USD rally only lasted 48 hours, then turned lower with stocks ahead of President Trump’s State of the Union speech
Tuesday 30 January, 2018
Daily Currency UpdateBreaking news - the US Dollar didn’t fall yesterday! The USD index reached a low point last Thursday of 88.20 before rallying into the NY close and then holding around half of its gains on Friday. It opened on Monday morning in Sydney around 88.75 and then climbed on to an 89 ‘big figure’ for the first time in four days. Its gains were broad-based and saw the USD rise against every major currency to take a rare top spot on our one-day performance table. This morning in Asia the USD index reached a best level of 89.25 before the EUR and GBP recovered off their early lows below 1.2350 and 1.4000 respectively to send the index back down to 88.75.
US economic data on Monday were pretty much in line with consensus expectations. They may be a bit obscure for some of our readers, but the personal consumption and spending figures are very important to the Fed for two reasons: First, they feed directly into estimates of GDP and second, they are accompanied by so-called a PCE deflator which is the measure of inflation the Fed is targeting. Whereas the BoE in the UK, RBA in Australia and the RBNZ in New Zealand all have CPI targets, the US Fed has a PCE target. The headline measure of PCE inflation was 1.7% with the core ex-food & energy number as expected at 1.5%. The Fed’s latest forecasts released at the December meeting, showed core PCE back at 2.0% on a 2-year horizon.
After the US numbers were published, the Atlanta Fed updated its GDPNow model. It had overstated the Q4 numbers last week but its first estimate of Q1 2018 is a very punchy 4.2% which would more than make up for any disappointments last Friday. Its’ next update will come on Thursday after the ISM survey and official numbers on construction spending. For today, consumer confidence is the main data point but the big event of the day will be President Trump’s State of the Union address at 9pm EST. The FOMC begins a two-day meeting in Washington today, though the market is ascribing only a 3% probability to a hike in interest rates at what will be Dr Yellen’s last time in the chair. The US Dollar index opens in North America this morning at 88.75 as 10-year bond yields are 3bp easier at 2.69%.
Key MoversOver the last few days, USD/CAD has settled in a 1.2280-1.2390 range with investors keen to get a sense of how the NAFTA uncertainties so ably summarized by BoC Governor Poloz last week might be resolved. Having reached a high around 1.2375 around the end of the Asia session, USD/CAD fell around half a cent during the European morning today as the EUR and GBP both rallied against the USD.
Trade ministers from Canada, Mexico and the United States ended the sixth round of NAFTA negotiations in Montreal on Monday, agreeing some progress was made but acknowledging that tough challenges still lie ahead to strike a new deal. US Trade Representative Robert Lighthizer said while some progress was made, he hoped it would accelerate and achieve major breakthroughs. "This round was a step forward, but we are progressing very slowly," he said. This was because trilateral negotiations are more "complicated and contentious" than bilateral talks. Nevertheless, in his closing remarks, Lighthizer said, “Some real headway was made here today… We're committed to moving forward." Canadian Foreign Minister Chrystia Freeland, said she was “pleased” with progress made this week. “There is still a significant gap on a number of issues, and we are going to be working extremely hard, extremely energetically with our two partners to try to close those gaps,” she said at an individual press briefing.
After the relief that NAFTA talks haven’t completely collapsed despite plenty of outstanding differences between the three negotiating teams, investors can now focus on upcoming economic data releases. We get the monthly GDP and industrial production numbers on Wednesday and the manufacturing PMI survey on Thursday. The Canadian Dollar opens this morning in North America at USD/CAD1.2320, AUD/CAD0.9975 and GBP/CAD1.7395.
EUR/USD hit a 3-year high of 1.2530 during the ECB Press Conference last Thursday before then falling one and a half cents on President Trump’s comments to CNBC about wanting a stronger Dollar over the longer-term. On Friday it couldn’t regain the highs, whilst yesterday’s high was again at a lower level than the day before. All eyes now are on technical support around 1.2345 which has so far held during the European morning and a strong bounce has helped the EUR back on to a 1.24 ‘big figure’.
In economic data this morning, real GDP in the Eurozone rose 0.6% q/q in Q4, slowing slightly from an upwardly-revised 0.7% in Q3, in line with the consensus. As it’s the preliminary report, there is no detailed breakdown of the various components: consumption, investment, government spending and net trade. It was the 19th consecutive quarter of growth in GDP and put the euro region’s 2017 expansion at 2.5%. That’s better than had been anticipated by the European Central Bank, and it’s a pace the region hasn’t seen since before the financial crisis in 2008. A separate release showed regional economic confidence remained close to a 17-year high in January. The index slipped to 114.7 in January from 115.3, the European Commission said. Industrial sentiment held at a record at the start of the year. Confidence slipped among services providers and increased among consumers and construction firms.
