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USD rises for 6th day out of last 7 as stocks make fresh all-time highs. AUD finally catches a bid, NZD pauses, GBP and EUR soft again.

By Nick Parsons

Content: Having finished Monday way out at the top of the FX pile and up against every major currency, the Kiwi Dollar extended its gains even further on Tuesday morning before finally giving back a little of its stellar performance. It still finished the day up against every currency apart from the AUD (against which it was net unchanged at 1.0900 having at one point been to AUD/NZD1.0864) and did best against both the GBP and EUR.

Why is it, our readers may wonder, that the appointment of just one person to the Central Bank might have such a disproportionate impact on the FX market? There are two parts to the answer: firstly, we always have to take investor positioning into account. After the September 23rd General Election in New Zealand, there were worries about the overall direction of economic policy, the attitude towards inward capital flows into the residential property market and a change in the Central Bank’s inflation fighting mandate. Investors were generally short of NZD, either outright or relative to neutral benchmark weights. Such positions are always vulnerable to a squeeze on unexpected positive news flow. Secondly, New Zealand doesn’t have a monetary policy committee with separate votes for each member. As the RBNZ notes on its own website, “At the Reserve Bank of New Zealand responsibility and accountability for monetary policy rests on one individual − the Governor of the Reserve Bank”. If he or she wants to change interest rates, they are changed. It’s as simple as that.

After giving back some – but by no means all – of Tuesday’s gains, the Kiwi Dollar opens in Asia this morning at USD0.6935 whilst GBP/NZD at 1.9190, is a more than 5 cents below last Thursday’s highs up around 1.9760.

Although the Aussie couldn’t hold on to its best levels against a very strong US Dollar, Tuesday was actually a pretty good day. It held its ground against the buoyant NZD and finished up against every major currency we track here with its biggest percentage gains versus the EUR (+0.7%) CAD and GBP (both +0.5%). Sometimes it helps to be lucky and we’ll humbly thank serendipity for the fact that AUD/USD peaked at 0.7576 after we’d pointed out here 24 hours ago that the first level of technical resistance on the chart came at 0.7577…

Tuesday’s NAB Survey can take some of the credit for the AUD rally, for behind the headlines on Business Confidence and Conditions, there was stable employment (+7) and the fact that most measures of activity and confidence are still above their longer-term averages. More importantly perhaps, is the fact that offshore traders who have seen the NZD soar don’t want to be caught facing the same way with excessively short positions in the AUD ahead of Thursday’s Australian labour market report. Everyone makes mistakes but the secret is to try to learn from them, not replicate them.

The diary for Wednesday shows a couple of RBA speakers: Governor Phil Lowe is first up with a speech at the Australian Payments Summit in Sydney but with perhaps more meat for the markets, Deputy Governor Christopher Kent is talking at a Finance and Business Conference on “The availability of business finance”.

Looking forward to Thursday, 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.

For today, AUD/USD opens in Sydney around USD0.7555; a quarter of a cent below its best level in New York but still a net 20 pips up on the day against a very strong US Dollar. AUD/NZD, meantime, begins at 1.0900; up almost 40 pips from Tuesday morning’s low.

Tuesday morning’s British newspapers for once weren’t dominated by Brexit but as we wrote in our London morning commentary, “this may well be only a temporary reprieve, both politically and for the currency”.

For six days, UK MP’s have been debating the Brexit Bill; what is known as the Committee Stage. The trickiest votes have been scheduled for tomorrow and for next Wednesday. Though the Government has either backed down with concessions or narrowly won all of the procedural stuff so far, there is a proposal by the former Attorney General 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. This could well be the moment for a more serious rebellion than the votes thus far which have been on the scale of what colour paperclips to use.

Amidst the relative Brexit calm, Tuesday brought the November CPI numbers. We had thought that higher petrol prices might outweigh Black Friday discounting and luckily this is exactly how it turned out. CPI printed at 3.1% y/y which will require the Governor of the Bank of England to write a letter of explanation to the Chancellor; the central banking equivalent of being made to sit on the naughty step.

