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US Dollar slumps further as EUR and GBP hit new cycle highs. NZD back to 73 US cents for first time since Election.

By Nick Parsons

The Kiwi Dollar reached another milestone on Monday; back on a US 73 cents big figure for the first time since the Monday morning after the General Election back in late September. Since the start of 2018, NZD/USD is up over 2 cents to a high of 0.7313, whilst measured from the November 8th low, the gain is over 5 cents.

Ahead of today’s Quarterly Survey of Business Optimism, Statistics New Zealand yesterday published its monthly gauge of food prices. These are closely watched because, as in Australia, New Zealand only calculates CPI inflation on a quarterly basis and food makes up almost a fifth of consumer prices index. According to the official statisticians, total food prices were down 0.8% m/m in December – the fourth consecutive monthly drop - as all store-bought food groups fell during the month. Grocery food and seasonally cheaper fruit and vegetables were the main factors in the dip in food costs. Butter (-4.9%), chocolate bars, and wholemeal bread prices all fell. Tomatoes and nectarines were also cheaper, but avocado prices remain almost twice as expensive as they were a year ago. It’s all fascinating stuff!

Forty-five minutes after the QSBO, we’ll see data on credit card transactions for December which will then allow analysts locally to firm up their estimates for Q4 consumer spending. Before all that, the NZD opens in Asia this morning at USD0.7305 with AUD/NZD at 1.0910.

The Australian Dollar managed to extend its recent gains in Monday’s Northern Hemisphere trading and ended up joint strongest of the major currencies we track here, along with the NZD. More than half its rise against the US Dollar had already taken place before London arrived at work. AUD/USD had risen from around 0.7910 at the Sydney open to 0.7950 by the time the first Europeans got to their desks. As the rising EUR continued to pressure the USD index, so the AUD rose to an intra-day high in New York of 0.7975; the highest since September 21st.

Aside from the general weakness of the US Dollar after the ECB’s pre-announcement of a change of forward guidance later in the year, the main driver of the Australian Dollar was continued strength in the gold price. The yellow metal began last week at $1318 per ounce and after dipping to $1309 on Wednesday, it then rose persistently and virtually without correction up to a high of $1337 on Friday; the highest since September 10th 2017. Yesterday, gold added another $5 to $1342 to be up $33 in just four trading sessions.

In a week which will be dominated locally by the December employment report on Thursday, there’s still plenty of second and even third tier data to keep the statistics enthusiasts occupied. Today we’ll see monthly motor vehicle sales. The Australian Bureau of Statistics doesn’t usually provide the level of colour, interest and general wackiness of its counterpart in New Zealand. It drily defines passenger cars, for example, as “vehicles designed primarily for the carriage of people, such as cars, station wagons and people movers. Also includes four-wheel drive passenger vehicles not classified as SUVs.” In November there were a seasonally-adjusted 36,565 passenger vehicles registered, 39,106 SUV’s and 23,384 ‘other vehicles’ to give a total of 99,055. This was a 0.1% increase m/m and a 2.1% rise y/y. There are no consensus forecasts for the December numbers.

This Tuesday morning, the AUD opens in Asia at USD0.7970 with AUD/NZD at 1.0910 and GBP/AUD1.7315.

Another day, another big figure… On Friday the British Pound traded at USD1.35, 1.36 and 1.37. Yesterday it moved on to 1.38 around the middle of the European morning but after a quick half a cent pullback, then went on to a best level in New York around 1.3815.

The GBP’s gains came despite news of the collapse of one of the UK’s largest construction companies which employs around 43,000 people and has been working on a host of government-funded projects such as the high-speed rail link between London and Birmingham as well as many contracts for hospitals, schools, prisons and the Army. In total, Carillion has around 450 contracts with the UK government, equivalent to 38% of its 2016 revenue. In a statement to the House of Commons, the government announced emergency moves to underwrite the cost of the collapsed construction company’s public-sector contracts to ensure that “vital” services continue but insisted that the move was not a “bailout” for the company. We’ll have to wait to see how much political capital the Opposition parties can gain from the affair.

For this Tuesday in the UK, the main economic data are the inflation numbers. The annual rate of CPI inflation was 3.1% in November 2017, up from 3.0% in October; it was last higher in March 2012. The consensus for December is that the annual rate might slip back a tenth to 3.0% as seasonal promotions and discounting at Christmas offset a continued increase in petrol prices. If it doesn’t fall back, BoE Governor carney will be having to sharpen his quill pen to write his letter to the Chancellor explaining why the CPI has overshot the upper band of its 1-3% target.

