Home Daily Commentaries USD nudges edges gradually higher as German politics weigh on EUR. NZD was Monday’s top performer.

USD nudges edges gradually higher as German politics weigh on EUR. NZD was Monday’s top performer.

Daily Currency Update

We have been warning for a few days that the New Zealand Dollar was becoming more volatile, exhibiting some of the price action which characterized it in early December when it would regularly swing from being the day’s strongest currency to the very worst. For two of the last three trading days it has been top of the performance table even though there has been a complete absence of domestic economic or political news to drive the currency. Yesterday, NZD/USD extended recent gains to a 12-week high of 0.7182 whist AUD/NZD at one point fell to 1.0918; its lowest since December 18th.

We didn’t get any fresh economic news on Monday, but did get the usual detailed and always fascinating annual summary of the past 12 months and 3-month weather outlook from New Zealand’s National Institute of Water and Atmospheric Research. Obviously for an economy so dependent on farming, forestry and agriculture the weather forecast is massively important. NIWA reported that 2017 was “a year of extremes” with New Zealand recording its fifth warmest year in more than a century. Annual rainfall was above normal across the country and for some regions including Auckland, Waikato and coastal Canterbury, as much as 149% higher.

Only the years 2016, 2013, 1999, and 1998 were warmer than 2017, whilst the nationwide average temperature was 13.1°C or 0.5°C warmer than average. The ‘Tasman Tempest’ in March and cyclones Debbie and Cook in April contributed to record or near-record rainfall yet by the end of 2017, 11 out of New Zealand's 16 geographical regions were experiencing meteorological drought and it was the second warmest December on record. For the 3 months January - March 2018, temperatures are forecast to be above average, with high confidence for all regions of New Zealand. Rainfall totals are most likely to be in the above normal range in the North Island and about equally likely to be near normal or above normal in the South Island.

If only it were possible to be as mathematically precise about the outlook for the currency… The Kiwi Dollar opens in Asia this morning at USD0.7180 with AUD/NZD at 1.0920.

Key Movers

The Australian Dollar hasn’t been able to extend last week’s gains. Though it is still on a US 78 cents ‘big figure’, on Monday it slipped steadily lower and at one point was more than 40 pips below Friday’s peak of 0.7874, which was its highest since October 20th. Overall, it ended the first day of this week the second-weakest of all the major currencies we follow closely here.

The Australian Government’s Department of Industry, Innovation and Science said in a report published yesterday that it expects iron ore prices to average $51.50 a tonne this year, down 20% from 2017, because of rising global supply and moderating demand from top importer China as its steel sector shrinks. The forecast price decline will continue into 2019, when the steelmaking raw material will average only $49 a tonne, the Department said. Today, the price of iron ore is around $75 per tonne and it hasn’t been below the $52 forecast since June 2017. The report warned, “The iron ore price is expected to experience some ongoing volatility in early 2018, as the market responds to uncertainty regarding the impact of winter production restrictions on iron ore demand.”

We said at the very beginning of trading on Monday that the AUD “may now need better domestic data, continued support from higher commodity prices or a further collapse of the USD if it is to build on recent gains.” None of these materialised yesterday and the DIIS report weighed down on the Australian Dollar throughout the day.
The AUD opens in Sydney this morning at USD0.7840 with AUD/NZD at 1.0920 and GBP/AUD 1.7300.

After a mixed week in which the British Pound raced up to a high of USD1.3608, then back down equally rapidly to 1.3500 before finishing on Friday evening at USD1.3565 and AUD1.7255, the GBP had another up and down day on Monday.

Talk of an imminent Cabinet reshuffle by Prime Minister Theresa May and some weak numbers on the UK residential property market pulled the rug from under the pound during the European morning and GBP/USD reached a low of 1.3528. Figures from Halifax Bank showed UK house prices fell by 0.6% in December. It’s the first monthly decline since last June, and the latest signal that Britain’s property market is weakening. Halifax also reports that prices only rose by 2.7% during 2017. The average price of £225,021 at the end of the year compares with £219,741 back in January 2017.

As for the Government reshuffle, it proved to be much less far reaching than most commentators had either hoped or feared. There were no changes in any of the three big jobs - Chancellor of the Exchequer, Foreign Secretary or Home Secretary – but plenty of movement lower down the pecking order; the immediate impact of which was not particularly obvious. But, to the extent that it doesn’t increase the chancellors of rebellion or mutiny, investors nerves were somewhat soothed by the lack of major changes. The pound regained its morning losses by the end of the European afternoon and stood where it had begun at 1.3560.

Ahead of Tuesday’s data from the British Retail Consortium (embargoed until midnight local time), the pound opens in Asia this morning at USD1.3560, AUD1.7300 and NZD1.8895.

