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USD continues to slide lower even as rate differentials widen. AUD/USD hits 2-month high of 0.7777, NZD/USD reaches 0.7075

By Nick Parsons

We’ve now had fully 48 hours of post-Christmas trading in the New Zealand Dollar and it has largely kept pace with the strength in its Aussie cousin with the AUD/NZD cross in a 1.0970-1.1000 range since Friday last week. NZD/USD reached a best level of 0.7040 on Tuesday and yesterday in Europe extended its gains to 0.7075; its highest since October 19th.

Arguably there is perhaps more substance to the Australian Dollar recovery than to the Kiwi; higher commodity prices have helped the AUD whereas the last Global Dairy Trade (GDT) auction just before Christmas showed prices falling by 3.9%. The average price per tonne on the GDT index was US$2969 (NZ$4247), with the key price indicator whole milk powder (WMP) at US$2755, a drop of 2.5%. This was the fourth drop of at least 2.4% in recent months - with a fall of 2.4% on October 3, 3.5% on November 7 and 3.4% on November 21. The next GDT auction doesn’t come until the New Year and will be keenly watched for any sign of pick-up in prices.

The New Zealand Dollar opens in Asia this morning at 0.7070 with AUD/NZD at 1.0995.

The Aussie Dollar has had a pretty good post-Christmas run. Boxing Day saw AUD/USD hit a high of 0.7730 - its best level since October 25th – and yesterday during the New York morning the pair extended its gains to a near 10-week high of 0.7777.

The price action was first driven a couple of weeks ago by a squeeze on short positions in the institutional and hedge fund community, but the AUD has over recent days been helped by higher commodity prices. Gold has recovered almost $50 per ounce from its mid-December lows whilst the price of three-month copper on the LME rose to a three-and-a-half-year high of $7,201 a tonne yesterday and iron ore is up almost 25% over the past two months. On the London Stock Exchange on Wednesday, the miners Anglo American, BHP Billiton, Glencore, Rio Tinto and Antofagasta rose by between 1.6% and 1.8% per cent whilst precious metal miners also rose on higher gold prices, with Fresnillo and Randgold Resources gaining 2.0% and 1.4% respectively.

It remains to be seen whether this recent strength in the AUD can persist, especially as 10-year Australian bonds now yield only 24bp more than their US equivalents and 3-month rates are only 11bp higher. And, with higher commodities now arguably ‘in the price’ of the Australian Dollar, it’s a struggle to see where the next positive surprise might come from.

The AUD opens in Asia this morning at USD0.7775 with AUD/NZD at 1.0995 and GBP/AUD1.7230.

The GBP had a day of two halves on Wednesday in the Northern Hemisphere. The overnight session in Asia had been pretty quiet, but in London trading the GBP moved sharply higher once stops were hit around last Friday’s intra-day high of 1.3390. GBP/USD reached a best level of 1.3425 before giving back almost all of the gains in the North American time zone.

For many people in the UK, the best part of the festive break between Christmas and New Year is the absence of Brexit negotiations. The seemingly interminable rows between Government and Opposition parties have been temporarily suspended, whilst talks between the EU and European Union don’t restart for several weeks. That said, the Chancellor is being pressed to publish documents after he told the Treasury select committee earlier this month that the government had “modelled and analysed a wide range of potential alternative structures between the European Union and the United Kingdom”.

It is to be hoped any documents are more informative than the so-called sectoral studies which the Minister for Exiting the European Union published just before Christmas. As economic analysis, they were utterly useless. For comedy value, they were wonderful. On fishing, for example, we learned that, “As an island nation, the UK has been dependent on the sea for its trade and defence throughout history, and strong traditions of seafaring can be traced back hundreds of years… There is a concentration of activity in coastal towns.” We’ll leave our readers to reflect upon this insight, and to wonder where else, other than coastal towns, a fishing industry might be based…

The GBP opens in Asia this morning at USD1.3395 with GBP/AUD at 1.7225 and GBP/NZD1.8970.

