USD at highest level in almost two weeks after bond yields jump
Friday 20 April, 2018
Daily Currency UpdateUS equity markets gave back all of the last two days’ gains on Thursday and the Dow Jones Industrial Average turned negative for the year as US 10-year bond yields rose above 2.90% and 2-year notes jumped a massive 12 basis points to 2.43%. This leaves the spread between 2 and 10 years at just 47bp compared to 105bp this time a year ago. The US Dollar finally began to gather some support from higher interest rates and the USD index against a basket of major currencies rose from 89.10 to a best level of 89.55; its highest in almost 10 days. Overnight, the USD has pushed on further and with EUR/USD and GBP/USD both a quarter of a cent lower, its index is up at 89.65.
Economic yesterday was limited to weekly jobless claims which fell 1k to 232k but are probably still being distorted by the timing of the Easter vacation, and the Philadelphia Fed Business Survey. This rose very slightly from 22.3 to 23.2 though the details were much less rosy with the new-orders index tumbling by 17 points to 18.4 while the workweek jumped by 8.8 points. Given the recent focus on inflation and what it might mean for the Fed, the prices sub-indices make interesting reading. “Price increases for purchased inputs were reported by 59 percent of the manufacturers this month, up notably from 44 percent in March. The prices paid diffusion index increased 14 points to its highest reading since March 2011. The current prices received index, reflecting the manufacturers’ own prices, increased 9 points to a reading of 29.8, its highest reading since May 2008.”
Federal Reserve Bank of St. Louis President James Bullard said this week he doesn’t support more interest-rate increases unless there are upside economic surprises, in part because the yield curve may become inverted. Implied forwards are already pricing-in curves to be heading towards zero in 2019, on expectations of additional 2 or 3 Fed interest-rate hikes and balance-sheet unwinding. The Fed hiking with flat yield curves has preceded the last two recessions. There are no US statistics today and the USD index opens this morning in North America around 89.65.
Key MoversHaving slumped to the bottom of our one-day performance table on Wednesday, the Canadian Dollar had quite a good day on Thursday, finishing in third place behind a buoyant US Dollar and a strong euro. USD/CAD opened around 1.2625 before then jumping to 1.2675 as the USD surged. Nonetheless, GBP/CAD remained under pressure, falling to 1.7850 whilst the CAD gained against both the AUD and NZD. This morning in Europe, USD/CAD has risen to 1.2680 though the Canadian Dollar is up against every other major currency.
The price of oil, one of Canada's major exports, rose to its highest since late 2014 as US crude inventories declined and after sources told the Reuters news agency that top exporter Saudi Arabia aims to push prices even higher and wanted to see $100 per barrel. Brent crude rose 1.7% to $74.74 on Thursday, the highest level since November 2014 whilst West Texas Intermediate hit a high around $69.42. Both Brent and WTI are off their respective highs today but are still up around 2% on the week.
This morning brings news on both retail sales and inflation. Consensus expectations are for both headline and core retail sales to have risen around 0.3% on the month with a 0.4% monthly increase in CPI to take the annual rate up from 2.2% to 2.4%. The Canadian Dollar opens in North America at USD/CAD 1.2680, AUD/CAD 0.9755 and GBP/CAD 1.7825.
The Single European Currency had a very mixed day on Thursday. After a positive start, EUR/USD fell to a low of 1.2335; its lowest since Monday as the USD surged on higher bond yields across the curve. Despite this drop, the euro rose against every other major currency and finished in second place on our one-day table. Overnight in Asia and in Europe this morning, the euro has fallen further and has fallen on to a 1.22 ‘big figure’ for the first time since April 9th.
In separate news, European Central Bank President Mario Draghi has decided to remain a member of the Group of 30, a private forum of financiers, economists and current and former policymakers who meet behind closed doors to discuss global economic issues. European Ombudsman Emily O’Reilly had recommended that Draghi gave up his membership to fight “a public perception” that the ECB’s independence as a banking supervisor could be compromised. The ECB rejected the Ombudsman’s recommendation saying it, “continues to consider the President’s membership of the G30 to be fully compatible with the independence, reputation and integrity of the institution and, most importantly, to consider that this does not entail any conflict of interest.”
According to a survey published by Bloomberg this morning, ECB President Mario Draghi will take longer than previously expected to lay out the European Central Bank’s plan to exit unconventional stimulus as protectionism threatens the euro-area outlook. No change to policy settings or language is expected from the Governing Council meeting on April 26th, and respondents pushed back their estimates for when the ECB president will communicate the next step toward normalization. They still see asset purchases ending this year. Most respondents predict the ECB will set an end-date for bond-buying in July or September. Only 36 percent expect a June decision, down from 46 percent. The EUR opens in North America today at USD 1.2295 and EUR/CAD 1.5590.
The Pound has had a very poor week so far, finishing equal bottom of the table with the New Zealand Dollar on Tuesday, second from bottom Wednesday and last on Thursday. Yesterday it fell victim to more disappointing economic data and doubts as to whether the Bank of England would indeed be raising interest rates in May. GBP/USD reached an early high of 1.4215 but after the morning’s UK retail sales numbers and a TV interview with BoE Governor Carney in the evening, the pair fell to a low around 1.4075; its weakest level in almost a fortnight and almost 3 cents below Monday’s 1.4365 high. This morning in Europe, GBP/USD has extended its decline, falling to a 2-week low just below 1.4050.
