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USD dumps after FOMC Minutes, AUD struggles against everything else

By Nick Parsons

The Kiwi Dollar hasn’t had much independent direction of its own this week with an AUD/NZD rate firmly stuck around 1.1080 until Wednesday’s New York session when it finally broke 20 pips lower to 1.1060. This break and more general USD weakness saw NZD/USD pick up almost half a cent to 0.6875; its best level in almost a week. Yesterday we saw the latest official data on overseas visitor numbers to New Zealand. These always make fascinating reading. Short-term visitor arrivals, which include tourists, people visiting family and friends and people travelling for work, reached 3.7 million in the October year, up 8 per cent from a year earlier and a new annual record. Statistics New Zealand says the number of people going to New Zealand on holiday rose 8.6 per cent on an annual basis to 1.9 million people. During the past five years, annual visitor arrivals have regularly hit record highs, and have risen by more than one million, or 40 per cent, since the upward trend began in 2013. Meantime, people living in New Zealand took a record 2.83 million overseas trips in the October 2017 year, up 11 percent on the October 2016 year. If the NZD stays down at current levels, then a trip from North America will be around 3% cheaper than a year ago whilst UK tourists will find the Pound buys around 10 per cent more than it did back in November 2016.

The Australian Dollar has managed to gain some ground against a very weak US Dollar, but it is lower against most of the other FX majors: EUR, GBP and CAD and has even slipped a bit against the Kiwi Dollar. We’ve been arguing here that investors were wrong to focus on RBA Governor Lowe’s comments that, “it is more likely that the next move in interest rates will be up, rather than down” as they weren’t time-defined, most certainly did not indicate an early tightening of policy and told us nothing about the pace of rate hikes relative to the rest of the world. Sometimes it is nice to see a plan come together and feel vindicated when it happens. On a day when the US Dollar index finally broke down through key technical support at 93.30, a net gain for AUD/USD of just 40 pips over the past 24 hours is pretty unimpressive. Yes, it is just overhalf a cent off the European session low of 0.7560 but the feeling persists that it really should have done better. With the US celebrating Thanksgiving on Thursday and all this week’s Australian economic data all out of the way, investors locally can get down to the serious business of watching the first Ashes Test in Brisbane. England’s cricket fans now get A$1.75 per pound which is the most in more than a year. It may take some of the sting out of buying consolation beers…

The pound had a pretty mixed day on Wednesday – up against the USD and AUD but down slightly against the EUR, CAD and NZD – after UK Chancellor Philip Hammond delivered his annual Budget speech to the House of Commons. He had the seemingly impossible task of spending more whilst borrowing less against the backdrop of a slowing UK economy and though he generated some initially popular headlines with the scrapping of taxes on house purchases by first-time buyers, the economic numbers he presented from the independent Office for Budget Responsibility (OBR) made for pretty grim reading. After growing just 1.5% in 2017, UK GDP is then expected to grow over the next five years by 1.4, 1.3, 1.3, 1.5 and 1.6 percentage points. Never in modern history has a UK Chancellor stood up to forecast growth below 2% in every one of the next five years. Even the initially positive news headlines might not stand up to much scrutiny when it’s realised that cutting transaction taxes merely pushes up prices with the benefits accruing to existing owners, not new homebuyers. It is often said that a Budget should be judged after 5 weeks, not 5 minutes and if the smiles on the Government benches begin to evaporate, then so too will the recent enthusiasm shown for the GBP…

Even before the Minutes of the last FOMC Minutes were released, the US Dollar had been under pressure; its index against a basket of currencies falling below the key technical support level at 93.30 that we have been highlighting here for the past 10 days. In our London opening commentary on Wednesday, we drew attention to Janet Yellen’s speech at NYU. She said inflation should rebound over the next year or two, although “I will say I am very uncertain about this. My colleagues and I are not certain that it is transitory, and we are monitoring inflation very closely… It may be that there is something more endemic going on or long-lasting here that we need to pay attention to.” These doubts (well-founded in our view) helped push the US Dollar lower throughout the day and were later confirmed in the FOMC Minutes. “A number of participants were worried that a decline in longer-term inflation expectations would make it more challenging for the Committee to promote a return of inflation to 2 percent over the medium term. These participants’ concerns were sharpened by the apparently weak responsiveness of inflation to resource utilization and the low level of the neutral interest rate, and such considerations suggested that the removal of policy accommodation should be quite gradual.” The USD index has now tumbled below 93.00 to a low of 92.91 and with the Thanksgiving holiday Thursday, there’s nothing now to prevent further USD losses.

The euro had a pretty good day on Wednesday, regaining a 1.18 handle against the US Dollar and up against all the currencies we follow apart from the CAD. In our New York morning comment (OFX never sleeps!) on German politics, we noted Press reports suggesting Ms. Merkel’s team expected increasing public and political pressure on the SPD to abandon its aversion to a rerun of a "grand coalition" with the Chancellor’s Christian Democratic Union. On Monday, SPD leader Martin Schulz had said: "I will never join a government with Angela Merkel." In response, the Chancellor told ZDF television, "I do hope that they will reflect very intensely about whether they should step up and take responsibility." Opinion polls published Wednesday afternoon show why Ms. Merkel might wish to avoid a return to the ballot box: one survey showing her Conservatives on 29.2 per cent - sinking below 30 per cent for the first time since she took over in 2000 – whilst another put her Christian Democrat party and her current Bavarian coalition allies (CDU/CSU) on exactly 30 per cent, their lowest level ever. With the opposition SPD also losing support, the big gainer continues to be the right-wing AfD party. It is this fact alone which might persuade the traditional parties to re-visit Coalition negotiations; something which would surely be seen as EUR positive.

The Canadian Dollar had another good day on Wednesday, boosted by a further sharp rise in oil prices to their highest level of the year. As recently as last Tuesday, NYMEX crude was at $55.19 per barrel. On Tuesday this week it finished in New York around $57.05 and yesterday it traded – and then closed - as high as $58.02. The rise in oil prices was very timely for the Canadian Dollar as some of the earlier optimism around the ‘NAFTA 2.0’ began to be reassessed locally. Indeed, one of the major banks locally in Canada put out a report saying the CAD could fall as much as 20% if the talks failed in the New Year. They stressed this was not their central scenario (otherwise they might now be looking for a new Head of Research!) but noted, “Despite ongoing threats from President Trump and a more contentious renegotiation process of late, we continue to view NAFTA termination as a tail risk… the risk of significant negative impacts to economic activity and financial volatility, through the channel of policy uncertainty, is non-trivial.” USD/CAD is down 75 pips from 1.2780 to 1.2705 over the past 24 hours whist the AUD/CAD cross is down from almost 0.9690 to 0.9665.