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USD volatile but net unchanged. EUR slides after ECB meeting. GBP mixed on Brexit news but AUD and CAD both surge.

By Nick Parsons

The Kiwi Dollar had held on to a US 69 cents big figure ever since 01.00am New York time on Monday morning and reached a 3½ week high of 0.6995 even before last night’s Fed Statement. After Janet Yellen’s final FOMC Press Conference, the US Dollar suffered a sharp and broadly-based sell-off. NZD reached US 70 cents for the first time since October 19th and opens in Asia around USD0.7020.

Yesterday in New Zealand, the latest data on food prices matched the consensus of analysts’ forecasts, falling -0.4% m/m in November. Lovers of economic data always have plenty to feast on from NZ’s official statisticians. We learned that lower fruit and vegetable prices were driven by a 6.5% fall for vegetables. Tomatoes, broccoli, and lettuce led this fall. Fruit prices rose 3.7%, driven by higher prices for nectarines and apples, slightly offset by lower strawberry prices. Elsewhere, and as shoppers around the world will be painfully aware, annual butter prices increased 48% to reach another record high. The average price of the cheapest available 500 gram block was $5.74 in November 2017, compared with just $3.88 a year ago.

Let’s see if the official number-crunchers can make today’s data on agricultural production and Friday’s vehicle registrations just as interesting…

The Aussie Dollar had a good day on Wednesday, getting back on to a US 76 cents big figure for the first time in just over a week even before the FOMC Statement. This was partly because traders didn’t want to be caught short of AUD ahead of today’s Australian labour market report, and partly because the takeover of Sir Frank Lowy's Westfield Corporation - in a deal said to be worth AUD$32.7 billion – has prompted thoughts of some ‘pre-hedging’ of the foreign exchange transactions associated with the deal.

Founded in Sydney in 1953, Westfield currently has interests in 35 shopping centres in the US and the UK and its chairman received a knighthood from the Queen at Windsor Castle just a few days ago for his contribution to the British economy. French company Unibail-Rodamco will acquire Westfield for a combination of shares and cash, and though the 35% cash element won’t be paid until next year, there could be some early structured purchases of Aussie Dollars, whether in the spot, forward or derivatives market.

Looking forward to today’s Australian economic data, consensus estimates are for a +15k increase in employment with the jobless rate steady at 5.4%. Unlike many countries elsewhere in the world, Australia doesn’t produce monthly earnings data alongside the labour report; instead the wage price indices are available only quarterly and we’ll have to wait until February for the latest updates.

Having reached a pre-FOMC high of 0.7612, the Aussie Dollar extended its gains to a best level just above 0.7630 (the highest in 8 days) which is where it opens in Asia this morning with AUD/NZD at 1.0870.

Content: The Pound had a very mixed session on Wednesday ahead of a key Parliamentary vote that would require the Prime Minister to write the terms of her Brexit deal into a law that would have to be passed by Parliament. Just as we publish this morning note in Sydney, it has been announced that Prime Minister Theresa May suffered a defeat with 12 of her own backbenchers joining with Opposition MP’s to defeat the Conservative/DUP Coalition Government. We will have to wait until the start of the UK morning on Thursday to assess the implications of this in a little more detail.

The latest UK economic data had something for everyone but on balance were a bit disappointing. The total jobless number fell by 26,000 in the last 3 months to 1.43m, taking the unemployment rate down to a 42-year low of just 4.2%. But, the total number of people in work fell by 56,000 in the last quarter; the biggest drop in more than 2 years. The simultaneous fall in employment and unemployment is possible because there has been a large increase (115,000 over the quarter) in the number of economically inactive. As for wages, the 3-month average measure of total pay rose to 2.5% but is still below the rate of inflation. Real wages in the UK have now fallen for 8 consecutive months and show few signs of picking up any time soon.

Ahead of the FOMC Statement, the pound rose against the USD and CAD, but fell once more against the Australian and New Zealand Dollars. With the USD generally in retreat after the Fed, GBP/USD extended its gains to 1.3410, though the Pound fell further against the relatively buoyant Australian and New Zealand Dollars. GBP opens this morning at USD1.3410 with GBP/AUD at 1.7565 and GBP/NZD1.9085.

