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President Trump talks up USD Dollar, leading to sharp reversal of earlier weakness

By Nick Parsons

The NZD on Wednesday rose to a high of USD0.7433; the first time it has been on a US 74 cents ‘big figure’ since early-August 2017. Thursday morning, however, it suffered a very sharp reversal as the long-awaited quarterly inflation numbers fell well short of consensus expectations. NZD/USD immediately tumbled a full cent to around 0.7325 before then recovering just under half these losses.

The median published estimates were for a quarterly increase in CPI of 0.4% which would have left the annual rate at 1.9%. Instead, StatsNZ reported that prices rose just 0.1% in the December 2017 quarter. Higher petrol prices, air fares, and housing-related costs were offset by lower prices for vegetables, new cars, and a range of household goods. The relatively flat result this quarter leaves the CPI inflation rate at 1.6% for the December 2017 year.

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 now heads to the shredder, analysts have been quick to revise down their interest rate expectations. ANZ, for example, said the data, coupled with their belief the “economy is set to go through somewhat of a near-term growth wobble”, have pushed its expectations for the Reserve Bank of New Zealand to hike the official cash rate back from November 2018 to mid-2019.

There is no economic news scheduled for release locally today and the NZD opens in Asia this morning at USD0.7330 with AUD/NZD at 1.0950.

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.

Although markets locally in Australia are closed today, it is business as usual elsewhere in the APAC region and AUD opens in Asia this morning at USD0.8030 with AUD/NZD at 1.0955 and GBP/AUD1.7595.

The pound’s remarkable run saw GBP/USD rise for 10 consecutive days without breaking the previous day’s low. From the day the ECB dropped its bombshell about possibly changing the language around forward guidance of monetary policy on Thursday January 11th, (ironically in an attempt to smooth market volatility) GBP/USD rose almost 9 cents; its biggest 10-day gain since June 2009. In London trading earlier yesterday morning, the pound moved higher still and hit a best level of 1.4325 before then tumbling almost 2 cents into the US close as President Trump showed he has more clout in global FX markets than ECB President Draghi.

In an interview with Bloomberg Television in Davos, UK Chancellor of the Exchequer Philip Hammond said, “We’re very happy with where the currency is at the moment… Getting the inflation rate down - and a rising pound helps to do that - helps to drive increases in real wages, and that’s good for our economy and good for our society,” he said.

In economic news locally, mortgage approvals by Britain’s banks fell to their lowest level since April 2013 in December, according to trade association UK Finance. Banks approved just 36,115 mortgages for house buying, down from 39,007 in November and 19% lower than a year ago. The RICS survey last week was consistent with even lower levels of activity in this first quarter of 2018. Separately, the CBI’s latest distributive trades survey, showed UK retail sales at a slower pace than anticipated. The survey showed a balance of +12 for January, down from +20 in December. Sales for the time of year were the weakest compared to the norm for more than four years. Orders to suppliers also fell, and looking ahead retailers expect similar growth in sales volumes while orders are forecast to be flat.

Thus far, weaker UK economic numbers haven’t mattered at all to currency traders, though we’ll see if today’s Q4 GDP numbers have any impact. Consensus expectations are for a +0.4% q/q increase compared to the +0.5% rise which the Bank of England expected in its November Quarterly Bulletin. The British Pound opens in Asia this morning at USD1.4125, AUD1.7590 and NZD1.9270.

The US Dollar continued to slide Thursday until a fairly emphatic intervention in Davos from President Tump. The USD index against a basket of major currencies had fallen almost 4 per cent; 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. Late in the New York afternoon, 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,", further adding that Treasury Secretary Steven Mnuchin's comments were taken out of context. The USD index jumped from 88.40 to 89.25.

Earlier in the day, Treasury Secretary Mnuchin played down his comments that a weaker dollar was “good for us as it relates to trade and opportunities”. Mnuchin told reporters, “I thought my comment on the dollar was actually quite clear yesterday. I thought it was actually balanced and consistent with what I’ve said before, which is, we are not concerned with where the dollar is in the short term.” Mnuchin said there were “both advantages and disadvantages of where the dollar is in the short-term” and stressed that the United States wanted fair economic competition. “We want free and fair and reciprocal trade. So, I think it’s very clear. We’re not looking to get into trade wars. On the other hand, we are looking to defend America’s interests.”

Amidst all the uncertainty and rising volatility in global equity and foreign exchange markets, the US Dollar index opens in Asia at 89.25.

Two days ago, the EUR rose to USD1.24 for the first time since December 2014. Yesterday, it hit 1.2460 at the end of the Asia session before a bit of position-squaring ahead of a much-anticipated ECB meeting. During President Draghi’s Press Conference which was notable in several respects (see below), it touched a high of 1.2530 before then crashing to 1.2370 after President Trump’s comments on the USD.

Whilst the ECB worries about whether EUR strength will hinder progress towards its inflation objective by weighing down on the cost of imported raw materials and forcing exporters into more cost-cutting to remain internationally competitive, it seems to be doing no harm at all to the broader Eurozone economy. The ifo Business Climate Index out this morning rose to 117.6 points in January from 117.2 points in December. This was due to far better assessments of the current business situation, with the sub-indicator hitting a record high. Business expectations for the next six months, by contrast, were slightly scaled back, but remain at a high level. As the ifo puts it, “the German economy made a dynamic start to the year.” The big issue 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 Dragi should reflect that the ECB did more to push up EUR/USD than anything on US side. Its January 11th account of the December meeting 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…

The EUR opens in Asia at USD1.2375, AUD/EUR0.6475 and NZD/EUR0.5915.

USD/CAD continued to move a bit lower, albeit the Canadian Dollar has lagged other major currencies after some slightly softer than expected local economic data. The low point for USD/CAD came just before lunchtime in North America at 1.2287 before a rally back on to 1.2380 after President Trump’s comments on the USD.

Retail sales increased for the third consecutive month in November, rising 0.2% to $50.1 billion. Sales were up in 6 of 11 subsectors, representing 37% of total retail trade. Higher sales at gasoline stations, electronics and appliance stores and general merchandise stores offset lower receipts at new car dealers. Excluding motor vehicle and parts dealers, retail sales rose 1.6%. The headline number was below consensus, the ‘core’ number quite a bit higher so it was a pretty volatile 10-15 minutes as the pre-programmed algorithms tried and failed to make sense of it all.

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.”

The CAD opens in Asia this morning at USD/CAD1.2380, AUD/CAD0.9920 and NZD/CAD0.9060.