The US Dollar continues to slip gradually lower. Last week its index against a basket of major currencies fell from 93.50 to 92.85 and its fall has continued in this Christmas-thinned week. After a very brief opening rally on Tuesday, the index fell to a 3-week low of 92.73 and yesterday in Europe it traded down to 92.51; the lowest level since December 1st.

The move lower comes as US yields have slipped back across all points on the maturity spectrum. 2-year notes now yield 1.90%, 10-year Treasuries are down from 2.47% to 2.41% and the 30-year long bond is down 6bp at 2.75%. Despite these declines, the spread between 2-year US and German rates of just over 250bp is the widest in almost 20 years.

The performance of the US equity market over the last ten days might explain some of the caution on the US Dollar even if it isn’t yet flashing a red warning light for the currency. If we look at the S+P 500 index futures contract, this hit an intra-day high of 2694 back on Tuesday December 19th. The peaks of last Wednesday and Thursday failed to take the index back to this level and it closed the week 10 points off the high at 2684. Yesterday’s low was 2679 but the big level to watch is last Thursday’s 2678 low. If we see a break and a close below this level, then the technical picture turns much more negative in the short-run and will raise fears of a return to the post-FOMC low around 2650.

There were more US economic statistics released yesterday. The headline Conference Board Consumer Confidence index missed expectations of 128.0; falling instead to 122.1 from 129.5. The 'miss' was driven by a huge drop in "expectations" which tumbled from 113.3 to 99.1; the lowest since November 2016. Indeed, the spread between the present situation (156.6) and expectations (99.1) is now just over 57 points; the widest since the days of the dotcom boom turned to bust.

The US Dollar index opens in Asia this morning at 92.57. Later today, we’ll have the advance goods trade balance, weekly jobless claims and the Chicago NAPM index.

The EUR finished higher against a generally weak US Dollar on Wednesday but did no better than hold its own against the GBP whilst falling against the Australian, New Zealand and Canadian Dollars. It had remained on a USD1.18 big figure ever since 6am local time on Tuesday December 19th until mid-afternoon yesterday when it rose to a best level of 1.1907 before again settling back to the high USD1.18’s.

The Single European Currency still seems a favourite pick for 2018 for a wide range of FX strategists and analysts but one of the main questions in the near-term is the extent to which this is already reflected in investor positioning. A very interesting Bloomberg analysis of the EUR/USD options market yesterday reflected a 75% probability that the pair will reach 1.2170 by end-2018, a 67% probability of 1.2290 and a 50% probability of 1.2560.

The ECB publishes its monthly Economic Bulletin today and it will be interesting to see how much weight, if any, it places on recent economic developments in Spain. Thousands of businesses, including major banks and energy firms, have moved their headquarters out of Catalonia 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 country accounts for around 11% of Eurozone GDP and is the fourth largest country after Germany, France and Italy.

The euro opens in Asia this morning at USD1.1895, with AUD/EUR at 0.6535 and NZD/EUR at 0.5935.

The Canadian Dollar continues to do well. We noted here yesterday how resilient the CAD had been in the face of somewhat weaker than expected GDP figures last Friday and it has subsequently received more support from higher oil prices. NYMEX crude rose $1.50 dollars per barrel to a 2 ½-year high of $59.92 on Tuesday on reports of an explosion on a crude pipeline in Libya and voluntary OPEC-led supply cuts. It slipped a little to $59.55 yesterday but it is still a dollar higher than at the time of the OPEC meeting at the end of November.

We are now at a very important pivot point for the Canadian Dollar. On both November 9th and December 4th, USD/CAD closed in the 1.2670’s before bouncing higher. Yesterday in North America, it broke below this level and closed below it, making the technical picture far more bullish for the CAD. As markets begin to thin for the New Year there’ll be an obvious reluctance to commit fresh investment capital just yet and some of the ‘fast money’ traders will doubtless be wary of getting hurt just as they were 10 days ago on the break up through USD1.2905. Nonetheless, the CAD does appear to be in much better shape now and it will be a currency to keep a close eye on in the first few days of 2018.

For this Thursday morning, the Canadian Dollar opens in Asia this morning at USD1.2640 with AUD/CAD at 0.9830 and NZD/CAD at 0.8930.