USD tumbles for no obvious reason. GBP best performer on the day, followed by EUR. AUD and NZD mixed but on balance a touch stronger.
Tuesday 19 December, 2017
Daily Currency UpdateThe Australian Dollar had quite a good day on Monday, though perhaps not quite as good as a quick look at the AUD/USD exchange rate would suggest. It couldn’t quite get back to Friday’s 0.7688 high – which was the best level since November 10th – on a day when the US Dollar itself was the weakest of all the major currencies. Each of the three main global time zones saw AUD/USD trade sequentially higher though by the end of the New York session, it had reached a best level of ‘only’ 0.7676.
The main event for investors in Australia to mull over was the Government’s Mid-Year Fiscal and Economic Outlook (MYEFO). This update traditionally gives the Government a good opportunity to make soothing noises to the international ratings’ agencies about economic growth and debt sustainability. In this regard, this latest MYEFO was exactly as expected.
The Government continues to forecast a return to budget balance in 2019-20 and then a surplus of $10.2bn in the 2020-21 fiscal year. A slowdown in the housing market and slower growth in wages have reduced the estimate of 2017-18 GDP from 2.8% to 2.5% though the unemployment rate is now seen a quarter of a percent lower at 5.5% and CPI has been left unchanged at 2.0%.
The initial reaction from the credit agencies was broadly positive. Moody’s said, “Overall, the modest changes in Australia’s fiscal and economic outlook maintain a credit-positive commitment to returning the budget to a surplus in fiscal 2021.
Moody’s continues to see risks that fiscal deficits will be wider for longer than the government projects. This reflects our expectation for more subdued nominal GDP growth than over the past decade, a consequent dampening of revenue generation and a testing climate for spending restraint. The mild reduction in the expected profile for wages growth embodied in the forecasts remains a concern.”
The AUD opens in Asia this Monday morning at USD0.7667 with AUD/NZD at 1.09458. The big event locally with be the 11.30am release of the RBA Minutes for the December Board meeting.
Key MoversAfter its very strong performance last week, the New Zealand Dollar was much more mixed on Monday. It rose against the US and Canadian Dollars, was down a little against the euro and Australian Dollar and fell somewhat more against the British Pound. As with the AUD, it couldn’t get back to Friday’s highs against the USD with an intra-day high of 0.7027 a couple of pips shy of last week’s best level.
The day began very well for the flightless bird. The BNZ performance of services index rose 0.7 points to 56.4 last month, above its long-term average of 54.4. All of the five sub-indices were above the 50 reading that separates contraction from expansion. The survey's new orders sub-index posted the highest reading, rising to 60.7 from 60.3, while activity/sales advanced to 60.5 from 58.2. This was the seventh consecutive month the new orders index has been above the giddy heights of 60 though the survey's employment sub-index continued to be a relatively softer component of the PSI; printing at just 50.6 from 51 in October.
The week ahead is packed with economic data as the official statisticians clear their diaries ahead of the local holiday season. Q3 GDP figures will finally be published on Thursday with growth expected to slow to 0.6% in the quarter for an annual pace of 2.4 per cent, whilst today we’ll get to see if the sharp fall in ANZ’s November business confidence has been at all reversed. There is no published consensus for this number, but recall that last month it plunged 29 points to an 8-year low of -39.
NZD/USD opens in Asia this morning at 0.6995 with NZD/EUR at 0.5937 and GBP/NZD at 1.9130.
The British Pound performed better than its cricket team yesterday but that is setting the bar really low! It opened in Sydney on Monday morning at 1.3320 and by mid-afternoon London time had reached a best level of 1.3415. It gave up some of these gains in New York but nonetheless finished as the day’s strongest performer amongst the major currencies we track closely here.
Although Prime Minister Theresa May has consistently declined to give what she calls a “running commentary” on Brexit negotiations, she always gives a statement to the House of Commons after EU summits. These used to be extremely dull, with little information content, but they have now become major set-piece Westminster events. The published text of her remarks to Parliament says, “the guidelines published by President Tusk on Friday point to the shared desire of the EU and the UK to make rapid progress on an implementation period, with formal talks beginning very soon… We will now work with our European partners with ambition and creativity to develop the details of a partnership that I firmly believe will be in the best interests of both the UK and the EU”.
