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USD volatile but net unchanged. EUR slides after ECB meeting. GBP mixed on Brexit news but AUD and CAD both surge.

By Nick Parsons

Three straight days of gains proved to be quite enough for the New Zealand Dollar which found the air a bit thin above US 70 cents. It peaked just as Janet Yellen finished her last FOMC Press Conference at 0.7025 and has spent the last 24 hours edging steadily and gradually down to reach a low of 0.6981 before closing in New York around USD0.6990.

On Thursday, the new Labour-led Government in New Zealand released its Half-Year Economic & Fiscal Update. It forecast that economic growth would average close to 3 per cent over the next five years, peaking at 3.6 per cent in 2019. Unemployment is also forecast to fall to 4 per cent, despite hikes in the minimum wage pushing wage growth significantly higher. The forecast sees revenue growth rising sufficiently to see net debt fall to below 20 per cent of gross domestic product by 2022, a core election promise of Finance Minister Grant Robertson.

The general consensus amongst analysts locally is that the Government is being too optimistic and has presented what is more likely a “best-case” scenario. Responding to criticism, Treasury secretary Gabriel Makhlouf said the forecasts assumed the sharp drop in business confidence since the election was assumed to be only temporary and would soon rebound. NZD/USD opens in Asia this morning at 0.6990 with NZD/EUR at 0.5930 and GBP/NZD at 1.9215.

The Australian Dollar had a much better day than its cricketers on Thursday, though few people would bet against a reversal of the fortunes of both by next Monday. It has now enjoyed four consecutive days of gains and there’ll be huge sighs of relief from those who observed the squeeze in the Kiwi Dollar on Monday and thought it might be prudent to scale back their Aussie shorts too. Having jumped from USD0.7630 to 0.7668 on publication of the latest jobs report, the AUD then managed to hold on to these gains for the next 18 hours, closing in New York around 0.7670.

To recap the numbers, consensus estimates were for a 19,000 increase in employment with the jobless rate steady at 5.4%. According to the Australian Bureau of Statistics (ABS), employment actually jumped by 61,600 to 12.4 million in November. It was the largest monthly increase since October 2015, whilst the previous month’s figure of +3,700, was also revised up to show a gain of 7,800.

The figures are arguably not quite as good as they look. Every month the sample of the population in the survey is rotated and it appears the incoming group may have had higher levels of employment than those who left the survey. Nevertheless, the rest of the report was very strong indeed. Full-time employment jumped by 41,900 to 8.5 million, beating a 19,700 increase in part-time employment which rose to 3.9 million. Over the last 12 months, full-time employment has increased by 304,600, with a 78,700 increase in part-time employment. Combining the two, total employment has increased by a huge 383,300 whilst the total number of hours worked by all Australians is up by 9.8 million hours, or 0.6%, to 1.7409 billion hours.

The AUD opens in Asia this Friday at USD0.7675 with the AUD/NZD cross up almost exactly a cent from yesterday morning at 1.0970.

The British Pound had a much better day than might have been expected on Thursday, rising against most currencies except the newly-buoyant Australian Dollar and Canadian Dollars. Its best performance came – in order - against the NZD, EUR and USD.

Political commentators have been busy trying to work out the implications of the UK Government’s defeat on a parliamentary vote on Brexit. On the one hand, any defeat for the Prime Minister is something which will weaken her authority and arguably put her in a weaker negotiating position in Brussels. On the other, the substance of the new 24-word Bill is to give Parliament a vote on the final terms of the Brexit deal. Essentially, it means that MPs could reject the terms of any withdrawal — or amend the legislation to delay Brexit — if they are not satisfied with the deal negotiated. In the event of “no deal” the amendment could be used by MPs to try to reverse Brexit. To the extent that it leaves the door open to a rejection of Brexit, this could perhaps be interpreted as a GBP positive, although the immediate impact might well be to toughen the Government’s rhetoric. As with most things Brexit, it’s a mess. In economic data, retail sales rose a faster than expected +1.1% in November though the official statisticians cautioned they are having problems adjusting for the impact of Black Friday/Monday promotions and internet sales. Electrical household appliances, for example, jumped by nearly 9% in one month.

Separately, the Bank of England MPC voted unanimously 9-0 in favour of no change in Bank Rate. Its accompanying Statement read very cautiously, stressing that the pace of future rate hikes would be very gradual and limited in extent. It reiterated its judgment that that “inflation is likely to be close to its peak, and will decline towards the 2% target in the medium term.”