There are two ways of looking at the Dollar’s performance last week: the bearish view is that with all the good news on the economy, the stock market and a rising trend of yields across the maturity spectrum, it still couldn’t rally and made a fresh 14-week low of 91.44 on its index against a basket of major currencies. The bullish view is that for all the growing political storm around President Trump, a disappointing labour market report and a stream of negative forecasts for it from major financial institutions, it finished off the lows with some late positive momentum.
It will obviously take some time to see which of these views proves correct though, in the very short-term at least, the bulls can take some comfort from Monday’s price action. At 91.56, the low of the Sydney session was above Friday’s 91.50 low and from that point it moved steadily higher to make it back on to a 92 ‘big figure’ for the first time in more than a week.
The Dollar’s rise on Monday came despite a generally very dovish speech on the US economy from Federal Reserve Bank of Atlanta President Raphael Bostic. He urged his colleagues to be patient in raising interest rates, citing some indications that the public’s expectations on inflation could slip below the central bank’s 2 percent target. He said, “I am comfortable continuing with a slow removal of policy accommodation. However, I would caution that that doesn’t necessarily mean as many as three or four moves per year.”

After a very busy first week of 2018, all eyes now will be on Friday’s CPI to see whether or not the strength in economy and labour market is at last feeding through into higher prices. The US Dollar index opens in Asia this morning around 92.00.

The EUR had a poor day on Monday, slumping to the bottom of the one-day performance table despite further upbeat survey indicators. The morning brought a better than expected consumer confidence index of 116 (f/c 114.8) industrial sentiment of 9.1 (f/c 8.4) and business climate of 1.7 (f/c 1.51). For good measure, retail sales in the Eurozone rose 1.5% m/m in November, above the consensus estimate of a 1.3% monthly increase. We mentioned here yesterday the growing concerns about the political situation in Germany and that this was likely to weigh down on the EUR. This is precisely what happened as EUR/USD slipped to a 2018 low of USD1.1962.
The German chancellor Angela Merkel said it would be “an enormous challenge” to bridge political divisions within her own Christian Democrats and with the left-wing SPD in order to re- create the coalition that ran the country from 2013 to 2017. A failure by Mrs Merkel to agree a Große Koalition, or “Groko”, will trigger new elections at a time when her own conservative alliance with the Bavarian Christian Social Union (CSU) is under strain and losing support to right-wing nationalists who took third place in September’s federal election with 5.8 million votes.
The leaders of both the SDP and CSU have said that their political careers would be over if coalition negotiations failed and Germany were once again plunged into divisive elections. Talks are scheduled to continue until Thursday and the longer they go on, the more nervous will foreign exchange markets become. The EUR opens in Asia this Tuesday morning at USD1.1965, AUD/EUR0.6550 and NZD/EUR0.6000.

The Canadian Dollar had a very good start to the new year 2018, finishing way at the top of the performance table after further gains in energy prices and a second consecutive labour market report which was considerably stronger than consensus expectations. USD/CAD tumbled at one point on Friday to 1.2372; the lowest since September 27th. Yesterday, it stabilised in a range 1.2385-1.2435.

The yield on 2-year Canada bonds jumped 6bp to 1.77% on Friday, close to a seven-year high whilst the market-derived probability of a rate hike at the Bank of Canada’s next meeting on January 17th surged to 70%, from 40% earlier in the week. Yesterday, that rate hike odds hit 86% after the Bank of Canada published its Q4 Business Outlook Survey; the last real chance for the Central Bank to communicate something dovish ahead of next Wednesday’s monetary policy meeting.

The Business Outlook Survey indicator rebounded almost to its summer peak, consistent with widespread positive sentiment. “Firms plan to expand operations to accommodate sustained demand, which is evident in a rebound of investment and employment intentions since the autumn survey. Reflecting strong demand and tightening labour markets, indicators of capacity pressures and labour shortages picked up. Survey results suggest that economic slack is now largely limited to the energy-producing regions. Firms expect growth of input prices to rise, owing to gains in commodity prices. Pass-through of input costs and emerging wage pressures to output prices remains limited due to competitive forces. Inflation expectations are modest and unchanged from the third quarter”.
The Canadian Dollar opens in Asia this morning at USD1.2415, AUD/CAD0.9735 and NZD/CAD0.8915.

Expected Ranges

  • NZD/AUD: 0.9055 - 0.9200 ▼
  • GBP/NZD: 1.8850 - 1.8945 ▼
  • NZD/USD: 0.7140 - 0.7230 ▼
  • NZD/EUR: 0.5940 - 0.6050 ▼
  • NZD/CAD: 0.8700 - 0.9050 ▼