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USD at weakest since December 1st. AUD/USD hits 2-month high, NZD/USD at best level in 10 weeks.

By Nick Parsons

The New Zealand Dollar had a pretty symmetrical week before the Christmas break; falling for the first half and regaining pretty much all its losses in the second. Business confidence didn’t bounce back in December as many analysts had anticipated though the Q3 GDP numbers beat consensus estimates thanks to some upward revisions to back data. Having fallen from 0.7027 last Monday to 0.6960 on Wednesday, NZD/USD recovered to 0.7027 at Friday’s close.

Overnight there are reports of a 4.2 magnitude earthquake which was felt in Marlborough and the Wellington region. This follows a 3.8 magnitude quake at 7.17pm on Tuesday around 10km south-west of Wellington that was felt by more than 4,000 people. Mercifully, both of these were light by recent standards and no injuries to people or severe damage to property have thus far been reported.

Yesterday in the Northern Hemisphere, the NZD extended its gains to a near 10-week high of USD0.7038 before slipping back just a few pips to open in Asia this morning at 0.7035 with AUD/NZD at 1.0985.

The Australian Dollar was just edged out of top spot last week by its Canadian counterpart. A solid but unsurprising Mid-Year Economic and Fiscal Outlook earlier in the week was followed by a relatively upbeat set of RBA Board Minutes before they headed off for the Summer holidays. There is now no further meeting scheduled until the first Tuesday in February.

With no Central Bank to worry about and no data to concern investors, the Aussie Dollar opened the first day after Christmas in as good a shape as its cricket team. Plenty of runs on the board before lunch, a dour afternoon session and a late flourish saw AUD/USD hit a high of 0.7730; its best level since October 25th.

Although the AUD certainly begins this 2017/18 holiday season in much better shape than might have seemed likely just a few weeks ago, it remains to be seen whether it can sustain its recent strength. Against the US Dollar, it is up over 2 cents in a fortnight whilst against the British Pound it has gained more than 6 cents over the past three weeks. The price action seems to reflect a squeeze on short positions in the institutional and hedge fund community rather than any fundamental reappraisal of the currency. For any locals planning an overseas vacation, this might represent a very good opportunity to load up on some cheaper spending money.

The AUD opens in Asia this morning at USD0.7728 with AUD/NZD at 1.0985 and GBP/AUD1.7305.

The British Pound didn’t have a great end to last week but after testing the lows around USD1.3350 at the start of Tuesday’s New York session, it subsequently rallied around 30 pips in generally thin liquidity conditions.

The latest revisions to the whole of the UK GDP data series last week served only to polarise opinion about the state of the economy. Upward revisions to Q4 2016 meant that in the calendar year which included the EU referendum, the UK economy was the joint fastest-growing in G7; its 1.9% rate was the same as Germany, above the US & Canada (both 1.5%) and well ahead of France’s 1.1%. The revised numbers also meant that the latest y/y growth of 1.7% in the year to September 2017 was better than the 1.5% which had been expected. Unfortunately, the revisions also raise the starting point for the next set of quarterly data, meaning we could see a sharp slowdown in the annual rate of growth when the Q4 numbers are published at the end of January.

In the shouty echo chambers of social media, both sides in the Remain/Leave argument sought vindication in the GDP numbers. In the eyes of the foreign exchange market, the figures supported the view that the best of the UK’s post-referendum performance might now lie behind it and the early part of 2018 could well be more challenging. The GBP opens this Wednesday morning in Asia at USD1.3375 with GBP/AUD at 1.7305 and GBP/NZD at 1.9010.

The Dollar had a poor pre-Christmas week despite further record highs for the stock market, a rise in market interest rates at all points of the maturity spectrum and generally solid incoming economic data. Its index against a basket of major currencies opened on Monday morning at 93.50 which proved to be the high of the week; it subsequently fell almost without interruption to end on Friday around 92.85.

Financial markets remained open in the world’s non-Christian centres on December 25th, with Tokyo and Shanghai the two stand-out markets, albeit volumes were not high. In China the renminbi jumped to USD/CNY6.5514; the strongest since mid-September though the US Dollar was little changed against other major currencies. Yesterday, as the United States returned to work, the US Dollar index opened around 92.80 and rose to 92.92 before then trading down to a 3-week low of 92.73.

There were some US economic statistics released yesterday. The 20-city house price numbers published by S&P/CoreLogic showed the annual rate of growth around 6.2%, though 16 of 20 major U.S. cities experienced home price growth of 5% or higher: double the pace of average wage growth. Seattle prices rose almost 12.5% in the year to October whilst Las Vegas grew 10.2%. Later in the week, we’ll have consumer confidence on Wednesday, then the advance goods trade balance, weekly jobless claims and Chicago NAPM on Thursday.

The US Dollar index opens in Asia this morning at 92.78.

Five days have passed since the elections in Catalonia and it is still not clear who will form a regional coalition there, let alone what relations will be with the rest of the country. Although Spanish Prime Minister Rajoy's conservative Popular Party (PP) had a disastrous election, winning just three of the 135 seats, he will for the moment keep control of the region, because he imposed direct rule in October, invoking Article 155 of the constitution. That extraordinary measure was a first in post-Franco Spain and though it was said to be “temporary”, no end date has yet been announced for the current situation.

The European Union has treated the matter as an internal affair for Spain to resolve and is highly unlikely to change its stance. Meantime, the Catalan economy has suffered. Thousands of businesses, including major banks and energy firms, have moved their headquarters out of the region and, as it accounts for around 19% of Spanish GDP, the economic uncertainty is weighing down on activity. The OECD, for example, now forecasts GDP growth of just 2.3% in 2018 after 3.0% in 2017.

The ECB publishes its monthly Economic Bulletin on Thursday and it will be interesting to see how much weight, if any, it places on developments in Spain. The country accounts for only 11% of Eurozone GDP and is the fourth largest country after Germany, France and Italy.

Having swung between USD1.1816 and 1.1877 yesterday in North America, the euro opens in Asia this morning at USD1.1862, with AUD/EUR at 0.6515 and NZD/EUR at 0.5930.

The Canadian Dollar was the best of all the major currencies last week. As well as the strong performance immediately after Thursday’s CPI and retail sales numbers, it’s worth pointing out how resilient the CAD was after a relatively soft set of GDP figures on Friday. USD/CAD spiked immediately from 1.2705 to 1.2885 yet by close of business had regained around three-quarters of its losses to finish the week at 1.2720.

Unlike its American cousin, the Canadian stock market remained closed yesterday though the currency was well supported both by the general weakness of the US Dollar and by rising oil prices. NYMEX crude rose $1.50 dollars per barrel to a 2 ½-year high of $59.80 on reports of an explosion on a crude pipeline in Libya and voluntary OPEC-led supply cuts.

The Canadian Dollar is even stronger in Asia this morning than at the end of last week. It opens at a 3-wek low (CAD stronger) of USD1.2693 with AUD/CAD at 0.9805 and NZD/CAD at 0.8925.