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AUD reaches US 80 cents for first time in nearly 4 months. GBP/USD surges to post-Brexit high. Bank of Canada hikes rates 25bp

By Nick Parsons

Top of the pile Monday, back at the bottom Tuesday, and back up to second place on Wednesday – just a normal pattern for the Kiwi Dollar! NZD/USD traded from a high of 0.7283 in Sydney (on the USD spike down) to a low of 0.7237 at the start of business in London. It subsequently regained all its losses and by early afternoon in New York broke US 73 cents once more, on its way to a fresh 2018 high of USD0.7330.

In local economic news yesterday, New Zealand commodity prices dropped again in December. The ANZ commodity price index fell 2.2% and was up just 3% year-on-year. In New Zealand Dollar terms, however, the index fell a punchy 3.3% m/m as the Kiwi’s trade-weighted index rose 2.7% during the month. ANZ noted that, “this was the largest fall in world and local prices since the current upward cycle in commodity prices began in early 2016”.

The latest Global Dairy Trade (GDT) auction showed a 4.9% gain but this comes after ANZ’s survey showed very large falls in December as an upswing in global milk supply placed downward pressure on all product prices. Cheese prices fell 11% in the month, butter was down 10% while whole milk powder fell 2.2%.

The NZD opens in Asia this morning at USD0.7300 with AUD/NZD at 1.0960.

The Aussie Dollar certainly had a volatile session in the Northern Hemisphere on Wednesday. It first got caught up in the USD spike lower late in the Sydney morning, touching a high of USD0.7993; the highest since September 20th. There were no news headlines whatsoever to trigger this move and, given the changed regulatory environment these days in wholesale FX markets, no chat around what client flows may have triggered it. By the London opening it was down to 0.7945 but then was bought steadily and persistently through the European day and in the New York afternoon had regained all its prior losses and more to be back on US 80 cents for the first time since September and on to an intra-day high of 0.8021.

Unusually, the AUD rise came despite further weakness in commodity prices. Gold and silver were both down on the day, as too were copper, zinc and nickel, though iron ore was pretty flat as was aluminium. Along with more general USD weakness, perhaps it was the proximity of the 2018 high at 0.7993, a change of big figure to 80 cents and hopes for an upside surprise in this morning’s Australian labour market report which all contributed to the AUD/USD surge.

To recap, consensus expectations today are for a 15,000 increase in December employment after a huge 61,600 increase in November. Last time around, full-time employment increased 41,900 to 8,501,900 and part-time employment increased 19,700 to 3,901,100 although the unemployment rate remained steady at 5.4%. It is generally estimated that, over time, around 14-15k new jobs per month are enough to keep pace with demographic change and leave the unemployment rate steady though this doesn’t always hold for every individual month’s data.

Ahead of the data, the AUD opens in Asia at USD0.8005 with AUD/NZD at 1.0960 and GBP/AUD1.7330.

There is plenty of intra-day volatility across the major currencies at the moment; a development from which the GBP is by no means immune. Yesterday in Asia, the GBP was caught up in the USD spike lower and reached a fresh high for 2018 of USD1.3825 before slipping back in early European trading to USD1.3760. As with both the Aussie and Kiwi Dollars, however, this proved to be the low point of the Northern Hemisphere day and from then on the GBP was chased up to another fresh 2018 peak of 1.3837 just before London traders headed for home. By the time they got to their front doors, GBP/USD had added another cent to a post-referendum high of 1.3930. Perhaps we’ll have to rename it the British Bitcoin!

There was nothing new at all on Wednesday’s UK economic calendar. At midnight local time (11am Sydney) the Royal Institution of Chartered Surveyors will release its excellent monthly report on the UK residential property market but then there’s nothing scheduled until Friday’s December retail sales numbers.

In the latest Brexit developments, European Commission President Jean-Claude Juncker has again been stirring the pot. He told MEP’s in Brussels yesterday, “Our hand remains outstretched... We are not throwing the British out. We would like the British to stay. And if they so wish, they should be allowed to do so.. Even if the British leave according to article 50, then article 49 would allow them to accede again. And I would be happy to facilitate that. I would not want to push anyone into a corner.” It is an offer of help which is unlikely to be well received in Downing Street.

The British Pound opens in Asia this morning at USD1.3870, AUD1.7330 and NZD1.9000.

Wednesday was a day of three halves for the US Dollar! Its index against a basket of major currencies tumbled to a 2018 low in Sydney of 89.93, recovered by lunchtime in Europe to 90.43 then lost half a point to another fresh low of 0.8990 in the New York afternoon before rallying 40 pips to 90.30.

