USD hit by fears of US government shutdown. GBP and EUR very close to 2018 highs, AUD back on 80 cents.

Key Movers

The British Pound continues to trade in quite wide ranges against the USD with another 100 pips separating the high and low on Thursday. Overnight in Asia, GBP/USD has regained the 1.39 level, though has thus far stopped just short of the 2018 low at 1.3930.


UK Prime Minister Theresa May and French Prime Minister Emmanuel Macron held a low-key summit at the Royal Military Academy in Sandhurst yesterday. They struck a series of agreements relating to Anglo-French cooperation after the summit. They released 13 papers and agreements in total, covering areas such as security and defence, cyber and digital, foreign policy and even sports events.


On Brexit, the key point re-emphasised by Mr Macron was that “I’m here neither to punish nor to reward. I want to make sure that the single market is preserved because that is very much at the heart of the European Union. So the choice is on the British side, not on my side. They can have no differentiated access to financial services. If you want access to the single market, including the financial services, be my guest. But it means that you need to contribute to the budget and acknowledge European jurisdiction. Such are the rules and we know this is the system already in place for Norway.


If you want a trade access, it will cover everything, but then it is not full access to the single market and to financial services. Otherwise, it’s closer to the situation of Canada.” It’s hardly the ‘bold and imaginative’ arrangement the UK has been calling for but is a message that’s sure to be repeated many times over in the next few months.


Today we’ll get the December retail sales figures. There has been a significant shift in buying habits as a result of Black Friday promotions a month before Christmas. Sales volumes ex-fuel rose +1.2% in November but are expected to show a -0.9% drop in December.


Ahead of this, the pound opens in London this morning at USD1.3910, GBP/EUR1.1340 and AUD1.7350.


It’s a familiar story but Thursday was another poor day for the US Dollar. With the EUR and GBP well bid, and the AUD and NZD back within touching distance of their 2018 highs, the Dollar’s index against a basket of major currencies fell from a high in Asia of 90.61 to a low in the New York afternoon of 90.05.

Equally as familiar as the dollar’s drop is that it came despite yet another good set of economic numbers. Last week, we saw higher core inflation and retail sales numbers. On Wednesday, industrial production surged +0.9% in December as very cold weather at the end of the month boosted demand for heating. Yesterday we learned that weekly jobless claims Jobless decreased by 41k to 220k; their lowest level since February 1973 and the biggest weekly biggest drop since April 2009. The figures suggest the unemployment rate of 4.1%, already the lowest since 2000, could be set to fall further. The latest week for claims includes the 12th of the month, which is the reference period for the Labour Department’s monthly employment surveys.

Rather than look at the incoming data, the USD is being spooked by headlines that US Senate majority leader Mitch McConnell is making contingency plans for the growing possibility of a government shutdown. Congress is facing a January 19 deadline (today) to pass a spending bill, which helps determine the government’s budget and discretionary spending for the fiscal year. Without it, the government will shut down. This would be truly surreal. It would be the first time ever that a party which controls the White House, Senate and House of Representatives has overseen a government shutdown.

During the last government shutdown in October 2013, 850,000 federal workers were furloughed, equal to nearly 40% of the government workforce. The shutdown lasted for 16 days, triggered by a disagreement over Obamacare. According to Standard & Poor’s, it cost the economy $24 billion.

The US Dollar index opens in London at 90.05 whilst US 10-year bonds are 4bp higher in yield at 2.63%. 


It’s a familiar story but Thursday was another poor day for the US Dollar. With the EUR and GBP well bid, and the AUD and NZD back within touching distance of their 2018 highs, the Dollar’s index against a basket of major currencies fell from a high in Asia of 90.61 to a low in the New York afternoon of 90.05.


Equally as familiar as the dollar’s drop is that it came despite yet another good set of economic numbers. Last week, we saw higher core inflation and retail sales numbers. On Wednesday, industrial production surged +0.9% in December as very cold weather at the end of the month boosted demand for heating. Yesterday we learned that weekly jobless claims Jobless decreased by 41k to 220k; their lowest level since February 1973 and the biggest weekly biggest drop since April 2009. The figures suggest the unemployment rate of 4.1%, already the lowest since 2000, could be set to fall further. The latest week for claims includes the 12th of the month, which is the reference period for the Labour Department’s monthly employment surveys.


Rather than look at the incoming data, the USD is being spooked by headlines that US Senate majority leader Mitch McConnell is making contingency plans for the growing possibility of a government shutdown. Congress is facing a January 19 deadline (today) to pass a spending bill, which helps determine the government’s budget and discretionary spending for the fiscal year. Without it, the government will shut down. This would be truly surreal. It would be the first time ever that a party which controls the White House, Senate and House of Representatives has overseen a government shutdown.


During the last government shutdown in October 2013, 850,000 federal workers were furloughed, equal to nearly 40% of the government workforce. The shutdown lasted for 16 days, triggered by a disagreement over Obamacare. According to Standard & Poor’s, it cost the economy $24 billion.


