President Trump to speak in Davos. US GDP could be the third quarter of 3%; best performance in 13 years
Daily Currency UpdateThe US Dollar continued to slide Thursday until a fairly emphatic intervention in Davos from President Trump. The USD index against a basket of major currencies had fallen almost 4 per cent so far in January; its worst start to any year since 1987 and reached a low point of 88.21, down more than half a percent on the day. During the evening, in an interview with CNBC, President Donald Trump said, "the dollar is going to get stronger and stronger and ultimately, I want to see a strong dollar," He added further that Treasury Secretary Steven Mnuchin's comments were taken out of context. The USD index jumped from 88.40 to 89.25, though overnight it has fallen more than half a point to be back at 88.60.
President Trump’s keenly-awaited speech to the WEF is due around 2pm local time; around half an hour before the Q4 US GDP figures are published. The US economy grew an annualised 3.1% in 2Q17 and 3.2% in 3Q 2017 and consensus looks for another 3% growth figure in today's report. This would be the first time the US has experienced three consecutive quarters of 3% growth since 2004/05. The Federal Reserve Bank of Atlanta’s GDPNow forecasting model has been one of the most accurate in recent years and as of last night it suggests GDP will come in at 3.4% with real consumer spending growth of 4%.
Ahead of all this, the US Dollar index opens in North America this morning at 88.60 with US 10-year bond yields 1bp lower at 2.63%.
Key MoversUSD/CAD has continued to edge a bit lower, albeit the Canadian Dollar has lagged other major currencies after some slightly softer than expected retail sales data. The low point for USD/CAD on Thursday came just before lunchtime in North America at 1.2287 before a rally back to almost 1.2390 after President Trump’s comments on the USD. Overnight and in the European morning, it has traded around three-quarters of a cent lower to 1.2305.
Speaking in Davos, Bank of Canada Governor Stephen Poloz said he did not know what potential there may be for further interest rate hikes this year, reiterating that policymakers remained both data dependent and alert to developments with NAFTA. "We've explained to people that there are a number of important issues that force us to not be mechanical or to use a rule or to plan ahead in that way. We've said we are totally data dependent."
Asked if the BoC was also "NAFTA dependent," Poloz said: "Oh yes, very." But he said it was impossible to do the arithmetic ahead of time to know what policy response may be needed if the trade deal is terminated or significantly altered. "If the economy began to slow as a result, then we'd be able to put those pieces together, then it would go into the mix, the inflation target would be at risk, and we'd be cutting rates into that. But a lot of things could move at the time.”
This morning we have the monthly CPI data. The consensus expectation is that CPI fell -0.3% in December to take the annual rate from 2.1% to 1.9%. The Canadian Dollar opens in North America this morning at USD1.2305 and GBP/CAD1.7535.
Having hit USD1.24 for the first time since December 2014 earlier in the week, during President Draghi’s Press Conference yesterday, it touched a high of 1.2530 before then crashing to 1.2370 after President Trump’s comments on the USD. Overnight in Asia and in Europe this morning, it has rallied almost a full cent to 1.2465.
The big issue for the ECB was whether Draghi would change forward guidance on interest rates (he didn’t), try to talk the EUR lower (he didn’t) or sound in any way concerned about the impact of a strong EUR on growth and inflation forecasts (he didn’t). The standard practice amongst Central Bankers when asked to speak about the actions of another is a diplomatic “no comment”. Instead, he entered a war of words with unnamed (but clearly American) officials for manipulating the currency, saying “someone else’s FX talk doesn’t comply with agreed terms... When I said communication, I didn’t mean ECB communication but other people’s communication. We don’t target the exchange rate.”
Instead of throwing stones from inside the ECB’s elegant glass house in Frankfurt, perhaps Mr. Draghi should reflect that the ECB has done more to push up EUR/USD than anything on the US side. We described the January 11th account of the December meeting as a ‘bombshell’ which said “language pertaining to various dimensions of the monetary policy stance and forward guidance could be revisited early in coming year". EUR/USD rose 4.5 cents after that so it seems a bit odd to blame the United States for the rise in exchange rate volatility.
The EUR opens in North America this morning at USD1.2465 and EUR/CAD1.5340.
