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USD only just above 3-year lows even as bond yields rise further. US non-farm payrolls later day another source of volatility for stocks, bonds and FX

By Nick Parsons

As recently as Tuesday morning, GBP/USD was below 1.4000 before then jumping almost 2 cents. After a half cent drop post-Fed, on Thursday it added nearly another cent to a high of 1.4275; its best level since the day of the ECB meeting last week. The overnight session in Asia has been notable only for the relative calm – GBP/USD, EUR/USD and therefore GBP/EUR are all exactly where they were at 9pm yesterday evening.

There has been little or nothing on the UK data calendar which is obviously GBP-positive. The manufacturing PMI survey saw a further easing in the rate of expansion of the sector. At 55.3 in January, the index was down further from November’s 51-month high and at its lowest level since June last year. The Press Release noted, “The UK manufacturing sector reported an unwelcome combination of slower growth and rising prices at the start of 2018. Encouragingly, despite the slowdown, the latest survey is consistent with production rising at a solid quarterly rate of around 0.6% in January, with jobs also being added at a faster pace. However, output growth has slowed sharply since last November’s high, and the more forward-looking new orders index has slipped to a seven-month low. The trend in demand will need to strengthen in the near-term to prevent further growth momentum being lost in the coming months”.

On the politics of Brexit, plenty of seemingly irreconcilable differences seem to be emerging. Yesterday the Prime Minister said that that EU citizens who arrive during the post-Brexit transition period must not have the same rights as those who came before. Sure enough, within a few hours, the European Parliament’s Brexit negotiator, Guy Verhofstadt, replied that, “The maintenance of EU citizens’ rights during the transition is not negotiable… We will not accept that there are two sets of rights for EU citizens. For the transition to work, it must mean a continuation of the existing acquis [EU law] with no exceptions.” Overnight, international trade secretary said Britain must “take control” by seeking trade deals across the world which are impossible within EU arrangements. “It’s very difficult to see how being in a customs union is compatible with having an independent trade policy because we would therefore be dependent on what the EU negotiated in terms of its trading policies and we’d be following behind that”. The weekend Press is unlikely to be kind to the government, but for the moment the GBP seems completely unfazed. The Pound opens this morning at USD1.4265, GBP/AUD1.7805 and GBP/NZD1.9350.

The US Dollar fell again on Thursday, and though it’s index against a basket of major currencies didn’t quite make a fresh low for 2018, it was a very close-run thing. Immediately after Treasury Secretary Mnuchin’s comments in Davos last week, the index fell to 88.21. Yesterday it printed at 88.28 before a very modest rally overnight lifted it off the lows. It would take a very brave person to bet against a new cycle low being reached today; if 88.21 is broken, the USD would be at its weakest since early-December 2014.

Whatever the many reasons analysts advance for the US Dollar’s decline – and many of them would sound more convincing if they had been made before it happened rather than afterwards – the performance of the US economy certainly isn’t one of them. The number of Americans filing for unemployment benefits unexpectedly fell last week, pointing to a tightening labor market and strengthening economy at the start of the year. Initial claims for state unemployment benefits slipped 1,000 to a seasonally adjusted 230,000 for the week ended January 27th. This was the 152nd straight week that claims remained below the 300,000 threshold; the longest such stretch since 1970. Separate numbers showed construction output rose almost twice as fast as expected with a +0.7% m/m gain whilst the January ISM manufacturing index dipped very slightly to a higher than expected 59.1 from a revised 59.3. This marked the 105th straight month of growth for the overall economy.

After this latest batch of economic data, the Atlanta Fed published updated estimates of its Q1 GDP forecast. Its first estimate was an already-punchy 4.2% but this has now been pushed up to 5.4%; the highest since Q1 2012. Of course, the model is not infallible and there is a well-established pattern of high numbers at the beginning of a quarter which then get revised progressively lower. As a starting point, though, it’s a pretty strong place to be. US 10-year bond yields are another 2bp to a fresh high of 2.79% and the USD index opens in Europe today at 88.40; just two-tenths above the Davos low last week.

The EUR dipped once more below USD1.24 early yesterday morning but since then it’s been on an upward tear; rising a full cent off the low to be within touching distance of the 3-year high of 1.2530 reached during the ECB Press Conference last week. Indeed, the EUR finished at the top of our one-day performance table, rising against all the major currencies we track closely here. Overnight in Asia it has traded either side of USD1.25 in a surprisingly narrow range given the volatility in US equity and bond markets.

In economic news, final Eurozone Manufacturing PMI printed at 59.6 in January, down from December’s record high of 60.6 and identical to the earlier flash estimate. The PMI has signaled expansion in each of the past 55 months. Markit’s Press Release noted, “The eurozone manufacturing sector made a strong start to 2018. Although January saw rates of growth in output and new orders ease from near-record highs at the end of last year, they remained among the best seen since the survey began in 1997.” Companies indicated that they were experiencing solid inflows of new business from both the domestic and export markets during January whilst manufacturing employment rose for the 41st successive month in January. The rate of jobs growth remained substantial and close to the survey record highs achieved in November and December of last year.

