US Dollar falls to test 2017 low ahead of CPI data. EUR and GBP both jump further after Thursday’s ECB bombshell.
Friday 12 January, 2018
Daily Currency UpdateThe last 48 hours have been pretty wild for the US Dollar. ‘Fake news’ from China had seen it fall sharply then erase all its losses before the ECB’s bombshell hit the foreign exchange market on Thursday and sent the USD tumbling once more. Having recovered from 91.60 to a high in London of 92.17, the US Dollar Index against a basket of major currencies fell sharply throughout the New York session to end the day back down at 91.50. This morning in Europe it has fallen further with the index now back testing the 2017 low of 90.98 on September 7th. As well as the ECB news, the USD was not helped by a very soft set of US PPI figures. The Labor Department said its producer price index for final demand slipped 0.1% last month. That was the first drop in the PPI since August 2016 and followed two straight monthly increases of 0.4%. In the 12 months through December, PPI rose 2.6% after accelerating to 3.1% in November. There isn’t a perfect – or even a very good – correlation between PPI and CPI on a monthly basis. Indeed, if there was, there’d be no need to publish CPI figures separately or for markets ever to worry about them: all the fresh information value would be in the PPI. We’ve said before that the FX market reaction is often to shoot first and ask questions later, so it would have been a brave analyst who stood up in the middle of a busy dealing room to announce that the PPI figures didn’t matter. The market has passed its verdict that soft PPI means expectations for CPI today should be lowered. That might be a wrong assumption but we’ll see this morning when the numbers are released at 08.30 Eastern Time. Consensus expectations are for a +0.2% m/m gain to leave the annual rate of CPI inflation at 2.1%. Separate but simultaneously released numbers on December retail sales are expected to show both the headline and core (ex-autos) measures rose 0.4% on the month. The US Dollar index opens in North America this Wednesday morning at 91.00.
Key MoversThe Canadian Dollar has had a very poor week so far week as investors start to question whether a lot of good news is already ‘in the price’ and whether a rate hike at next Wednesday’s BoC monetary policy meeting really is a done deal. USD/CAD touched a low of 1.2375 last Friday but after touching a high of 1.2490 in Europe yesterday, it then surged late in the New York afternoon to a high of 1.2578. The catalyst for this latest sell-off was concern over the renegotiation of the North American Free Trade Agreement (NAFTA) between the United States, Canada and Mexico A report by the Reuters news agency on Wednesday afternoon, citing two government sources, and picked up immediately by all the Canadian newspapers and TV channels said that Canada is increasingly convinced that President Donald Trump will soon announce the United States intends to pull out of NAFTA. President Trump has long called the 1994 treaty a bad deal that hurts American workers. According to the Reuters report, “the US negotiating team has set proposals that have alarmed their Canadian and Mexican counterparts. Among the most divisive are plans to establish rules of origin for NAFTA goods that would set minimum levels of U.S. content for autos, a sunset clause that would terminate the trade deal if it is not renegotiated every five years, and ending the so-called Chapter 19 dispute mechanism”. A White House spokesman said “there has been no change in the president’s position on NAFTA”. Officials are due to hold a sixth and penultimate round of negotiations in Montreal from January 23-28. In a new world of media engagement and direct communications with an audience, it is increasingly difficult to separate fact from fiction, and to determine what is real and what is fake news. This story’s sources are no doubt genuine, but their motives are unknown. Was it intended merely to extract further concessions or a genuine warning about future progress? We simply don’t know. Whatever the case, in foreign exchange markets its often a case of shoot first and ask questions later. After Wednesday’s sharp sell-off, the Canadian Dollar opens in North America this morning at USD1.2570, GBP/CAD1.6930 and AUD/CAD0.9895.
The euro was quietly trading in the USD1.1940’s in the European morning on Thursday, caught between the usual opposing forces of very strong economic data and worries about German politics. Then, at lunchtime, the ECB released its usually bland account of the last monetary policy meeting of the Governing Council. Buried deep in the report, the ECB dropped the bombshell on to financial markets that it was considering changing its guidance to markets about future monetary policy. As it quickly dawned on investors what the implications of this would be, EUR/USD immediately surged to USD1.2040, where it closed in New York. This morning in Europe, the EUR as had another leg higher, almost reaching 1.2130; the highest in just over 3 years. We have to go all the way back to December 2014 to find the last time the EUR was at this level. One of the great ironies of this dramatic correction higher in the external value of the euro was the sentence in the ECB’s account of the December Council Meeting that, “It was suggested that the Governing Council’s communication should be adjusted gradually over time to avoid sudden and unwarranted movements in financial conditions.” Oftentimes, after a sharp move in either foreign exchange or currency markets, the ECB does an off-the-record briefing with select journalists to attempt to halt or even reverse what it might see as an unwelcome development. These are often referred to in the professional market as “ECB sources” stories as they are always anonymous with no names attributed to them. The main feature of this morning’ trading in Europe is that there has been no such push-back. Eurozone money markets now price in a 70% chance of a 10bp rate hike by year-end; up from around 50% at the beginning of the week. The EUR opens in North America this Thursday morning at USD1.2125 and EUR/CAD1.5185.
