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AUD rises but NZD surges after strong China PMI data. USD index hovers near 14-week lows whilst EUR/USD hits fresh 3-year high.

By Nick Parsons

The New Zealand Dollar is beginning to show some of the day-to-day volatility which characterized it in early December when it would regularly swing from being the day’s strongest currency to the very worst. On Wednesday, it showed some signs of under-performance with the AUD/NZD cross moving up to a 1-month high of 1.1050 and the NZD/USD pair struggling to hold on to a US 71 cents big figure. Yesterday, however, it surged to the top of the FX pile with AUD/NZD down to 1.0985 and NZD/USD back up to 0.7160.

As with the Australian Dollar, the lift to the Kiwi came not from domestic economic data, but the strength of the Chinese PMI numbers. Buried beyond the headlines, the report noted, “Average input costs faced by services companies in China increased at a solid and accelerated rate in December. Furthermore, the rate of inflation was the joint-quickest since February 2013 (on par with March 2017). Raw materials, transportation and salaries were all cited as having gone up in price in the latest survey period.” One country’s input costs are, of course, another country’s exports and both NZ and Australia send a large portion of their goods in to China; industrial metals for Australia, dairy and lumber for New Zealand.

The Kiwi Dollar opens in Asia this morning at USD0.7160 with AUD/NZD at 1.0985.

What drives currencies one day sometimes doesn’t matter the next. New things come along, fresh economic and political developments, previously ignored pieces of information or newly-found correlations which purport to explain FX fluctuations. We always think of currency drivers in the same way that a 24-hour news cycle operates: a story develops over time, it then becomes headline news and great resources are expended covering its every angle and implication. Then, as soon as it emerged, it disappears from sight and often from memory; replaced by the next big story.

Why do we mention this now? Because for the last two or three weeks the AUD has been all about industrial commodities and precious metals. Yesterday and today they didn’t seem to matter. Instead, it’s the China growth story which has been the latest reason to push the AUD higher to a best level of USD0.7865.

We said here earlier this week that, “the Aussie Dollar still remains sensitive to Chinese numbers. These are important for Australia as China is the number one export destination, the largest market for agricultural goods and the most valuable inward tourism market. Australia needs a strong Chinese economy if it is to grow itself”. The Caixin China Composite PMI data released on Thursday (which covers both manufacturing and services) signaled a solid upturn in Chinese business activity at the end of 2017. At 53.0, the Composite Output Index picked up from 51.6 in November to indicate the fastest rate of activity growth for a year.

Steep increases in activity were registered across both the manufacturing and service sectors during December. Notably, services companies recorded the quickest expansion in activity since August 2014. Meanwhile, manufacturing output increased at a pace that, though modest, was the strongest seen for three months. Business confidence in the 12-month outlook for activity improved across both the manufacturing and service sectors at the end of the year. Services companies expressed the greatest degree of optimism since June, while sentiment at manufacturers picked up from November’s joint-record low.

The next important local economic data are the November trade figures out this morning. Ahead of their release, the AUD opens in Sydney this morning at USD0.7860 with AUD/NZD at 1.0985 and AUD/CAD0.9825.

After a strong start to the New Year, the GBP has rather lost traction. On Wednesday morning it reached USD1.3608; its highest since the day after the EU referendum back in June 2016. From that point on, however, it was downhill all the way and the pair tumbled more than a full cent with the pound losing ground against every one of the major currencies we track here. On Thursday it regained around half its losses after a better than expected set of PMI services numbers but still found it difficult to make progress up through USD1.3550.

The UK Services PMI Business Activity Index registered 54.2 in December, up from 53.8 in the previous month, to signal the second-fastest upturn in service sector output since April 2017. Higher levels of business activity have now been recorded for seventeen months running, supported by the resilient economic backdrop and rising consumer spending. However, service providers noted that Brexit-related uncertainty continued to hold back clients’ willingness to spend at the end of 2017. New business volumes increased at a solid pace in December, but the latest upturn was the slowest recorded since August 2016. Reports from survey respondents suggested that subdued business investment and cost consciousness among clients were factors that had weighed on sales growth in December.

On Friday in London we’ll get to see new car registration data which will likely be poor once again. Ahead of that, the pound opens in Asia this morning at USD1.3550, AUD1.7235 and NZD1.8930.