There is little realistic chance of a near-term rise in UK interest rates so the focus is on the squeeze in real earnings which is worsening as the holiday season begins. UK wages have grown by less than prices for almost the whole of 2017 and there’s no sign yet the squeeze is easing. It’s a very cold and bleak pre-Christmas period. The GBP fell 80 pips against both the AUD and NZD on Tuesday. GBP/USD did its usual 50 pip intra-day high-low swing on the CPI release and then slid back to the day’s lows in New York. It opens in Asia this morning at USD1.3310 with GBP/AUD at 1.7605.

The USD is on a real hot streak at the moment, rising for a 6th day out of seven on Tuesday to take its index against a basket of major currencies up to a high of 93.81; its best level since November 14th.

US equity markets reached all-time closing highs on Monday and then before Tuesday’s opening bell on Wall Street, futures markets made new all-time intra day highs, keeping up a stream of positive headlines right into the close. Not even the President could contain his excitement, tweeting, “Consumer Confidence is at an All-Time High, along with a Record High Stock Market. Unemployment is at a 17 year low. MAKE AMERICA GREAT AGAIN! Working to pass MASSIVE TAX CUTS (looking good)”.

The Fed ends its two-day FOMC meeting today and it is a near-certainty that rates will be raised 25bp. The only reason that some of the online calculators show an 88% probability of a 25bp hike is that the residual 12% reflects a 1-in-8 chance of a 50bp move. Now that would be a shock!

On the US economic calendar this week, CPI is released Wednesday, Thursday brings retail sales and Friday is industrial production. If the stock market can withstand higher rates and a new set of interest rate projections for 2018, the US Dollar ought to continue to find some support, at least until all the short positions have been squeezed out…

Apart from a brief rally around the release of the ZEW Survey (see below) it was downhill all the way for the EUR on Tuesday. Yet again, it fell against every major currency with its biggest losses against the AUD and NZD (-0.5%) but down -0.4% against the USD and 0.1% against the GBP. Looking at individual pairs, EUR/USD fell to a low of 1.1720; matching its lowest point in 3-weeks whilst AUD/EUR rose 40 pips to 0.6440 and NZD/EUR was up 35 pips at 0.5905.

The latest ZEW survey of professional investors in Germany was not to blame for the EUR’s drop. The headline expectations index dipped to 17.4 in December from 18.7 in November, marginally below the consensus of 18.0. The current situation index rose slightly to 89.3, from 88.8, very slightly above the consensus 88.7. The details showed that both Eurozone and German inflation expectations increased in December, and short-term rate expectations also rose a little. Expectations for the stock market rose across the major Eurozone countries, and investors also anticipate a slightly weaker dollar versus the euro.

Over the next few days, there’s an ECB Council Meeting at lunchtime on Thursday at which new staff economic projections will be unveiled and we’ll get the ‘flash’ December PMI’s on Thursday morning. For today, European Commission President Juncker and European Council President Tusk are scheduled to brief members of the European Parliament about Brexit negotiations ahead of the EU Economic Summit in Brussels on Friday.

Content: The Canadian Dollar had a day of two halves on Tuesday, tracking oil prices both up and down. The early news was that the North Sea Forties Pipeline System – which carries 400,000 barrels per day of oil to Scotland – is being closed for repairs after the discovery of a serious crack whose repair will likely take weeks rather than days. Fortunately (for production rather than prices) the damage is on an onshore section of the pipeline which will be much easier to repair than if it had been underwater but it is still a major disruption to supply.

NYMEX crude (not a perfect substitute for Brent but still highly correlated to it) jumped 50 cents to a high of $58.55 but then plunged a dollar-fifty in the North American session to $57.20. USD/CAD had moved down from 1.2855 at Tuesday’s Sydney open to 1.2820 at the New York open before the combination of a generally very strong US Dollar and a weaker energy complex (natural gas plummeted 4.2%) lifted USD/CAD by around 60 pips in New York.

The rest of the week is pretty light in terms of economic data with just new house prices on Thursday and the monthly survey of manufacturing on Friday. Bank of Governor Stephen Poloz has a fascinatingly titled speech “Issues keeping me awake at night” on Thursday lunchtime in Toronto which is presumably not about his list to Father Christmas…