The GBP had a classic day of two halves on Thursday; weak in the morning after the publication of the BoE Credit Conditions Survey but then rallying hard against the USD – but not the AUD, NZD or EUR - during the London afternoon. The pound hit a fresh 2018 low of 1.3461 just before the ECB lit a fire under the EUR but by the close of business in Europe it had gained more than three quarters of a cent to a high of 1.3547. This morning in Europe it has added another full cent to reach 1.3640; a fresh high for 2018 and the strongest since the day after the EU referendum back in June 2016. Three of the UK’s biggest retailers this week delivered disappointing Christmas figures as weak consumer confidence and aggressive discounting from online retailers hit sales. Retailers are trapped in a profit squeeze as the past devaluation of sterling pushes up the cost of sourcing products at a time when real disposable incomes are shrinking. Next week we’ll get to see the latest figures on UK inflation on Tuesday and the official retail sales numbers on Friday. Though the pound’s rally against the US Dollar over the past 24 has certainly been impressive, it has still lagged the EUR with GBP/EUR at one point this morning falling to within 10 pips of making a fresh low for 2018. After a 160 pip rise today, GBP/AUD is still only back to where it was on Monday whilst GBP/NZD is only back to Wednesday’s levels. The British Pound opens in North America this morning at USD1.3630, CAD1.7065 and AUD1.7310.
AUD/USD rose more than 40 pips on Thursday but could still only make it to third place on the one-day performance table behind the NZD (yet again!) and the EUR. After an early boost locally from retail sales figures, it then traded pretty much sideways until late in the New York afternoon when it reached a fresh 14-week high of 0.7895; the best since late September. Overnight in Asia it marginally extended these gains to just a couple of pips below 79 cents before slipping a little in the European morning. The AUD was quite resilient in the face of latest Chinese trade data which showed a big slowing of imports last month. China’s exports for the full year rose 7.9%, the fastest rate since 2013, while imports gained 15.9%, the best since 2011. For December, however, exports rose 10.9% from a year earlier, beating analysts’ forecast of a 9.1% increase whilst imports grew at a slower pace of 4.5%. That left the country with a trade surplus of $54 billion for the month, the highest since January 2016. As well as the strength of domestic economic data the AUD has also been given a boost from higher gold prices. The yellow metal is up $14 per ounce over the past 24 hours to $1331; the highest since September 14th 2017, whilst silver, platinum and aluminium have all registered gains. AUD/USD hasn’t been on a US 80 cents big figure since September 20th but given the foreign exchange market’s love of round numbers, this is the level which will be increasingly talked about now. The AUD opens in North America this morning at USD0.7870 with AUD/CAD at 0.9860 and AUD/NZD1.0850.
At the risk of repeating ourselves, the New Zealand Dollar was again top of the one-day performance table on Thursday and has now occupied this spot for five of the past six trading days. This time, however, it had to share the honours with the euro. The Kiwi reached a high in the New York afternoon of USD0.7255; the highest since September 26th when it was just beginning its post-Election slide all the way down to 0.6800 in late November. Overnight in Asia it extended gains to 0.7270 but has subsequently slipped around 20 pips during the European morning. Given that the remarkable rally in the NZD has come without the support of any fresh incoming economic news (apart from Wednesday’s QV house prices), November building permits data were never likely to be a big market mover. Nonetheless, Statistics New Zealand always provide a fascinating amount of detail in their economic releases and they are an endless source of information and entertainment for your author. We know that not only did November’s numbers show an 11% m/m increase after 10% drop in October, but that within the total of 3,262 new dwellings there were 1,870 houses, 577 townhouses, flats, and units (the highest number on record), 272 retirement village units and 543 apartments (a 9-year high). Wouldn’t it be nice if official statisticians elsewhere provided such detail and color in their often very dull Press Releases. The New Zealand Dollar opens this morning in North America at USD0.7255 with NZD/CAD at 0.9085.
- USD/CAD: 1.2430 - 1.2585 ▼
- EUR/USD: 1.2030 - 1.2250 ▼
- GBP/USD: 1.3530 - 1.3750 ▼
- AUD/USD: 0.7820 - 0.7895 ▼
- NZD/USD: 0.7200 - 0.7295 ▼