The Pound still hasn’t broken its 11-day sequence of rallying without testing the previous day’s low, even though the price action over the last 24 hours suggests a more two-way market than we’ve seen over the last couple of weeks. GBP/USD yesterday reached a high around 1.4330 during Mario Draghi’s Press Conference before giving back more than 2 cents to 1.4115 after President Trump’s comments in favour of a stronger US Dollar. It has subsequently recovered more than a full cent to 1.4250.
We’ve been wondering how the Pound would react once the subject of Brexit came back on to the agenda; something about which investors have heard very little in this new year. That is about to change as a row has broken out between the PM and her Chancellor, whilst a group of backbench MP’s say they are getting closer to the 48 votes needed to trigger a leadership election.
Chancellor Philip Hammond Hammond told business leaders in Davos that the government would seek only “modest” changes in its relationship with the European Union. “Instead of doing what we’re normally doing in the trade negotiations – taking two divergent economies with low levels of trade and trying to bring them closer together to enhance that trade, we are taking two completely interconnected and aligned economies with high levels of trade between them, and selectively moving them, hopefully very modestly, apart,” Hammond said.
After pro-Brexit Conservative MPs in Westminster reacted angrily to the speech, and some ministers privately made their disquiet known, Downing Street moved to distance the prime minister from her chancellor’s remarks. A source said: “Whilst we want a deep and special economic partnership with the EU after we leave, these could not be described as very modest changes.”
With this latest row set to run in to the weekend, today’s Q4 GDP numbers were a touch stronger than consensus forecasts but exactly in line with the +0.5% rise which the Bank of England expected in its November Quarterly Bulletin. The reaction has so far been fairly predictable: “Leave” supporters claim proof the UK can survive post-Brexit whilst the “Remain” camp argue it could all have been so much better. BoE Governor Carney is speaking in Davos later this afternoon.
The British Pound opens in North America this morning at USD1.4255, CAD1.7560 and AUD1.7655.
Our many Australian clients will be celebrating Australia Day today and we wish them all a happy and peaceful day of celebrations with friends and family and a very enjoyable long sunny weekend.
On the eve of the national day, currency markets in the Northern Hemisphere appeared very comfortable with an Australian Dollar at 80 US cents, though this one currency pair undoubtedly overstates the general strength of the AUD. Instead, it’s a US Dollar story which has been largely responsible for pushing the pair higher, along with the associated rise in commodities which nearly always accompanies a weaker USD.
We won’t find out for another 11 days what the Reserve Bank of Australia has to say – if anything – about the current mix of exchange rates. Before then, we have the quarterly CPI figures next Wednesday to navigate; a potentially tricky day if yesterday’s experience of New Zealand CPI is any guide.
The AUD opens in North America this morning at USD0.8090 with AUD/CAD at 0.9960 and AUD/NZD1.0980.
The NZD hasn’t been back on a US 74 cents ‘big figure’ since the long-awaited quarterly inflation numbers were published around 10pm London time on Wednesday evening. NZD/USD immediately tumbled a full cent to around 0.7325 before then recovering just under half these losses and overnight in Asia was down to 0.7295 before another rally into the mid-73’s.
In its last published monetary policy assessment back in early November, the RBNZ saw inflation reaching 2 percent in Q2 2018 as opposed to Q1 2019 which they had previously forecast. It also said it no longer sees headline inflation declining. As that forecast has now been torn up, investors are now awaiting the next one on February 8th.
In the meantime, analysts have been rushing to revise down their interest rate expectations. ANZ said the data have pushed its expectations for the Reserve Bank of New Zealand to hike the official cash rate back from November 2018 to mid-2019. ASB said, “it reinforces that there is no need for the Reserve Bank to raise interest rates anytime soon," whilst amongst the offshore banks Morgan Stanley noted “the weakness seen in 4Q inflation should see the RBNZ on-hold over 1H18, possibly with an added emphasis on the need for a weaker currency”.
The New Zealand Dollar opens in North America at USD0.7360 with NZD/CAD at 0.9065.
- USD/CAD: 1.2250 - 1.2390 ▼
- EUR/USD: 1.2370 - 1.2520 ▲
- GBP/USD: 1.4200 - 1.4330 ▲
- AUD/USD: 0.8020 - 0.8120 ▼
- NZD/USD: 0.7290 - 0.7430 ▼