USD eases back after 5 straight gains; NZD soars on announcement of new RBNZ Governor
Monday 11 December, 2017
Daily Currency UpdateThe US Dollar last week completed a clean sweep; rising for five consecutive days. Friday’s gain was only very marginal but the statistics don’t lie: its index against a basket of major currencies ended the week at 93.50 having begun around 92.80. For sure, it was not a huge percentage gain but it did have the benefit of being stable and progressive, without the volatility which most of the other currencies suffered throughout the period.
In overnight trading in Asia and London, the USD has given back around 15 pips of its gains to open in New York this morning around 93.35. This mostly results from a modestly higher EUR/USD exchange rate as the euro comprises around 57% of the dollar’s narrow trade-weighted index. The Japanese Yen has a 14% weight, GBP 12%, CAD 9%, with the Swedish Krone and Swiss Franc both at 4%.
The Fed begins its two-day FOMC meeting tomorrow and it is a near-certainty that rates will be raised 25bp. First up on this week’s US economic data calendar is the so-called “JOLTS” report; the Job Opening and Labour Turnover Survey. This is often said to be one of Fed Chair Janet Yellen’s favourite indicators of labour market activity though it hasn’t gotten much traction with currency or interest rate analysts. The NFIB Survey of small business optimism comes Tuesday, 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 (S+P futures are indicating a very modestly higher open) , the US Dollar ought to find some support though we wouldn’t rule out a move down to 93.00 in the meantime.
Key MoversThe Canadian Dollar had a much calmer week, even if calm doesn’t necessarily mean good. It opened at USD1.2704 and by Tuesday morning reached a best level of USD1.2644 as investors anticipated the possibility of a hawkish surprise from Wednesday’s Bank of Canada policy meeting.
There was nothing too troubling in its review of the domestic economy though the CAD was hit by the line that, “While higher interest rates will likely be required over time, the Governing Council will continue to be cautious, guided by incoming data in assessing the economy’s sensitivity to interest rates, the evolution of economic capacity, and the dynamics of both wage growth and inflation”.
USD/CAD jumped up to 1.2800 almost immediately and by the New York close on Friday it was up at 1.2850; almost exactly where it was just before the stunning Canadian employment report 10 days ago. The week ahead is pretty light in terms of economic data with just new house prices on Thursday and the monthly survey of manufacturing on Friday.
The euro’s low last week came right at the open of North American trade on Friday morning when it simultaneously hit USD1.1735 and CAD1.5067 (It had been lower against the CAD before the BoC meeting when it printed at 1.4930). It recovered a little into Friday’s close at USD1.1775 and has marginally extended its gains early this Monday morning.
There was some talk at the weekend that the euro’s poor performance might have been linked to the European banking sectors’ seasonal demand for USD financing ahead of year-end; a phenomenon which has seen the cross-currency basis swap move sharply lower (USD more expensive to borrow) in each of the last two calendar years and which seems to be repeating again in 2017. The very last working day of 2016 proved to be especially painful for international bank funding desks and there may be a willingness to pay up early for year-end money rather than suffer the extreme and very expensive volatility of end-Dec 2016. If this explains last week’s EUR weakness, however, it still doesn’t solve the puzzle of why it’s a bit stronger this morning.
For the week ahead, there’s an ECB Council Meeting at lunchtime on Thursday at which new staff economic projections will be unveiled. Before that, tomorrow its Germany’s ZEW survey of professional investors and we’ll get the ‘flash’ December PMI’s on Thursday morning. On Wednesday, 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. At the start of business in North America today, the EUR opens up very slightly against the USD at 1.1790 EU/CAD at 1.5160.
The British Pound first rallied hard then fell sharply on Friday in reaction the deal finally announced in Brussels between the UK and Irish governments which allowed the Brexit negotiations to move forward to ‘Phase Two’ at which trading arrangements between the UK and EU are supposed to be agreed. The GBP’s decline came as worries grew about whether the Government’s own MP’s would support the Irish border deal and whether in fact ‘regulatory alignment’ was just the same as staying in the EU but paying a big bill in order to do so!
Over the weekend, with the Foreign Secretary away for meetings in Iran, the Minister for Exiting the European Union, David Davies, described the agreement as a “statement of intent” which was not legally enforceable, suggesting that the government could walk away from the deal. He also said that Britain would not pay a divorce bill without securing a trade deal with the EU in return; in contrast to the chancellor who said last week it was “inconceivable” that Britain would fail to honour its international obligations. Mr. Davis said of the bill, “It is conditional on getting an implementation period. Conditional on a trade outcome. No deal means that we won’t be paying the money.”
Investors are struggling to know what weight to ascribe to policy announcements which seem to be made up, announced, then quickly rescinded. Indeed, only this morning The Brexit Secretary was forced to issue ‘clarification’ of his comments; none of which left observers any wiser.
For the week ahead, there’s a busier economic calendar than we’ve seen recently. CPI, average earnings and retail sales are all due before Thursday’s BoE MPC meeting. So far in Asia and the European morning sessions, the GBP has already been up, sold off then reversed again without ever gaining much traction in either direction. It opens in North America this this morning at USD1.3370 with GBP/CAD at 1.7180.
The Australian Dollar is a bit firmer in London this morning after a week which wasn’t dramatically bad but nonetheless saw the currency slide to 6-month lows against the US Dollar (0.7503) and its worst level in almost 18 months against the British Pound (1.7985).
With the Reserve Bank of Australia clearly in no rush whatsoever to tighten monetary policy (and now not having another Board meeting for almost two months), the income economic data in Australia have largely been disappointing. Last week saw GDP and trade data fall shy of analysts’ expectations whilst the previous week saw softness in consumer confidence, wages and house prices. It would be an even more depressing picture were it not for the fact that its nudging 80 degrees Fahrenheit in Sydney this week with another blistering Summer in prospect.
The third cricket test match between England and Australia gets underway in Perth, Western Australia on Thursday. So far, and to no-one’s great surprise, Australia are 2-0 up in the 5-game series. It’s a fair bet that the sport will get more column inches than the official labour market report which is released a couple of hours before play begins. Analyst expectations centre on a 15,000 increase in employment with the unemployment rate steady at 5.4%.
For today, the AUD opens in New York and Toronto around 50 degrees cooler than in Sydney. AUD/USD is at 0.7525 with AUD/CAD at 0.9670.
After a very choppy week, the volatility of the NZD has continued and it is back at the top of the FX pile; up against every major currency. This time, at least, there is some genuine news to explain the move: the appointment of a new Governor of the RBNZ. Finance Minister Grant Robertson has announced Adrian Orr – a well-respected and highly experienced professional economist, former head of financial stability at the RBNZ and currently head of the NZ Superannuation Fund - will take up the post in the New Year.
The new Labour-led government in New Zealand wants to add full employment to the bank’s inflation-fighting mandate and change its governance structure, including the appointment of outside experts to its policy committee. The appointment of a classically-trained insider to be the new Governor will help calm investor fears about a too-radical shift of direction which have weighed on the NZD since the election on September 23rd.
NZD/USD is up around 80 pips at 0.6920 in North America this morning with NZD/CAD more than a full cent higher at 0.8890.
- USD/CAD: 1.2830 - 1.2880 ▼
- EUR/USD: 1.1735 - 1.1840 ▼
- GBP/USD: 1.3320 - 1.3430 ▼
- AUD/USD: 0.7510 - 0.7570 ▼
- NZD/USD: 0.6860 - 0.6950 ▼