe Champagne said his country got a better deal than the one the other nations wanted to sign back in November. "When we were in Danang we stood up for Canada. We said for this agreement to work for Canada we need to address specific issues," he said. "You saw that we were forceful in our position and since then we have worked to get agreements with our partners, notably on the cultural sector ... to protect, defend and promote out culture across Canada."

With NAFTA representatives already embarked on sixth round of talks in Montreal, they at least know Canada and Mexico are signing free trade deals with large new markets in the Pacific Rim though more immediately important for CAD currency traders – who will be digging out their charts to see that last September’s low was USD/CAD1.2104 – are November retail sales data this afternoon and then Friday’s CPI numbers.

The Canadian Dollar opens in London this morning at USD1.2305 and GBP/CAD1.7610.

After Tuesday’s table-topping performance, the NZD only managed second place on Wednesday although against a very weak US Dollar, it did rise to a high of 0.7433; the first time it has been on a US 74 cents ‘big figure’ since early-August 2017. Overnight in Asia, however, it has suffered a very sharp reversal as the long-awaited quarterly inflation numbers fell well short of consensus expectations. NZD/USD immediately tumbled a full cent to around 0.7325 before then recovering just under half these losses.

The median published estimates were of a quarterly increase in CPI of 0.4% which would have left the annual rate at 1.9%. Instead, StatsNZ reported that prices rose just 0.1% in the December 2017 quarter. Higher petrol prices, air fares, and housing-related costs were offset by lower prices for vegetables, new cars, and a range of household goods. The relatively flat result this quarter leaves the CPI inflation rate at 1.6% for the December 2017 year.

In its last published monetary policy assessment back in early November, the RBNZ saw inflation reaching 2 percent in Q2 2018 as opposed to Q1 2019 which they had previously forecast. It also said it no longer sees headline inflation declining. As that forecast now heads to the shredder, analysts have been quick to revise down their interest rate expectations. ANZ, for example, said the data, coupled with their belief the “economy is set to go through somewhat of a near-term growth wobble”, have pushed its expectations for the Reserve Bank of New Zealand to hike the official cash rate back from November 2018 to mid-2019.

The Kiwi Dollar opens in Europe this morning at USD0.7365 with AUD/NZD at 1.0990 and GBP/NZD1.9385.