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AUD steadies but NZD/USD nears fresh 2017 low

By Nick Parsons

Thursday’s Australian labour market report was a classic example both of why foreign exchange can sometimes be such a difficult asset class, and why it pays to look beyond the immediate headlines which flash across the screens and the news wires. The world is a dangerous place already without adding unnecessary layers of excitement by programming trading systems to react in a pre-determined way to economic data releases. From a starting point of 0.7593 yesterday, the AUD/USD pair traded at both 0.7584 and 0.7606 within moments as the employment numbers were simultaneously better and worse than expectations: weaker job creation but a lower unemployment rate. A more considered look at the data showed not only the weakness in jobs was false: full-time job creation far outstripped the losses in part-time employment but so too was the strength of the unemployment rate; it fell largely because the participation rate fell a tenth to 65.1%. The more considered reaction to the data would have been to do nothing and that’s pretty much what then happened over the next 18 hours! AUD/USD has been stuck in a 22 pip range from 0.7582 to 0.7604 and finishes the NY session exactly unchanged from where it was one minute before the jobs report. Overall, that seems a fair reaction.

Price action in the New Zealand Dollar has been fairly poor over the last 24 hours. From a high of USD0.6918 on Wednesday, it fell steadily to a fresh November low of 0.6837 at this morning’s North American open. It has subsequently recovered around 20 pips off the low point but overall the NZD has today been the worst performer of the currencies we follow here. With no major economic data locally, such attention as there was on these matters settled on the delivery of ready-mixed concrete in the 3 months to September which fell slightly from the June quarter, and is barely above the level it was a year ago. The main centres of population are now showing year-on-year declines; Auckland is down -4.2%, Wellington is down -12.5% and Christchurch down -14.6%. Meantime, separate figures showed the ANZ Roy Morgan Consumer Confidence Index eased from 126.3 to 123.7 in November; its lowest in 7 months. Looking ahead, Friday brings PMI and PPI data but with no RBNZ meeting now until February 8th, international investors selling the NZD feel they’re pushing on something of an open door. NZD/USD is below its 20, 50, 100 and 200 day moving averages and a close below 0.6830 would set a fresh 2017 low.

The British Pound almost managed to stay on the same big figure against the US Dollar (1.31) for the whole of the last 24 hours but there were a few minutes where it briefly printed 1.32 and the high in New York was 1.3203. By the end of the North American session, it was back down at 1.3183. With a pretty stable Aussie Dollar, it’s been a similar pattern for the GBP/AUD cross which reached an intra-day high of 1.7395 before settling back to 1.7367 at the NY close. Economic data in the UK in the first part of this week showed the cost of goods and services as measured by the CPI, the number of people in work and the amount they were collectively paid. On Thursday, we got to see how all that translated into consumer spending. After a -0.8% m/m tumble in September, October rebounded a little to +0.3% m/m; a tenth above consensus expectations. The annual rate of sales is now negative (-0.3% y/y) for the first time since 2013 and the official statisticians comment that, “growth month-on-month in October was particularly strong in the second-hand goods sector”, doesn’t exactly point to buoyant consumer confidence. Speaking in Liverpool, BoE Governor Carney said, “If the economy evolves broadly in line with our projections we would probably raise interest rates a couple of times over the next few years… But there’s some pretty big forces, some pretty big decisions still to be taken with respect to Brexit by the UK Government and the Europeans and all of those things can affect it”. There’s no UK economic data scheduled Friday so it looks like a somewhat calmer day ahead unless UK politics suddenly turn nasty.

The memo about buying the dip may have arrived 24 hours late but it finally got there. The S+P 500 index is up over 20 points and the December futures contract is up more than 30 points from Wednesday’s intra-day low of 2,556. There’s been no particular catalyst for this move, though we’d note that ahead of the opening bell, WalMart exceeded analysts’ earnings expectations and Cisco gave a boost to the entire tech sector. As for the tax reform agenda, House Republicans passed their bill on Thursday with a 227-205 vote though it still isn’t clear whether it will have enough support to pass in the Senate. In economic news Thursday, weekly jobless claims were a higher than expected 249k but industrial production beat expectations with a +0.9% m/m gain and manufacturing output surged 1.3% against forecasts of a more modest, but still impressive +0.6% increase. Putting it all together, the best day for the stock market in almost 3 months, renewed hopes around tax reform and slightly higher US bond yields have all supported the US Dollar. Its index against a basket of currencies ended up around half a percent on the day at 93.65, having touched a low on Wednesday of 93.11. As for interest rate expectations, the CME online calculator shows a 91.5% probability of a 25bp December Fed rate hike but, unbelievably, an 8.5% chance of 50bp. Perhaps the econometricians should have attended that Central Bank course on policy communication…

The euro has found it very difficult to hold on to a USD 1.18 ‘big figure’ and has spent the whole of the last 24 hours between 1.1760 and 1.1799. The move lower came even though ECB Chief Economist gave a pretty upbeat address to a working group of bank economists in Brussels on Thursday morning. He noted that, “domestic demand has become the mainstay of growth in the euro area, making the recovery more resilient to developments overseas. Real GDP growth is projected to remain above potential growth in the coming years. The strength and resilience of the recovery tends to foster our confidence that reflationary forces will gradually support a return of headline inflation towards a level that is below, but close to, 2% over the medium term”. For all the fancy econometric analysis available to the ECB through its vast and highly-qualified Research staff, we’d simply point out that petrol prices are now rising throughout Continental Europe and the UK. Over the last month, there’s been nearly a 5% jump in prices at the pump. And, when prices rise, so does inflation! EUR/USD opens in Sydney this morning around 1.1760; barely 20 pips below its level 24 hours ago. There’s not a lot on the economic calendar on Friday so we’d expect it to spend a bit more time on USD 1.17 than it did on the way up.

The Canadian Dollar has eked out some very modest gains against most of the major currencies and helping draw under a line after its wobble over the past couple of days. Official data on manufacturing sales were quite a bit better than consensus (actual +0.5% m/m versus f/c -0.5%) and USD/CAD has edged down from the high 1.27’s to around 1.2750 at this morning’s Sydney open. On an otherwise quiet day for news, ADP launched their first Canadian Employment Report at a breakfast function in Toronto. Their US report used to be quite widely watched as a lead indicator of payrolls but in fact now it incorporates the last official numbers as in input, making it a much less reliable guide to upcoming data. ADP had trumpeted, “Leaders from ADP will speak about the October report, what it means to the Canadian economy, and how to use monthly employment insights to make more informed decisions”, and we noted overnight that it might get a bit of coverage on an otherwise quiet day. For what it’s worth, the new report put the monthly change in Canada’s September non-farm payrolls at -5,700 but an upbeat Press Release said, “The Canadian economy has added more than 250,000 jobs so far this year, which is 25 percent more than the total number of jobs created in all of 2016.” Whether Thursday’s very modest CAD rebound can be extended still remains to be seen…