Though this speech gave a pre-Christmas lift to Conservative MP’s and their supporters, it doesn’t take much textual analysis to spot the two big problems: The phrase “very soon” is not defined and could actually mean many months pass before even the most tentative agreement is reached. More importantly, there appears no desire on the EU side to work with creativity. Michel Barnier, the lead EU Brexit negotiator said at the weekend that “no way” could there be a bespoke trade deal that mixed those that applied to Canada and Norway. “There won’t be any cherry picking,” he said.
The GBP opens in Sydney this morning at USD 1.3382, AUD1.7452 and NZD1.9125. There are no UK statistics released this Tuesday.
The Dollar had a very poor day on Monday even if, with the benefit of hindsight, it is hard to pin the blame on any specific factor. Indeed, we’d repeat the wise words of Janet Yellen that “correlation does not imply causality”. Having opened in Sydney at 93.50, the USD’s index against a basket of major currencies reached a high of 93.55 in the first couple of hours of trading but from then on it was downhill all the way; falling in all three time-zones to a low of just 93.03 before rallying to 93.23.
The blame for its decline cannot be placed on the equity market. The S+P 500 index added almost 20 points to yet another all-time record high with the Dow Jones Industrial average up almost 200 points. Nor can the finger of blame be pointed at the bond market. Ten-year US Treasuries were steady at 2.38% whilst 2-year yields climbed a couple of basis points to 1.83%. If political nerves were the culprit, this would surely have been reflected in a lower, not a higher, stock market. As for the day’s economic data, the NAHB homebuilders index smashed consensus expectations of 70 and rose to 74; its highest since December 1999.All we can say with confidence is that the Dollar fell. Be very wary of anyone who claims to know why.
The US Dollar index opens this morning in Asia at 93.23 with all eyes still on the passage through Senate of the tax reform bill. US economic data for Tuesday are housing starts and building permits; rarely market movers but – as we saw Monday – sometimes markets move for no obvious reason at all.
The euro had a good day on Monday, rising first in Asia, then in Europe and early in the New York day reaching its best level since just before last week’s ECB meeting. From an opening level around 1.1745, it reached 1.1818 before sliding back late in the day to the high 1.17’s. This strength in the Single European Currency came despite a very dovish speech from ECB Council member and Bank of Finland Governor Erkki Liikanen and the details of the final Eurozone CPI numbers for November.
Ms Liikanen said the recovery of the Euro area economy and reduction of economic slack supports confidence in inflation converging towards our inflation aim in due course but, “An ample degree of monetary stimulus is still required for underlying inflation pressures to continue to build up and support headline inflation developments over the medium-term”.
Inflation in the Eurozone was confirmed at 1.5% y/y in November. This was boosted by higher energy prices (which are now up 4.7% y/y) whilst food, alcohol and tobacco eased back to 2.3%. Core CPI rose just 0.9% y/y, in line with the preliminary estimate and it is for this reason that the ECB persisting with a very easy monetary policy even as the real economy is accelerating at a pace not seen since well before the GFC.
The EUR opens in Asia this morning at USD1.1780 and AUD/EUR0.6506. The big data point on Tuesday will be the German ifo Survey which last month jumped to an all-time high of 117.5 and is expected unchanged at this level in December.
After last week’s very well-received speech, the Governor of the Bank of Canada gave an interview to the Globe and Mail newspaper this last weekend in which he played down the importance of so-called forward guidance. “I'm confident that other central banks, now that we are getting much more into normalcy, will gradually temper down the details around their forward guidance, too… I'm not going to judge whether the market got it right or not. But it does seem like the market has a tendency to seize on a new word as if it's a new secret code. Caution does not mean sitting back and doing nothing.”
For the moment, the Canadian Dollar hasn’t really responded to these latest comments. It spent all of Monday trapped in a range from USD1.2848 to 1.2878; shrugging off a 30c fall in oil prices but failing to get any real traction from Mr. Poloz’s call on interest rates that, “We need to get ourselves up there for real, and to the 2-per-cent zone, so we have room to manoeuvre for the next shock that comes along."
For the rest of the week, there’s still plenty to come on the Canadian economic data calendar. Wednesday is wholesale trade, Thursday is CPI and retail sales and on Friday it’s the monthly GDP numbers for October.
The Canadian Dollar opens in Asia this morning at USD1.2870 with AUD/CAD at 0.9865 and NZD/CAD at 0.9005.
- AUD/NZD: 1.0910 - 1.0980 ▼
- GBP/AUD: 1.7380 - 1.7530 ▼
- AUD/USD: 0.7640 - 0.7690 ▼
- AUD/EUR: 0.6480 - 0.6530 ▼
- AUD/CAD: 0.9840 - 0.9900 ▼