The volatility in FX was replicated across asset classes. A 367 point intra-day plunge in the DJIA on Tuesday was partially reversed by the close and on Wednesday the futures market added another 300 points to be back on a 26k handle and a fresh all-time record high.

All these wild price swings have come against a background where the US economy continues to perform very well. After last week’s higher core inflation and retail sales numbers, industrial production surged +0.9% in December as unseasonably cold weather at the end of the month boosted demand for heating. For all of 2017, industrial output rose 1.8% the first and therefore the largest increase since 2014.

According to the Federal Reserve Beige Book released at 2pm in Washington, the US economy and inflation expanded at a modest-to-moderate pace from late November through the end of 2017, while wages continued to push higher. “Most districts said that wages increased at a modest pace… A few districts observed that firms were raising wages in a broader range of industries and positions since the previous report… Firms in some districts noted an ability to increase selling prices. Retailers in some districts reported modest price increases and there were reports of rising home prices across the country,”

The US Dollar index opens in Asia at 90.30 whilst US 10-year bonds are 2bp higher in yield at 2.56%.

The EUR underperformed the USD for much of the day on Wednesday and after a yo-yo session in New York it finished in bottom spot in our one-day performance table. As the GBP, AUD and NZD recovered in the European morning, the EUR fell further to hit 1.2203 by lunchtime. It recovered to USD1.2275 in New York before losing half a cent to 1.2225.

We’ve been highlighting for the last few days, the lack of any push-back from ‘ECB sources’. Yesterday we finally got it. According to a Reuters story, “three sources on or close to the ECB’s policy-making Governing Council said any fundamental change to the guidance was likely to come only later, with the March meeting, when policymakers get updated economic forecasts, seen as a more likely option. ‘We need more thorough analysis before making any change,’ one of the sources said”.

In an interview with Italy’s La Repubblica newspaper, ECB Vice President Vitor Constancio said “I am concerned about sudden movements which don’t reflect changes in fundamentals… Looking at fundamentals, inflation declined slightly in December.” The next ECB Governing Council meeting is on January 25th and Constancio signaled little prospect of a change in the guidance on policy at that gathering, saying officials should be careful not “choke off growth too soon.”

As if to reinforce the message, ECB council member Francois Villeroy de Galhau said, “The only question is how long it will take to meet our inflation target. On this issue, the recent evolution of the exchange rate is a source of uncertainty which requires monitoring with regard to its possible downward effects on imported prices.”

All these ECB comments, whether anonymous or on the record, have had some effect. The EUR opens in Asia at USD1.2225, AUD/EUR0.6545 and NZD/EUR0.5970.

It’s been a long wait but the Bank of Canada finally put the market out of its misery yesterday. In line with the majority expectation, it raised rates 25bp to 1.25%. The initial reaction in FX markets was the usual mix of algorithm-driven stop-loss and stop-entry orders as the headlines flashed across the screens. Your author was watching a tick-chart of prices and in the space of less than 20 seconds, USD/CAD moved up from 1.2420 to 1.2540, down to 1.2375 and back to 1.2500.

The main points from the BoC Statement were that, “Recent data have been strong, inflation is close to target, and the economy is operating roughly at capacity. However, uncertainty surrounding the future of the North American Free Trade Agreement (NAFTA) is clouding the economic outlook.” On the domestic economy, “Consumption and residential investment have been stronger than anticipated, reflecting strong employment growth. Business investment has been increasing at a solid pace, and investment intentions remain positive. Exports have been weaker than expected although, apart from cross-border shifts in automotive production, there have been positive signs in most other categories”.

Looking forward, “consumption and residential investment are expected to contribute less to growth, given higher interest rates and new mortgage guidelines, while business investment and exports are expected to contribute more. The Bank's outlook takes into account a small benefit to Canada's economy from stronger US demand arising from recent tax changes. However, as uncertainty about the future of NAFTA is weighing increasingly on the outlook, the Bank has incorporated into its projection additional negative judgement on business investment and trade.”

The two mentions of NAFTA in the Statement and the sentence that “some continued monetary policy accommodation will likely be needed to keep the economy operating close to potential” mean we should probably characterize the BoC move as a ‘dovish hike’; hence the volatility as the headlines were released.

After it all settled down, the CAD opens in Asia this morning at USD1.2410, AUD/CAD0.9930 and NZD/CAD0.9065.