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USD sells off on reports Chinese to end buying of US Treasuries but then regains most of its losses. NZD outperforms AUD yet again.

By Nick Parsons

The Australian Dollar wasn’t having a great day on Wednesday, languishing in the low 78’s for much of the Asian session and London morning before rallying in line with all the other major currencies on the reported Chinese comments about buying of US Treasury bonds (see below). The Aussie was then able to benefit in two ways: firstly from the weakness of the US Dollar, and second from a rise in gold prices from $1313 to $1318. It hit a high of USD0.7861 late in the London morning before subsequently easing back a little in New York.

It’s certainly true that the employment situation in Australia looks bright. Job vacancies climbed to their highest on record in the three months to November, a sixth straight quarter of gains. Total job vacancies rose 2.7% to 210,300 in the Sep-Nov quarter, from 204,800 in the previous quarter. That was the highest reading since the series began in 1979 and left vacancies a healthy 16 percent higher than a year earlier. Vacancies in the private sector climbed 3.8% to 192,000, again the highest on record. That was up 17.3% on the previous year. In contrast, public sector vacancies fell back 7.6 % in the November quarter to 18,300.

This morning we’ll get to see whether these higher job vacancies and strong recent readings on employment have led consumers to dip into their pockets and actually spend some cash. Retail sales rose +0.5% in October after +0.1% in September and a fall of -0.6% in August. Consensus estimates are for a rise of +0.4% in November boosted perhaps by the arrival of shiny new smartphones.

The AUD opens in Asia this morning at USD0.7835 with AUD/NZD at 1.0895 and GBP/AUD1.7240.

Once again, the New Zealand Dollar was top of the one-day performance table on Wednesday and has topped the table for four of the past five trading days. The flightless bird reached a high in the London morning of USD0.7216; the first time it has been on a US 72 cents big figure since way back on October 1st. Later in the day it was back on 71 cents but had gained against all the major currencies we track here.

The first NZ private sector numbers of the year of relevance to foreign exchange markets were out overnight. Data from government valuer Quotable Value (QV) on Thursday showed its residential property price index rose 6.6% year-on-year last month, picking up pace from the 6.4% rise in November. The robust growth in the final two months of the year was in stark contrast to a slowdown from the middle of the year as sentiment was dampened by uncertainty over an election in September, which brought in a new Labour-led government. “This was partly due to buyers delaying purchasing until the election result was decided and may also have been in part due to some buyers racing to purchase before the new foreign buyers’ ban,” said QV.

The new government has vowed to shake up the property market and introduce a ban on foreign homebuyers in the first few months of 2018 although the RBNZ has announced it will ease back its macro-prudential mortgage lending curbs at the start of 2018. House prices in Auckland are up only 0.5% over the past 12 months though the QV index is now 61.6 percent above the market’s previous peak in late 2007.

For today, the Kiwi Dollar opens in Asia this Thursday morning at USD0.7190 with AUD/NZD at 1.0895.

After a poor day on Tuesday, the GBP was notably weak early on Wednesday, hitting a fresh 2018 low of USD1.3486 before jumping half a cent on the Chinese comments about buying US bonds. It should be noted, though, that even after reaching 1.3555, the pound couldn’t sustain these gains and spent the rest of the day falling back to the low 1.35’s to leave it the worst performing major currency on the day.

After the poorly-received Government reshuffle, those Ministers who kept their jobs were back at work. Two of them with the highest profiles – the Chancellor of the Exchequer and the Minister for Exiting the EU - were in Germany to make a direct appeal to business leaders to help secure the future of Britain’s financial services within a Brexit deal. They said they were seeking a bespoke deal with the EU described as “the most ambitious in the world that should cover the length and breadth of our economies including the service industries — and financial services”. Good luck with that one…

In a joint article for the German newspaper Frankfurter Allgemeine, Philip Hammond and David Davis argued that Britain and Germany should use “imagination and ingenuity” to craft a “bespoke solution” to maximise economic co-operation. The EU’s Brexit negotiator Michel Barnier warned the UK last month, however, that “There is no place for financial services. There is not a single trade agreement that is open to financial services. It doesn’t exist.” Yesterday he said that, “Britain’s financial services cannot benefit from a passport in the single market nor from a system of generalised equivalence of standards”. This issue is not just a debating point, it is key to whether the UK can make a success of its post-Brexit status. The Pound’s fortunes should now closely track the progress that either side makes in the negotiations around the inclusion of financial services in a new free trade agreement.