The British Pound opens in Asia this morning at USD1.3795, AUD1.7310 and NZD1.8890.

The US Dollar had a very bad week and on Monday morning in Europe it got a whole lot worse. On Friday the USD broke below last year’s September 7th low of 91.00; taking the index down to its lowest level in more than 3 years at 90.50. Having been steady in the Asia session and opened in London around 90.45, the Dollar’s index then tumbled to 89.98; the lowest since December 19th 2014.

It is another one of those periods when the dollar is falling because it is falling: momentum itself is one of the biggest drivers of the price. Certainly, there was nothing in last Friday’s numbers – core CPI greater than expected and a stronger than consensus retail sales report – that would have knocked the Fed off its tightening bias or suggested that growth expectations needed to be revised lower. The market-derived probability for a 25bp hike at the March FOMC meeting has gone up from 67% a week ago to 73% now and there’s a tiny chance (2%) of a surprise hike at the January 31st meeting.

Cash equity markets were closed yesterday for the Martin Luther King holiday but futures on the S+P 500 index rose around 7 points whilst DJIA futures advanced 150 points or 0.6%. On January 4th, the Dow Jones Industrial Average jumped past 25,000 for the first time ever and by the close of business that day it had made the fastest run ever to a fresh 1000-point milestone. The jump from 24,000 to 25,000 took 23 trading days. The move in the futures market to 25,957 has taken 8 days!

Later this week we’ll see manufacturing and industrial production data on Wednesday, and a number of regional reports such as the Empire State survey on Tuesday and the Philly Fed survey on Thursday. Sandwiched between these is the latest Federal Reserve Beige Book on Wednesday afternoon New York time.

For this Tuesday morning, the US Dollar index opens in Asia around 90.00.

It is only a week ago that the euro was trading down at a 2018 low of USD1.1918 and here we are up almost 3 ½ cents from that level after a surge beginning on Thursday lunchtime extended into a third day. The EUR opened in London yesterday morning around USD1.2210 then subsequently added another half a cent, largely on the absence of any attempt from monetary officials to express discomfort with its current level or pace of appreciation.

As we explained last week, after a sharp move in either foreign exchange or currency markets, the ECB sometimes 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. One perhaps surprising feature of this move is that there has been no such push-back. For professional FX traders, this is seen as giving the move the official seal of approval.

Of course, the latest Eurozone economic data did no harm. The seasonally adjusted trade surplus rose to €22.5bn in November from €19.0bn in October, largely driven by a 3.4% m/m rise in exports -mostly from Germany - offsetting a 1.4% increase in imports. Tomorrow and Wednesday we’ll get to see December’s final CPI readings in both Germany and the Eurozone and on Friday we’ll see how the trade numbers are contributing to a very healthy current account surplus. Amidst all the data flow, ECB Council Member and Bundesbank President Jens Weidmann is speaking along with his colleague Benoit Coeure at an IMF conference on Thursday.

After the recent dramas, the EUR opens in Asia this morning at USD1.2265, AUD/EUR0.6495 and NZD/EUR0.5955.

The Canadian Dollar is the only major currency which has fallen against the US Dollar over the past seven days. Having opened last Monday morning at USD/CAD1.2400, and been much higher (CAD weaker) in the meantime as investors began to question whether a rate hike at this Wednesday’s BoC monetary policy meeting really is nailed-on, it sits this morning at USD/CAD1.2425; still 25 pips higher than a week ago.

Market expectations about the Bank of Canada have swung quite a bit. Back in December, a January rate hike was only a 50-50 call. After the second strong monthly employment report, the probability of a 25bp hike jumped to 90% but after the uncertainties over what changes to NAFTA might mean, it was back down to just 60%. Yesterday it was back at 85%. In a Reuters poll on Monday, just eight of 31 analysts surveyed said they expect the BoC to hold rates steady on Wednesday as it waits for inflation to pick up and to see how the next round of NAFTA negotiations later this month proceed.

The median forecast in the Reuters poll is for one rate increase apiece in the third and fourth quarters, bringing the benchmark to 1.75 percent by the end of 2018. Analysts predict another hike in the first quarter of 2019. Economic growth is expected to average 2.2 percent this year, slightly higher than the 2.1 percent forecast in the previous poll in October. Expectations for 2019 were unchanged at 1.8 percent.

The CAD opens in Asia this morning at USD1.2425, AUD/CAD0.9900 and NZD/CAD0.9075.