Daily Currency Update

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USD rallies ahead of Trump’s “State of the Union” speech tonight. GBP pressured on Brexit and UK politics. BoE Governor Carney speaking this afternoon.

By Nick Parsons

The British Pound’s remarkable 11-day sequence in which it never tested the previous day’s low against the US Dollar was good while it lasted, but has now come to an end. At one point, GBP/USD was almost 9 cents higher than its starting point of 1.3460 on January 11th having reached a best level last Thursday around 1.4330. Yesterday it didn’t just break below Friday’s low of 1.4145, but traded all the way down to 1.4035; the first ‘down day’ for the GBP in 2½ weeks. Overnight in Asia, the GBP has remained pressured and a break through yesterday’s low would open up 1.4000 then 1.3925.

A confidential government analysis of the economic impact of Brexit was reported to have been shown to Cabinet Ministers over the weekend, though in order to minimize the risk of leaks, hard copies were not made available. Needless to say, the assessment duly appeared on the internet overnight. The Times today reports that under a comprehensive free trade agreement with the EU, British growth would be 5 per cent lower over the next 15 years compared with present forecasts. The “no deal” scenario, which would mean Britain reverting to World Trade Organisation rules, would reduce growth by 8 per cent over that period whilst the softest Brexit option of continued single-market access through membership of the European Economic Area would, in the longer term, still lower growth by 2 per cent.

Bank of England Governor Mark Carney is due to give evidence to the House of Lords Economic Affairs Committee at 3.30pm this afternoon. During his Q+A session at Davos last week, he attempted to quantify the loss of GDP which resulted from the EU referendum result 18 months ago and might well come in for some tough questioning over this. Amidst all the intrigue, the GBP opens this morning in Europe at USD1.4020, GBP/AUD1.7395 and GBP/NZD1.9185.

Breaking news - the US Dollar didn’t fall yesterday! The USD index reached a low point on Thursday last week of 88.20 before rallying into the NY close and then holding around half of its gains on Friday. It opened on Monday morning in Sydney around 88.75 and then climbed on to an 89 ‘big figure’ for the first time in four days. Its gains we’re broad-based and saw the USD rise against every major currency to take a rare top spot on our one-day performance table.

US economic data on Monday were pretty much in line with consensus expectations. They may be a bit obscure for some of our readers, but the personal consumption and spending figures are very important to the Fed for two reasons: First, they feed directly into estimates of GDP and second, they are accompanied by so-called a PCE deflator which is the measure of inflation the Fed is targeting. Whereas the RBA in Australia and the RBNZ in New Zealand have CPI targets, the US Fed has a PCE target. The headline measure of PCE inflation was 1.7% with the core ex-food & energy number as expected at 1.5%.

After the US numbers were published, the Atlanta Fed updated its GDPNow model. It had overstated the Q4 numbers last week but its first estimate of Q1 2018 is a very punchy 4.2% which would more than make up for any disappointments last Friday. Its’ next update will come on Thursday after the ISM survey and official numbers on construction spending. For today, consumer confidence is the main data point but the big event of the day will be President Trump’s State of the Union address at 9pm EST. The speech is titled, “Building a safe, strong and proud America”. With US 10-year bond yields having hit a fresh cycle high of 2.71%, the USD index opens in Europe today at 89.15.

EUR/USD hit a 3-year high of 1.2530 during the ECB Press Conference last Thursday before then falling one and a half cents on President Trump’s comments to CNBC about wanting a stronger Dollar over the longer-term. On Friday it couldn’t regain the highs, whilst yesterday’s high was again at a lower level than the day before. All eyes will be on technical support around 1.2345 and, if this breaks, the EUR could quickly unwind all the gains made since Mnuchin’s comments about the Dollar last Wednesday morning.

Speaking in Brussels yesterday, the ECB’s chief economist Peter Praet said the European Central Bank will only stop pumping cash into the euro zone economy when it is confident that inflation is heading towards its target without its extra help. Praet is one of the key supporters of the ECB’s €2.55 trillion bond-buying programme and was responding to calls by officials – notably in Germany and the Netherlands - to stop the scheme later this year. Despite these dovish remarks, German 5-year bond yields yesterday moved back into positive territory for the first time since late-2015 whilst 10-year bunds were up 6bp to 0.69%.

