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USD steadies after data but AUD now down to US 75 cents

By Nick Parsons

Writing here 24 hours ago about the upcoming economic data in Australia, we said, “The AUD is unlikely to react well to any number which falls shy of expectations”. Well, the numbers were below consensus forecasts and the Aussie Dollar got trashed; falling against every major currency in the world and most of the Emerging Markets ones too. AUD/USD tumbled to a low of 0.7575with AUD/NZD at one point below 1.10 for the first time since October 18th.

We said yesterday, “the risks [for the Wage Price Index] appear very moderately skewed to the downside” but in the event a big miss threw rate hike hopes/expectations completely out of the water. The RBA last week said it wanted to see, “how much wage growth will pick up in response to improved labour market conditions and the associated reduction in spare capacity”. The simple answer from Wednesday’s numbers is “not very much”. This isn’t a specific criticism of the RBA; they are merely guilty of the group-think which has afflicted Central Banks worldwide.

The Bank of England and the US Federal Reserve cling grimly on to their models which show that lower unemployment should lead to higher wages. Instead of seeking to explain why it hasn’t happened, they merely reiterate a strongly held belief that it eventually will. It’s quite possible that today’s employment report will show continued job gains. It may even bring a very modest bounce for the AUD. The one thing it won’t do, however, is shift the dial higher on interest rate expectations. Rallies in the Aussie Dollar still seem very likely to be met with heavy offshore selling. Indeed, on a jobs number less than the +18k consensus, a rally won’t even happen.

For international currency investors, the Kiwi Dollar has really slipped off the radar these past 36 hours. Price action on Tuesday was driven by better than expected numbers in Australia which pushed the AUD/NZD pair up to a high of 1.1131 but weaker Aussie wage data Wednesday slammed the cross back down at 1.0990; the first time it has been on a 1.09 ‘big figure’ since October 19th. NZD/USD benefitted from the US Dollar’s early weakness yesterday to reach a high of 0.6914 but it then gave back almost 40 pips to close in New York around the 0.6875 level.

Our economic tongue has been firmly in cheek this week as we’ve spoken about the upcoming NZ concrete production numbers on Thursday, and in all honesty it would be a big shock if the market reacted much to them when they are released. ANZ’s consumer confidence index is also published but there’s so little interest in this amongst the professional investor community that Bloomberg doesn’t even publish a consensus forecast. Friday brings PMI and PPI data but with no RBNZ meeting now until February 8th, Kiwi currency traders will likely continue to take their clues from the AUD/NZD cross.

The British Pound had another choppy overnight session though the absolute magnitude of its’ moves was much lower than in recent days. GBP/USD ended Tuesday in New York at 1.3160 then in the 20 minutes either side of Wednesday morning’s batch of UK economic numbers traded both at 1.3138 and 1.3197. The peaks and troughs then became progressively narrower during the day and GBP/USD ended the New York session around 1.3173; barley 10-15 pips from where it had opened in Sydney 24 hours earlier.

As for the data themselves, the jobless rate was steady at 4.3% though the number of people in employment across the UK fell for the first time in nearly a year. There were 32.06 million people in work in July-September, which is a 14,000 drop on the previous quarter. On wages, meantime, both measures (including and excluding bonus payments) were pretty much in line with consensus expectations at 2.2% y/y.

A year ago, the Bank of England forecast earnings would grow 3.0% in 2017 and it continues to believe there’ll be a strong pick up over the next 18-24 months. Unless and until they do, then with CPI of 3.0%, the squeeze on real incomes and consumer spending in the UK looks set to continue for some time to come. The GBP will find it difficult to rally unless there’s some unexpected good news on the political or Brexit fronts and whilst GBP/AUD it a 5-month high of 1.7390, this really tells us more about the Aussie Dollar than the British Pound.

The USD has just had a very mixed 24 hours; down for the first half and then a recovery in the second. At the start of trading in Sydney on Wednesday morning, the US Dollar’s index against a basket of major currencies stood at 93.52. By mid-morning in London it had tumbled to just 93.18; its lowest level since the day of the ECB Council Meeting back on October 26th. Immediately prior to the latest batch of US economic data, the USD index had slipped further to an intra-day low of 93.12.

Taking the numbers as a whole – retail sales, CPI and real hourly earnings – they were broadly in line with consensus expectations. Retail sales were up 0.2% m/m against consensus expectations of no change, the ex-autos number was a tenth weaker at +0.1% m/m but the so-called ‘control’ group’ which feeds into GDP was bang in line at +0.3%. Headline CPI met expectations at 2.0% y/y whilst the core ex-food and energy was a tenth higher at 1.8%. The CME’s online calculator at the beginning of the Northern Hemisphere day showed the probability of a December Fed hike at 96.7%.

The euro had the archetypal ‘day of two halves’ in the Northern Hemisphere. It may have been glued for a very long time recently on a USD 1.16 ‘big figure’ but it didn’t spend very long at all on 1.17; taking barely 12 hours to trade up to 1.18 and on to a best level of 1.1858 just before the US economic numbers were released. At this point in time, AUD/EUR had dived to 0.6409; a fresh low for 2017. As the US economic numbers were no worse than expected and, as noted above, interest rate expectations were entirely unmoved by the data, the EUR ran into a modest bought of profit-taking which saw it ease back to an afternoon low of 1.1793 which is where it opens in Sydney this morning.

The day ahead in Europe brings October’s final CPI reading and it would be a big surprise if it were much changed from the provisional estimate of 1.4% y/y. ECB Council member Constancio speaks late Thursday in Ottowa and he can at least smugly reflect that he’ll be earning more airmiles than he’s BoE counterparts who have the joys of a trip to Liverpool! We’d expect any further pullback in the EUR/USD exchange rate to be fairly limited with plenty of buyers on dips should US equity futures again turn lower through the Asian time zone.

We’ve been warning over the last couple of days that the Canadian Dollar’s recent good run could be coming to an end and Wednesday was indeed a poor day for the CAD. The currency was hit by a combination of lower energy prices and a generally poor set of domestic economic data. House prices in Canada fell another 1.0% m/m in October after a -0.8% decline in September which took the annual rate of growth down from 11.4% to 10.0%; a number which we can be virtually certain will fall much more sharply over the next 6-9 months.

As prices fell, so too did the pace of transactions with existing home sales up just 0.9% m/m in October after a 2.1% m/m gain in September. In the commodities complex which has recently been one of the big props for the currency, NYMEX crude ended the day unchanged at $55.45 having at one point fallen as low as $55.16. USD/CAD ended the New York session up at 1.2768 having been as high as 1.2787 whilst AUD/CAD opens in Sydney this morning around 0.9681; barely 40 pips off an 11-month low.