Content: After seven days without a fall (six up and one unchanged) the USD was arguably ripe for a bit of a correction ahead of last night’s FOMC Statement and Press Conference. Having touched 93.81 on Tuesday, its index against a basket of currencies was already slipping back as the CPI figures were released. Headline CPI came in as expected at 2.2% y/y but the core ex-food and energy number fell to 1.7%.

Fully three-quarters of the increase in the all-items CPI from 2.0% to 2.2% was due to energy prices whilst car insurance, new and used vehicle prices also increased. The core measure excludes these items and was depressed further by a 1.3% m/m drop in apparel; the biggest monthly decline since September 1998. Immediately prior to the Fed announcement, the USD index was down almost 0.4% from Tuesday’s high at 93.46.

The Fed Statement noted, “the Committee continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market conditions will remain strong.” In its new economic projections, it revised up 2018 GDP forecasts from 2.1% to 2.5% with further more modest upgrades to the outlook in 2019 and 2020.

Post-FOMC, the Dollar extended its decline, with the index falling to a 1-week low of 93.10 even as the S+P 500 hit yet another all-time high.

In a pre-FOMC session in which the dollar generally struggled after the core CPI numbers, the euro found it difficult to capitalise. In part this is due to renewed uncertainties around Italian politics and Press reports locally that President Sergio Mattarella will dissolve Parliament this month and set a March 4 election date. Under the Italian Constitution, the vote has to be held before May 20th.

Paolo Gentiloni on Monday celebrated his one-year anniversary as Italy's Prime Minister, an office he took after Matteo Renzi resigned following a humiliating defeat in a national referendum. A new electoral law known as “Rosatellum” had to be passed in October because Italy’s two houses of Parliament had different election systems. Under the Rosatellum law, there will only be a clear-cut winner if one party or bloc receives over 40 percent of the vote.

Recent opinion polls show a centre-right coalition ahead, followed by the Five Star Movement and Gentiloni's Democratic Party, but all of them several points away from the 40% bar. Given this uncertainty, 10-year Italian bond yields yesterday jumped 10bp. Although there was no contagion into other peripheral Eurozone bonds, investors haven’t recently needed much of an excuse to sell EUR and the Italian news was the trigger for its latest underperformance.

Away from the serious but sometimes very tedious business of politics, there’s an ECB Council Meeting at lunchtime on Thursday at which new staff economic projections will be unveiled. With Eurozone monetary policy likely to be on hold for a very long time, the main interest amongst analysts is the colour of Draghi’s tie. Yes, honestly!! If we look back over the last three years, there have been 5 announcements on QE. On four of these he wore a blue tie, the first three being the same blue tie he wore when he famously vowed to do “whatever it takes” to save the euro”. October was a light purple. Since January 2015, he has never announced a policy easing whilst wearing a red tie. So, if you’re at your screens for 2.30pm Frankfurt time, watch to see how EUR/USD reacts as he walks into the Press Conference…

With the FOMC Press Conference now behind us, EUR/USD opens in Asia at 1.1818 with AUD/EUR at 0.7635.

Content: There’s been so much to keep the foreign exchange market busy over the past few days that the Canadian Dollar has largely been overlooked. For most of Wednesday, USD/CAD was trapped in a very narrow range from 1.2845 to 1.2875 even as oil prices fell quite sharply during the North American morning. NYMEX crude fell almost a full dollar to $56.74; its lowest level since last Friday morning even though industry data showed a larger-than-expected drawdown in U.S. crude stockpiles.

Sometimes, the CAD is correlated almost 100% with intra-day and day-to-day swings in oil prices, yet at others it seems to have no impact whatsoever. It’s certainly frustrating both for those investors seeking to set trading rules and the analysts who are trying to explain the changes in the external value of the currency.

We’ll finally get to hear what issues are keeping Bank of Canada Governor Stephen Poloz awake at night when he speaks at lunchtime in Toronto today. The consensus amongst analysts locally is that he’ll focus more on the negatives for the economy as the positives would presumably allow him to sleep soundly!

With the US Dollar in a broad-based sell-off after the FOMC, USD/CAD opens at 1.2795 with AUD/CAD at a 6-week high of 0.9775