Today in the Eurozone brings Q4 GDP figures where consensus estimates are for a +0.6% quarterly increase. We’ll also get German CPI figures which will then see analysts firming up their forecasts for the Eurozone CPI numbers on Wednesday. After falling around a quarter of a cent in Asia overnight, the EUR opens in Europe this morning at USD1.2355 and GBP/EUR1.1350.

The Aussie Dollar joined in the holiday mood last Friday on Australia Day, rising to a high of USD0.8135; its best level since January 2015. But, just as everyone heads back to work, so too the AUD has come back down to earth. It’s still pretty elevated by standards of the last year – AUD/USD has spent fewer than 20 of the last 250 trading days at 80 cents or above - but is now down almost half a cent from Friday evening’s high.

The monthly NAB Business Survey was released overnight. The business confidence index bounced 4pts to +11 index points, the highest level since July 2017 whilst business conditions were unchanged at +13 which is above the long-run trend of +5. We’ve been pointing out recently that the RBA’s monetary policy stance will likely be determined more by growth in wages and household consumption than what’s happening to business conditions. In this respect there was a bit of disappointment that labour costs rose at an implied quarterly rate of 0.8%; down from 1.2% in the previous month’s survey.

The RBA’s Board meeting is on Tuesday February 6th; it’s the first Tuesday of every month except January. The two main pieces of fresh economic information it will have available are the NAB survey today then all the various quarterly measures of inflation which will be released tomorrow. Half-way through this data-fest, the Australian Dollar opens in Europe at USD0.8060, with AUD/NZD at 1.1025 and GBP/AUD1.7395.

Over the last few days, USD/CAD has settled in a 1.2280-1.2390 range with investors keen to get a sense of how the NAFTA uncertainties so ably summarized by BoC Governor Poloz last week might be resolved.

Trade ministers from Canada, Mexico and the United States ended the sixth round of NAFTA negotiations in Montreal on Monday, agreeing some progress was made but acknowledging that tough challenges still lie ahead to strike a new deal. US Trade Representative Robert Lighthizer said while some progress was made, he hoped it would accelerate and achieve major breakthroughs. "This round was a step forward, but we are progressing very slowly," he said. This was because trilateral negotiations are more "complicated and contentious" than bilateral talks. Nevertheless, in his closing remarks, Lighthizer said, “Some real headway was made here today… We're committed to moving forward."

After the relief that NAFTA talks haven’t completely collapsed despite plenty of outstanding differences between the three negotiating teams, investors can now focus on upcoming economic data releases. We get the monthly GDP and industrial production numbers on Wednesday and the manufacturing PMI survey on Thursday. The Canadian Dollar opens this morning in Europe at USD/CAD1.2365 and GBP/CAD1.7335.

Since last Wednesday’s soft quarterly CPI numbers, the NZD has fallen around 1¼ cents against the US Dollar, whilst the AUD/NZD cross yesterday hit 110.70; its highest level since December 5th. Overnight in Asia, the NZD/USD remains pressured but this is due to a USD recovery, not specific NZD weakness. In fact, the AUD/NZD cross is down around half a cent after better than expected trade figures in New Zealand.

The monthly trade balance in December 2017 was $640 million). The surplus was the largest in any December month, and the largest in any month since March 2015. According to the official statisticians, exports of milk powder, butter, and cheese lifted total exports to a record $5.6bn in December 2017. Monthly exports were $1.1bn higher than in the same month a year earlier. The previous highest values for both dairy exports and total exports were recorded in the 2013/14 dairy export season, when dairy prices were at a high level. Looking by destination, the largest increase in exports amongst was to China, up $343m (28 percent), led by dairy products (up $230m).

Later this week, on Thursday we have the ANZ job advertising figures and at the end of the week, the always fascinating numbers on net migration and visitor arrivals. The New Zealand Dollar opens this morning in Europe at USD0.7310 and GBP/NZD1.9170.