After its first annual drop since 2012, USD index opens at 91.90. AUD/USD and NZD/USD both start 2018 around 10-week highs.
Tuesday 2 January, 2018
Daily Currency UpdateJust three weeks ago, on December 11th, the Australian Dollar stood at USD0.7507. Twenty days later, with gold up from $1242 to $1305 it was on a US 78 cents big figure for the first time since October 23rd and today is trading above its 20, 50, 100 and 200-day moving averages. Whilst some of this strength is merely the flip-side of a weak US Dollar, we should note that GBP/AUD is down over six cents since early December whilst AUD/EUR is up from 0.6376 to 0.6505 over the same period. As the holiday season locally is well underway and even the RBA doesn’t bother with a monthly Board meeting in January, it’s easy to forget that the rest of the world returns to work today. Most of it won’t be enjoying the wonderful sunny climate of Australia’s beaches and in some parts of North America, the mercury on the thermometers is down to minus 20 degrees centigrade. As the Northern Hemisphere shivers and struggles into work, the first piece of economic news to digest will be China’s private sector manufacturing PMI index.
These figures are important for Australia as China is still the number one export destination, the largest market for agricultural goods and the most valuable inward tourism market. Australia needs a strong Chinese economy if it is to grow itself. November’s 50.8 reading for the so-called Caixin manufacturing PMI was the lowest since June and after the Aussie’s recent strong run it is likely going to need some more fundamental support if the positive momentum is to be sustained. Globally, there is a very wide spread of views as to what 2018 holds in store for the Australian Dollar. Morgan Stanley, for instance, sees AUD/USD at 0.67 by the end of next year whilst BoA Merril Lynch has 0.77 and UniCredit goes for 0.82. We’d note that in an environment of generally low asset market volatility and strongly rising commodity prices, the extra yield available in Australia looks very attractive. Experience also teaches us that it looks very attractive until it doesn’t and that reversals can be swift and sudden, especially if global growth concerns take the shine of metals’ prices. The AUD opens in Asia this first morning of 2018 at USD0.7810 with AUD/NZD at 1.0990 and GBP/AUD1.7310. On the same day back in 2017 it stood at USD0.72 with AUD/NZD at 1.04 and GBP/AUD1.71.
Key MoversAs the Aussie Dollar has surged over the past few weeks, the New Zealand Dollar has done very well to generally keep up with the pace. For sure, the AUD/NZD cross has risen from 1.0870 back on December 13th to 1.1000 this morning but for the past 10 days it has been solidly within a 1.0970-1.1100 range which has lifted NZD/USD back onto a US 71 cents big figure for the first time since October 18th. Whilst the gains in the Australian Dollar are largely linked to commodity prices, this most certainly is not what has been driving the New Zealand Dollar higher recently. Instead it is a combination of factors: a global investor base which was running short or underweight positions in the currency after the uncertainties of the September election, the announcement of a new but highly experienced Governor at the RBNZ and the extra yield available on New Zealand’s money and bond markets which looks attractive in an environment of generally low asset market volatility. We’d note the short position appears now to have been unwound, the change of personnel at the RBNZ is no longer news and the yield advantage in NZ is pretty slim by historic standards. This doesn’t of itself signal the top for the Kiwi Dollar as momentum is itself a powerful force in foreign exchange markets. After a very strong run recently, however, the NZD may need the support of improving macroeconomic data both at home, in China and the broader APEC region if its recent gains are to be sustained. For all the focus on domestic economic policy after the September elections, recall that the countries of Asia-Pacific Economic Cooperation (APEC) take more than 70 percent of New Zealand’s exports, provide 71 percent of tourism arrivals, and account for around 75% percent of New Zealand’s foreign direct investment. The New Zealand Dollar opens in Asia this first trading day of 2018 at USD0.7105 with AUD/NZD at 1.099. At the same point in 2017, it stood at USD0.69 with AUD/NZD at 1.04.
The British Pound had a very good Christmas week, rising from a low of USD1.3350 on Tuesday all the way up to a best level on Friday of 1.3536 before ending the year in New York on Friday evening at 1.3515. The outlook for the British Pound over the next year has rarely been so polarized. On the one hand (as the economists say!) is a view that a 2-year transitional deal on Brexit can be relatively swiftly concluded which would see the UK adopt the policies and rules of the EU from the formal date of leaving in March 2019 out to March 2021. This, it is argued, would be the best – or least bad – outcome for British business and allow more time to plan for a post-Brexit world of new trade and customs arrangements with the European Union. Under this scenario, it is further argued that the GBP can regain most of its post-referendum losses and see GBP/USD return to $1.50 with GBP/EUR closer to 1.20 than 1.10. On the other hand is a view that the EU has little incentive to agree either a favourable or an early trade deal for the UK. Playing tough would reduce the attractions for other nations of leaving the EU whilst benefitting from the powerful cyclical economic upswing within the Eurozone. Under this scenario, it is argued that hard-line anti-EU Conservative MP’s would refuse to back a ‘shadow EU’ arrangement and would instead split the party and force a General Election on the issue. Whatever the anti-Brexit equivocations of the Labour Party, it is feared that a change of government would see the pound plunge to its post-referendum lows below USD1.20 and EUR1.10. It is against this highly uncertain political background that the first economic data of the new year are released this Tuesday morning. Consensus expectations are for the December manufacturing PMI index to slip back from 58.2 to 58.0.The GBP opens in Asia this morning at USD1.3510 with GBP/AUD at 1.7315 and GBP/NZD1.9025. Exactly one year ago, it stood at USD1.23, GBP/AUD1.71 and GBP/NZD1.77.