Because the first working day of the new month fell on a Thursday, we won’t get to see the service sector PMI numbers until Monday next week. The EUR opens in Europe this morning at USD1.2505 and GBP/EUR1.1410.

During the European morning on Thursday, the AUD traded down on to a 79 cents handle for the first time in over a week. As has been the case with many currencies recently, though, just as they seem technically poised to break lower, there’s a sharp bounce higher. This is exactly what happened to the AUD with a quick half cent rally to 0.8045. Overnight in Asia, however, it has given back all yesterday’s gains and is poised somewhat nervously at exactly 0.8000.

The RBA’s commodity price index increased by 7.1% in SDR terms in January, after increasing by 4.5% in December. Coking coal and iron ore prices led the increase, whilst the rural and base metals sub-indices also increased in the month. In Australian dollar terms, the index increased by 4.6% in January. Commodity prices were certainly one of the factors which helped the AUD rise last month, along with lower volatility across asset classes. We’ve already seen a big jump in volatility over the past few days and if commodities don’t sustain recent rises, then the outlook for the AUD will look much less positive.

The next big focus for the AUD will be what the RBA has to say – if anything – about the value of the currency when it sits down to its first Board meeting of the new year next Tuesday. Members will surely note in private that the AUD/USD exchange rate alone gives a misleading impression of overall currency performance as that pair is all about specific USD weakness. And, to the extent that commodity prices are higher, it is hard to see the overall level of the AUD as either unjustified or unwelcome. They might well choose to say nothing at all in public, though it probably wouldn’t take much to knock the AUD lower from here if it can’t hold the psychological US 80 cents level. The Australian Dollar opens in Europe at USD0.8000, with AUD/NZD at 1.0860 and GBP/AUD1.7820.

The Canadian Dollar has held firmly on to a US 81 cents big figure since early Tuesday morning. In USD/CAD terms, this equates to 1.2345. Yesterday evening, this pair extended the recent move down to 1.2260; a level not seen since late-September last year. It would have to fall all the way to 1.2195 for the CAD to hit 82 cents and during the whole of the last year, USD/CAD spent only a couple of weeks in September below that level.

The Canadian Manufacturing PMI picked up to 55.9 in January from 54.7 in December, to remain well above the 50.0 no-change threshold. Manufacturers reported a strong start to 2018, underpinned by faster rises in output volumes, new business intakes and staff recruitment. There were also signs that the resurgence in production schedules would continue in the months ahead, with incomplete workloads accumulating at the fastest pace since the survey began in October 2010. Improved demand conditions and sharp input cost inflation meanwhile led to the largest increase in factory gate prices for almost seven years. An incredibly upbeat Press Release noted, “The manufacturing sector is beginning to show signs of firing on all cylinders, as shown by the broad-based improvement in operating conditions during January… Canada’s manufacturing sector has now seen resurgent new business flows for three months running, underpinned by greater sales at home and abroad. Well balanced demand growth and an ongoing improvement in global economic conditions should help manufacturers sustain a strong rate of expansion in the coming months”.

There are no more Canadian numbers to come this week, which is probably a good thing as there don’t seem to be any superlatives left after the PMI report! The Canadian Dollar opens this morning in Europe at USD/CAD1.2285 and GBP/CAD1.7515.

The New Zealand Dollar has done pretty well after its mauling a week ago. It only briefly got back on to a US 74 cents big figure and hasn’t been able to sustain that level but at USD0.7360 it is still higher than it was after the CPI figures were released. Against the Aussie Dollar its’ performance has been far more impressive. As recently as Monday, the AUD/NZD cross hit a 7-week high of 110.70. It has fallen steadily this week and overnight hit a low of 1.0850; below where it was before the soft NZ CPI figures last Wednesday evening and the best level for the NZD in exactly 3 weeks.

The official statisticians today released their net migration numbers. Annual net migration in the December 2017 year numbered 70,000. Migrant arrivals were 131,600 and migrant departures were 61,600. This was down from 70,600 in the December 2016 year, a drop of about 600. Migration saw a net gain of 71,100 non-New Zealand citizens and a net loss of 1,000 New Zealand citizens in the December 2017 year. Migrant arrivals were mostly from Australia (20 percent), United Kingdom (12 percent), and China (10 percent). Three in every five migrant arrivals from Australia were returning New Zealand citizens. Most migrants arrived in New Zealand on work and student visas. Arrivals on work visas rose 11 percent in the year ended December 2017. The largest increases in work visas were from the United Kingdom and the Philippines.

Separate figures showed in the last calendar year 3.73 million people visited New Zealand, 6.7% more than in 2016. Just over half of these overseas visitors were holidaymakers, and 30% travelled to New Zealand to visit friends and family. New Zealand residents took a record 2.9 million trips overseas in 2017, 9.3% more than in 2016. New Zealanders holidaying overseas accounted for 44 percent of all resident departures. Australia was the top source of visitors and the top destination for New Zealand-resident travellers in 2017. Over the year, 40% of overseas visitors were from Australia and 45% of all trips by New Zealand residents were to Australia. The second-highest source of visitors was China (11 percent). No wonder there’s such interest in the AUD/NZD exchange rate! The New Zealand Dollar opens this morning in Europe at USD0.7375 and GBP/NZD1.9340.