Already this morning we’ve seen a few of the German states release their CPI numbers and at 2pm European time we’ll get the pan-German numbers. These will then see analysts firming up their forecasts for the whole Eurozone CPI numbers which are to be released on Wednesday morning. After recovering from an early wobble at the start of the European morning today, the EUR opens in North America at USD1.2435, AUD/EUR0.6515 and NZD/EUR0.5905.
All good things come to an end and that’s exactly what happened to the pound’s 11-day run against the US Dollar. Monday saw the first ‘down day’ for GBP/USD for the first time in 2½ weeks, and at one stage early in the European morning today, the pair dipped below 1.40 for the first time since last Tuesday evening. It has subsequently recovered almost a full cent from the low but the momentum and euphoria which had driven GBP sharply higher have now disappeared.
A confidential government analysis of the economic impact of Brexit was reported to have been shown to Cabinet Ministers over the weekend, though in order to minimize the risk of leaks, hard copies were not made available. Needless to say, the assessment duly appeared on the internet overnight. The Times today reports that under a comprehensive free trade agreement with the EU, British growth would be 5 per cent lower over the next 15 years compared with present forecasts. The “no deal” scenario, which would mean Britain reverting to World Trade Organisation rules, would reduce growth by 8 per cent over that period whilst the softest Brexit option of continued single-market access through membership of the European Economic Area would, in the longer term, still lower growth by 2 per cent.
Bank of England Governor Mark Carney is due to give evidence to the House of Lords Economic Affairs Committee at 3.30pm local time this afternoon. During his Q+A session at Davos last week, he attempted to quantify the loss of GDP which resulted from the EU referendum result 18 months ago and might well come in for some tough questioning over this. Amidst all the intrigue, the GBP opens in North America today at USD1.4125, GBP/CAD1.7390 and GBP/AUD1.7425.
The Aussie Dollar joined in the holiday mood last Friday on Australia Day, rising to a high of USD0.8135; its best level since January 2015. But, just as everyone heads back to work, so too the AUD has come back down to earth. It’s still pretty elevated by standards of the last year – AUD/USD has spent fewer than 20 of the last 250 trading days at 80 cents or above - but at one point earlier in the European morning today was down at 0.8050 before recovering back onto 81 cents once more. It’s certainly been a volatile last few days.
The monthly NAB Business Survey was released overnight. The business confidence index bounced 4pts to +11 index points, the highest level since July 2017 whilst business conditions were unchanged at +13 which is above the long-run trend of +5. We’ve been pointing out recently that the RBA’s monetary policy stance will likely be determined more by growth in wages and household consumption than what’s happening to business conditions. In this respect there was a bit of disappointment that labour costs rose at an implied quarterly rate of 0.8%; down from 1.2% in the previous month’s survey.
The RBA’s Board meeting is on Tuesday February 6th; it’s the first Tuesday of every month except January. The two main pieces of fresh economic information it will have available are the NAB survey today then all the various quarterly measures of inflation which will be released tomorrow. Half-way through this data-fest, the Australian Dollar starts in North America this morning at USD0.8105, with AUD/NZD at 1.1035 and AUD/CAD0.9980.
Since last Wednesday’s soft quarterly CPI numbers, the NZD has fallen around 1¼ cents against the US Dollar, whilst the AUD/NZD cross yesterday hit 110.70; its highest level since December 5th. Overnight in Asia, the NZD/USD fell to 0.7285 as the USD recovered but it has since bounced back over half a cent. Note, too, that the AUD/NZD cross is also down around a quarter of a cent as investors digest the first economic data of a busy week in New Zealand.
New Zealand’s monthly trade balance in December 2017 was +$640 million. The surplus was the largest ever in a December month, and the largest in any month since March 2015. According to the official statisticians, exports of milk powder, butter, and cheese lifted total exports to a record $5.6bn in December 2017. Monthly exports were $1.1bn higher than in the same month a year earlier. The previous highest values for both dairy exports and total exports were recorded in the 2013/14 dairy export season, when dairy prices were at a high level. Looking by destination, the largest increase in exports amongst was to China, up $343m (28 percent), led by dairy products (up $230m).
Later this week, on Thursday we have the ANZ job advertising figures and at the end of the week, the always fascinating numbers on net migration and visitor arrivals. The New Zealand Dollar opens this morning in North America at USD0.7340 and NZD/CAD0.9040.
- USD/CAD: 1.2280 - 1.2390 ▼
- EUR/USD: 1.2350 - 1.2475 ▼
- GBP/USD: 1.3995 - 1.4200 ▼
- AUD/USD: 0.8045 - 0.8135 ▼
- NZD/USD: 0.7270 - 0.7390 ▼