Following a very poor pre-Christmas week, the US Dollar then did even worse into year-end. Its index against a basket of major currencies fell to a 14-week low of just 91.77 before rallying slightly to end the year at 91.91. For the calendar year 2017, the USD fell almost 9%; the first annual decline since 2012. Its high for the year was way back on January 3rd when EUR/USD hit a low of 1.0341. Since that point, the euro rallied more than 13%, its biggest advance since 2003, and was the largest G-10 gainer against the US currency last year. The US Dollar’s decline came despite the stock market recording more than 70 fresh all-time highs during the year and three hikes in interest rates from the Federal Reserve Bank. Donald Trump is still President of the United States, a historic tax reform bill has been passed and the money markets are pricing further interest rate hikes next year. Overnight Fed Funds Futures are pricing in a 95.2% probability of a hike by December 2018, with a 37.1% expectation for rates to be between 1.75 and 2% and 25.8% expectation for rates to be between 2 and 2.5%. For the next ‘live’ FOMC meeting in March, money market pricing reflects a 54% probability of a 25bp hike to 150-175bp. For the last week, none of these potential US Dollar positives seemed to matter. As the New Year begins, it will be fascinating to see if 2018 is a mirror image of 2017; against a background of near-universal bullishness on the USD, its index peaked on January 3rd last year at 103.3 and it was downhill almost all the way from there. USD sentiment may not yet be at historically bearish extremes, but it is certainly very depressed. Will the US Dollar spring a surprise in the opposite direction this time around? The US Dollar index opens in Asia this Tuesday morning at a more than 3-month low of 91.90. The 2017 low was 91.00 back on September 5th…
The EUR finished equal top of the FX performance table in the last, shorter holiday week of 2017. From a low point on Boxing Day of USD1.1846, the Single European Currency strengthened steadily with the move accelerating to reach a best level on Friday of USD1.2025; its highest since September 10th.
The euro has subsequently shrugged off a poor election outcome for German Chancellor Angela Merkel and the dissolution of the Italian Parliament ahead of elections to be held in early March 2018. The economic recovery has gained traction across the whole of the EU and though inflation has not yet followed, it surely will if recent increases in energy prices are sustained. Whilst much of the good news for the euro may already be ‘in the price’, its positive momentum and excellent economic growth story leave it well poised to extend recent gains in the first part of 2018. Its first test will come later this morning when December’s final PMI manufacturing figures are released for all the Eurozone countries. On this first trading day of 2018, the EUR opens in Asia at USD1.2000, AUD/EUR0.6510 and NZD/EUR0.5920. One year ago, it began 2017 at USD1.05, AUD/EUR0.69 and NZD/EUR0.66.
The Canadian Dollar ended the holiday week alongside the euro at the top of the FX performance table. The recent clear messages from Bank of Canada Governor Poloz appeared finally to be gaining some traction with investors, whilst a jump in energy prices and a potentially very significant shift in the technical outlook all offered good support to the currency. With continued supply disruptions globally, and a ferocious spell of cold weather over much North America, NYMEX crude on Friday hit $60.46; the highest since June 2015. For most of the north-eastern US encompassing New England, northern Pennsylvania and New York, the National Weather Service issued wind chill advisories or warnings as temperatures were expected to be below 10 degrees fahrenheit in a wide area until well into this first week of the New Year. For some incredible pictures of the cold, take a look at Niagara Falls with Google Images.
We’ve been highlighting here that the technical picture has definitely shifted in the CAD’s favour after the decisive close below USD/CAD1.2760 and it will be a currency to keep a close eye on in the first few days of 2018. Manufacturing PMI data are released later today but the really big test for the CAD will come with December’s employment report on Friday. For today, the CAD opens in Asia at a 10-week low of USD1.2550.
- AUD/NZD: 1.0970 - 1.1050 ▼
- GBP/AUD: 1.7220 - 1.7350 ▼
- AUD/USD: 0.7760 - 0.7850 ▼
- AUD/EUR: 0.6450 - 0.6530 ▼
- AUD/CAD: 0.9780 - 0.9840 ▼