The GBP opens in Sydney this morning at USD 1.3440, AUD1.7510 and NZD1.9215. The cricketers open at 305-4 in Perth. Those who love a bet will be wondering whether the currency or the sportsmen crumble first…

A quick look at the US Dollar index tells you that the USD had a good day on Thursday. A closer look behind the scenes, shows this is not strictly true. The EUR had a very poor day and as it comprises 57% of the index (which we highlighted here earlier this week), so the USD index was able to fight back. Having tumbled from a high on Tuesday afternoon in New York of 93.81, it had fallen almost a full point to 92.95 in Sydney yesterday morning. As EUR/USD then fell more than half a cent, the USD index climbed back to 93.30; regaining almost exactly half its losses over the period.

No matter how many times the Fed Statement is read and re-read (and your author has been doing this for longer than is healthy!) it is extremely difficult to pin the blame for any of the Dollar’s declines on the text therein: “the Committee continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market conditions will remain strong.” Its new economic projections revised up 2018 GDP forecasts from 2.1% to 2.5% with further more modest upgrades to the outlook in 2019 and 2020. Though two of the nine voting members dissented, there were no downward revisions to future ‘dot points’ and the belief that inflation would indeed pick up was again reiterated.

We’d say the US Dollar fell despite the Statemen, not because of it. And if we may re-quote Dr. Yellen’s very last sentence from her very last FOMC Press Conference, “let me emphasize the correlation is not causation.” OK, she was talking about the shape of the yield curve rather than currency markets but it’s a point that always bears repetition when looking at the multiple drivers of foreign exchange each day. In US economic data, retail sales increased more than expected in November as the holiday shopping season got off to a strong start. The Commerce Department said retail sales rose 0.8% after an upwardly-revised 0.5% increase in October. The annual pace of growth accelerated to 5.8%. The Labor Department meantime said initial claims for state unemployment benefits dropped 11,000 to a seasonally adjusted 225,000 for the week ended December 9. That was the lowest reading since mid-October when claims dropped to 223,000, a level not seen since March 1973.

The US Dollar index opens this morning at 93.00 with Friday bringing data on the Empire manufacturing survey and industrial production.

Another day, another set of broad-based losses for the EUR which completely unwound all of Wednesday gains against the US Dollar and finished firmly in bottom spot on the one-day FX performance table. EUR/USD fell from a high of 1.1844 to 1.1772 with AUD/EUR up from 0.6470 to 0.6510.

Yet again, the currency’s fall comes despite very positive incoming economic data; this time another very strong set of ‘flash’ PMI data in the Eurozone. Markit’s Press Release was full of seasonal good cheer. “The eurozone economy picked up further momentum at the end of 2017, with December seeing the fastest growth of business activity for nearly seven years. The best factory output and order book gains since 2000 pushed the manufacturing headline PMI to a record high, while an upturn in service sector to growth to the highest since early-2011 underscored the broad-based nature of the current surge in activity”.

As for the ECB meeting, new staff economic projections showed upward revisions to growth forecasts. 2018 GDP is now seen at 2.3% (previously 1.8%) with 2019 at 1.9% from 1.7%. 2018 CPI was nudged up from 1.2% to 1.4% though 2019 and 2020 were left unchanged at 1.5% and 1.7% respectively. The Introductory Statement was basically a “copy/paste” job from October and Mr Draghi had so little to say the Press Conference actually finished 7 minutes ahead of schedule.

EUR/USD opens in Asia this morning at 1.1795 with AUD/EUR at 0.6505.

The Canadian Dollar did extremely well on Thursday and knocked the AUD off top spot in the one-day performance table. We’ve been flagging up here all week the fascinatingly-titled speech from Bank of Canada Governor Stephen Poloz on “things that keep me awake at night”. He did not disappoint. He is always a wonderfully thought-provoking speaker, never afraid to go against the prevailing G7/BIS consensus and full of insight into the policy-making process. He is a very under-estimated Central Banker; erudite but self-deprecating in equal measure.

His speech to the Canadian Club in Toronto is worth reading in full. It can be found at http://www.bankofcanada.ca/2017/12/three-things-keeping-me-awake-at-night/ To summarize briefly here, the three issues were cyber threats, high house prices and “The tough job market for young people”. He also threw in a wonderful dismissal of bitcoin: “the term “cryptocurrency” is a misnomer: “crypto,” yes, but “currency,” no. For something to be considered a currency, it must act as a reliable store of value, and you should be able to spend it easily. These instruments possess neither of these characteristics, so they do not constitute “money.”

Overall, the context of his speech was that the Canadian economy is doing extremely well and is at a “sweet spot” in the economic cycle. “The economy has made tremendous progress over the past year, and it is close to reaching its full potential. We are very encouraged by this, and we are growing increasingly confident that the economy will need less monetary stimulus over time.”

Needless to say, currency markets loved this speech. USD/CAD tumbled a full cent to a one-week low of 1.2735 whilst even AUD/CAD fell 40 pips from its high to open in Asia this morning around 0.9780.