The question for markets has been whether the soft run of economic activity data in the first quarter of the year, coupled with a sharp fall in the rate of inflation, would be sufficient to deter the Bank of England from raising interest rates at its May MPC meeting. For much of the day on Thursday, investors were still inclined to the view that it would not prevent a hike as this would be too great a loss of face for the Bank and its Governor, Mark Carney. Instead, Mr Carney gave an interview to the BBC news in which he bizarrely claimed that Brexit uncertainties might be a reason for holding off on a rate hike. He said there “will be some differences of view” at May’s Monetary Policy Committee meeting and that he is “conscious that there are other meetings over the course of this year."
At the beginning of this week, markets were pricing a more than 80% probability of a 25bp interest rate increase at the Bank of England’s May MPC meeting. After Mr. Carney’s interview, this has now fallen to just 50%; no better than the toss of a coin. MPC member Michael Saunders gave a speech this morning which suggests he has now caught the old BoE disease of deliberate obfuscation. He reiterated the BoE’s position that “any further tightening is likely to be at a gradual pace and to a limited extent” but added that “a key point is that ‘gradual’ need not mean ‘glacial’.” The British Pound opens in North America this morning at USD 1.4065, GBP/EUR 1.1440 and GBP/CAD 1.79825.
Thursday was a far more interesting day for the Australian Dollar than the whole of the previous three days of the week. AUD/USD initially fell after a soft-ish labour market report, surged back on to a US 78 cents ‘big figure’ then tumbled to 0.7720 as the US Dollar caught a huge bid on the back of rising US bond yields. In the terminology of technical analysis, it was a classic “key day reversal” with a higher high, lower low and lower close than the previous day and it will be very interesting to see if this relatively rare indicator again proves correct. Overnight in Asia and in Europe this morning, price action has been what this relatively rare indicator would have predicted: AUD/USD is lower again and has fallen on to US 76 cents for the first time in 10 days.
On the Australian stock exchange, the ASX Metals & Mining index hit a three-month high on Thursday, driven by sharply higher prices for industrial metals. Aluminium is up 32% so far this month and nickel is 20% up this week alone on Russian sanctions and supply shortage concerns. Three-month nickel on the London Metal Exchange rallied as much as 9.3% to $16,690 a tonne yesterday, the highest since December, 2014. Australia’s biggest export commodity, iron ore, meantime, is up 8.5% over the last three days. Whether these metals can now sustain these gains in the face of a stronger USD remains to be seen.
After New Zealand produced its CPI figures yesterday, thoughts now turn to Australia’s numbers next Tuesday. Australian consumer price inflation has been below the Reserve Bank of Australia’s 2-3% annual target for more than two years, a trend which is expected to continue in the first half of this year. A Bloomberg survey of 20 analysts shows the median forecast for underlying CPI — of more importance when it comes to the outlook for interest rate settings — is for a quarterly increase of 0.5%, leaving the change on a year earlier at 1.85% after 1.87% in the December quarter. Headline CPI, including volatile price movements over both the quarter and year, is also expected to increase by 0.5% over the quarter, seeing the annual rate lift to 2% from 1.9%. The interest rate market only ascribes a 22% probability to a rise in rates by December and is not fully pricing in a hike until the middle of next year. The Australian Dollar opens in North America this morning at USD0.7690, with AUD/NZD at 1.0655 and AUD/CAD 0.9750.
The dismal run continues for the New Zealand Dollar. On the first four days of this week it has finished second from bottom, bottom, third-last and in second-last place yesterday. The day started promisingly enough with NZD/USD holding a 0.7310-30 range until mid-morning in London but in the afternoon, it dropped on to a US 72 cents ‘big figure’ and in New York tumbled to 0.7260; its lowest in almost two weeks. Overnight in Asia and in Europe this morning, the Kiwi Dollar has had yet another poor session, falling almost half a cent to 0.7215; its lowest level since April 3rd.
A survey by think tank the New Zealand Initiative last week called “Who Guards the Guard?” brought together responses from the country’s 200 top companies who were asked to both rate and rank the regulators they interact with. In total, the survey tracked 23 key performance indicators for 24 regulatory agencies. The survey revealed a direct link between how regulators are governed and how well they perform. The single decisionmaker model in place at the RBNZ fared extremely poorly. "RBNZ [staff are] completely divorced from the reality of how things are done," one told the survey. Another described the bank as "archaic", adding that entrenched officials "don't get challenged". To his credit, new RBNZ Governor Adrian Orr is said to have published this criticism on the RBNZ’s intranet saying that while the Reserve Bank's powers are enshrined in legislation, the organisation would be on "thin ground" if it relied on this, and needed to communicate better. "You can't expect people to understand us… Don't expect to a receive a ticker tape parade down [Auckland's] Queen Street for having maintained low-inflation. People just take that as a given." Hopefully, we are now going to see a new era of far more interesting communication on monetary policy and if its as good as that produced by Stats NZ who bring sometimes dull information to life, then all the better.
Governor Adrian Orr has already been on New Zealand radio after the CPI numbers saying he expected, “very benign inflation going forward without doubt, as we’ve forecast”. He added that “what really matters is the confidence and expectation and belief that we are aiming for that midpoint of 2 percent all of the time.” And he pledged that “we are doggedly determined to aim for two percent, but the accuracy around…that is very limited.” The Kiwi Dollar opens in North America at USD 0.7215 and NZD/CAD 0.9145.
- USD/CAD: 1.2610 - 1.2705 ▼
- EUR/USD: 1.2270 - 1.2350 ▼
- GBP/USD: 1.3990 - 1.4180 ▼
- AUD/USD: 0.7655 - 0.7750 ▼
- NZD/USD: 0.7160 - 0.7270 ▼