The US Dollar index opens in London at 90.05 whilst US 10-year bonds are 4bp higher in yield at 2.63%.


The EUR rallied throughout the day on Thursday, rising from a low of 1.2165 early in the Sydney morning to 1.2260 in the European afternoon. It has only very briefly been on a 1.23 ‘big’ figure this week and the high of the year remains the 1.2303 seen in Sydney time early on Wednesday morning.


In a survey published by Bloomberg this morning, economists have brought forward their estimate of when the European Central Bank will set an end-date for its bond-buying program, after signs that more optimistic views on inflation might be gaining sway among policy makers. Although no action is expected at next week’s Governing Council meeting on January 25th, almost half of respondents predicted the ECB will announce a definite end-date for asset purchases by June. Just 38% held that view in the previous survey last month. The first change in forward guidance is expected in March. Asked when interest rates will rise, the economists said the deposit rate will be lifted to minus 0.25% in the second quarter of 2019 from a record-low minus 0.4%. The main refinancing rate will then be increased over the following three months.


The EUR opens in Europe this morning at USD1.2265 and GBP/EUR1.1340.


European traders seemed to like yesterday’s Australian employment report more than their colleagues Down Under did. Indeed, by early afternoon London time, the AUD was back on a US 80 cents big figure having been just below 0.7950 after the figures were released. Since 10.30pm last night, AUD/USD has remained on 80 cents and is within just a few pips of the 2018 high at 0.8021.


Whilst many of the local banks shy away from publishing negative outlooks on the local property market – and price action over the last few decades has shown they were right to do so – there are a growing number of offshore institutions who are sounding a lot more cautious. The latest of these is Swiss mega-bank UBS. Its analysts note the addition of debt held by self-managed super funds in Australia has pushed the household debt to disposable income ratio to almost 200%, one of the highest in the world. The ABS and RBA now calculate total Household Debt to Disposable Income at 199.7%, up 3% on previous estimates.


The UBS team say, “With subdued growth in household income expected to continue, this implies household leverage is likely to rise further in the near term” and they are concerned about what this might mean for consumer spending and the economy if house prices fall. They say, “Pricing data from CoreLogic continues to show that the housing cycle has turned… Home values in Sydney are continuing to slide in January, down 3% from their September highs, while Melbourne has now peaked… We expect weakness to continue.”
The AUD opens in Europe this morning at USD0.8015 with GBP/AUD at 1.7340.


The Canadian market spent so long waiting for the Bank of Canada’s meeting on Wednesday that by the time the interest rate announcement came and the Monetary Report had been analysed, it almost died of exhaustion and indigestion. On Thursday, USD/CAD remained firmly bounded by the immediate post-BoC range of 1.2385-1.2470 and appears not to know quite what to do next.


Recall that the median forecast in the Reuters poll earlier in the week was for one rate increase in each of 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 challenge after the BoC Statement and Press Conference is to decide whether the references to uncertainties over NAFTA will be enough of take at least one of these hikes off the table. There doesn’t yet appear to be any consensus amongst the local banks on this so we may have to wait until the next round of weekly and monthly analysts’ notes to see if views have changed.


The Canadian Dollar opens in London this morning at USD1.2420 and GBP/CAD1.7260.


The New Zealand Dollar was again very well bid on Thursday, vying for top spot with the British Pound. During the Asian morning, NZD/USD had fallen below USD0.7250 but from there it was a pretty much uninterrupted journey back on to a US 73 cents handle early in the European afternoon. It didn’t quite breach the 2018 high of USD0.7330 seen on Wednesday, but did get to within almost 10 pips of that peak. Overnight in Asia it has eased back into the high 72’s.


In local economic data today, the seasonally adjusted PMI for December was 51.2 (a PMI reading above 50.0 indicates that manufacturing is generally expanding; below 50.0 that it is declining). This was 6.5 points down from the previous month, and the lowest result since December 2012. Despite the drop from November, the sector has remained in expansion in all months since October 2012. Christmas and the general holiday season were mentioned for those who provided both positive and negative comments, along with weather conditions.


Separate figures from the REINZ, showed median house prices across New Zealand rose by 5.8% in 2017 to $550,000; up from $520,000 in December 2016. Median prices for New Zealand excluding Auckland increased by 6.6% to $450,000 whilst Auckland’s median house price increased to $870,000 from $855,000 in December 2016. 13 out of 16 regions saw prices increase in December, with three of those regions experiencing record prices; Waikato, Bay of Plenty and Wellington. As REINZ also noted, “When looking at the Auckland picture, this is the first time that all seven districts have had a median price of in excess of $700,000 highlighting how expensive the city is becoming”.


The Kiwi Dollar opens in Europe this morning at USD0.7285 with AUD/NZD at 1.0990 and GBP/NZD1.9065.