Thursday will bring the always-interesting Bank of England Credit Conditions Survey. Ahead of that, the pound opens in Asia this morning at USD1.3510, AUD1.7240 and NZD1.8790.

The Dollar hasn’t been able to hold on to Tuesday’s gains which took its index against a basket of major currencies to a high of 92.27; the best since December 28th. Though it held steady yesterday in Asia, it was slammed lower in the European morning after reported comments that officials who are reviewing China's FX holdings have recommended slowing or halting buying of US Treasuries. The USD index was sold down to a low of 91.60 before recovering to 92.00 in the New York afternoon.

The Chinese comments said that US government bonds are becoming less attractive relative to other assets and that trade tensions with the US may provide a reason to slow or stop buying American debt. The headlines flashing across screens came at a sensitive time for bond markets after the yield on US 10-year Treasuries had already risen 6bp on Tuesday to 2.54%; the highest since March 2017. In yesterday’s trading, US 10-year yields added another five basis points to a high of 2.59%.

Of course, there is no way of knowing the status of the comments: whether they are a genuine sign of an imminent policy shift or merely a diplomatic response to the US Administration’s talk of tightening restrictions on China’s exports. One of the biggest losers in purely financial terms would be China itself, as it currently the world’s largest holder (ahead of Japan) of US Treasury securities with $1189.2bn as at the end of October 2017.

There were no immediately market-moving US economic releases on Wednesday, though we did get to see import prices and wholesale inventories, which feed directly into GDP. The Atlanta Fed’s GDPNow model – which is generally the most accurate and up to date predictor of the US economy – has revised up its estimates of GDP growth in fourth quarter of 2017 to an annualized pace of 2.8%, from 2.7% on January 5th.

The US Dollar index opens in Asia this morning around 92.00.

After two poor days on Monday and Tuesday, the EUR rallied on Wednesday following the Chinese comments on purchases of US Treasuries. On Tuesday, EUR/USD had fallen to a 2018 low of USD1.1919; its lowest since December 28th and had barely recovered 20 pips to 1.1935 in Europe yesterday before suddenly jumping almost a full cent on the China news. By the New York afternoon, it had given back around half its gains to USD1.1955.

It may well be the case that US bonds are unattractive relative to other assets but exactly the same can be said about Eurozone bonds. 10-year US Treasuries may have hit 2.58% today but their German equivalents yield only 0.53%. For sure this is still well above the December lows of 0.30% but the differential with the United States is back over 200bp at the 10-year maturity. And, in terms of attracting capital flows at the shorter end of the yield curve, 2-year US notes yield 1.97% compared to a still negative -0.63% in Germany.

The interest rate market is still not fully pricing an ECB rate hike until early 2019. Strong economic data are certainly helping the EUR but the yield differential is now creating quite a headwind for the exchange rate against the US Dollar, notwithstanding yesterday’s comments by Chinese officials.

The EUR opens in Asia this Thursday morning at USD1.1955, AUD/EUR0.6555 and NZD/EUR0.6010.

After its great start to the New Year 2018, the Canadian Dollar has not done quite so well this week as investors start to question whether a lot of good news is already ‘in the price’ and whether a combination of two very good employment reports and a very upbeat Q4 Business Outlook Survey really does mean that a rate hike at next Wednesday’s BoC monetary policy meeting is a done deal. USD/CAD touched a low of 1.2375 last Friday but after touching a high of 1.2490 in Europe yesterday, it then surged late in the New York afternoon to a high of 1.2575.

Energy prices are continuing support the Canadian Dollar. WTI crude overnight hit $63.41 as an industry report showed the biggest draw in US crude stockpiles for this time of year since 1999. The American Petroleum Institute reported domestic oil inventories tumbled by 11.2 million barrels last week; nearly triple consensus estimates.

On the debit side, the latest numbers on the Canadian housing market were pretty disappointing. The value of building permits issued by Canadian municipalities declined 7.7% to $7.7 billion in November, the first decrease in three months. The value of building permits for non-residential structures fell 12.3% to $2.9 billion in November, following two monthly increases. The decline was spread over all three non-residential components (commercial, industrial and institutional).

Thursday brings data on new house prices. Ahead of that, the Canadian Dollar opens in Asia this morning at USD1.2575, AUD/CAD0.9850 and NZD/CAD0.9040.