The good news for the US Dollar is that it didn’t make a fresh low yesterday! On Tuesday its index against a basket of major currencies hit a low of just 91.44 but then on Wednesday following strong ISM data and after the FOMC Minutes were published, it managed to reach 91.92. On Thursday in Asia it began to turn lower once more and in the London afternoon it slipped back to a low of just 91.49.

The big story of the day in the United States was further strength in the economic numbers and yet another record high for stock markets. The Dow Jones Industrial Average jumped past 25,000 for the first time on Thursday morning, on track to make the fastest run ever to a fresh 1000-point milestone. If the DJIA closes above 25,000, the jump from 24,000 would have taken 23 trading days, ahead of the 24-day spans that took the index to 11,000 in 1999 and 21,000 in March last year.

On the economy, the latest ADP employment report was much stronger than consensus expectations, showing 250,000 jobs were created in December against forecasts of a more modest, but still impressive, 190,000 gain. ADP’s Press released noted, “Throughout the year there was significant growth in services except for an overall loss of jobs in the shrinking information sector. Looking at company size, small businesses finished out 2017 on a high note adding more than double their monthly average for the past six months. The job market ended the year strongly. Robust Christmas sales prompted retailers and delivery services to add to their payrolls. The tight labor market will get even tighter, raising the specter that it will overheat.”

Today brings the official labour market report as well as the ISM services index and November’s trade balance. The US Dollar index opens in Asia this morning at 91.50; still perilously close to Tuesday’s 91.44 low.

After a year in which the euro was the best performing of all the major currencies, it got off to a flying start in 2018; with a high on Tuesday morning of 1.2077; the highest in over 3 years. It couldn’t sustain its very positive momentum throughout the day and finished in New York around 30 pips below its best level. On Wednesday the pullback continued, with a day’s low in the European afternoon of just 1.2006.

The modest pullback in the EUR comes despite a very good set of German labour market data. The seasonally adjusted jobless total dropped by 29,000 to 2.442 million; more than double the 12,000 consensus forecast. December's unemployment rate was 5.%, the same as a revised reading for November and the lowest level since German reunification in 1990, the office said. In 2017 as a whole, the rate fell to 5.7% from 6.1% the previous year. The detailed numbers showed Germany's workforce expanded last year to a record 44.3 million, whilst the Labour Office said there were 761,000 job vacancies in December, suggesting companies are struggling to find skilled workers quickly.

Of course, whilst the German data are very impressive, they have rather lost their power to surprise on the upside, given that expectations are already so elevated. Ahead of Eurozone aggregate and individual countries’ PMI services reports, the EUR opens in Asia this Thursday morning at USD1.2020, AUD/EUR0.6515 and NZD/EUR0.5905.

After Wednesday’s pause which saw USD/CAD spent most of the day grinding higher in a 1.2505-1.2540 range, yesterday it was a story of renewed strength for the Canadian Dollar, even if it couldn’t quite crack the 1.25 mark.

The first economic data release of the new year showed Canadian producer prices increased in November at their fastest pace in nearly three years due to higher costs related to energy and petroleum. Industrial product prices (which measure the price manufacturers receive once their goods leave the plant) advanced 1.4% in November. The last time the index rose at a faster pace on a month-over-month basis was in February 2015. Meanwhile, the country's raw-materials price index also rose at an elevated pace, jumping 5.5% in November, following a 3.8% increase in October. This pushed the annual increase up to 14.2% in November, after 6.6% y/y the previous month. The increase in the RMPI was mainly due to higher prices for crude energy products (+25.4%), particularly conventional crude oil (+26.7%). Year over year, the RMPI excluding crude energy products rose 6.5%.

As our Aussie and Kiwi clients enjoy the Summer sunshine, a quick look at the weather forecast shows the temperature in Toronto is not expected to rise above minus 10 degrees centigrade at any point over the next three days with lows of minus 25 degrees forecast on Friday. Rather than venturing outside, however, currency traders will be warmed by the heat from their computers as they await Friday’s labour force survey. Remember it was the November employment numbers which first lit a fire under the CAD with a 79,500 monthly increase in jobs.

The Canadian Dollar opens in Asia this morning at USD1.2505 with AUD/CAD at 0.9830 and NZD/CAD at 0.8945.