After some wild swings on Wednesday, GBP/USD is back at 1.40 and AUD/USD at 79 cents. Stock markets are up again despite higher US bond yields.

Key Movers

It’s hard to know where to begin with today’s US Dollar commentary so let’s stick initially to the facts and figures. The USD index peaked last Thursday around 90.25; a level it almost, but not quite, regained on Friday afternoon. From then on, as stock markets recovered, its index against a basket of major currencies fell over a full point to a low during Sydney time yesterday around 89.05. When January CPI came in above consensus expectations (see below) the index jumped to a high of 89.60 as 10-year bond yields hit 2.89%, the DJIA fell 460 points and the USD strengthened against all the currencies we follow here. Within 2 hours, however, the stock market was back in positive territory on the day and the USD had a stunning turnaround; losing almost a full point by the time London traders headed for home and hitting the lowest level in 10 days.


The much-hyped January CPI figures came in higher than consensus expectations which were for a m/m gain of +0.3% which would have taken the annual rate down from 2.1% to 1.9%. Instead, CPI rose 0.5% m/m and the annual rate was unchanged at 2.1%. The so-called ‘core’ rate of inflation which excludes food & energy prices and is seen as a better measure of underlying inflation trends, was one-tenth higher than expected at +0.3% m/m (the biggest monthly increase since last January) which lifted the annual rate from 1.7% to 1.8%. Indeed, the actual unrounded figure for core inflation was just 1/1000th of a point from being revised up to 0.4% m/m. For all the angst over CPI, we should remember that – unlike the RBA, RBNZ or BoE – the Fed does not target this measure of inflation. It tracks a different index, the personal consumption expenditures price index excluding food and energy, which has consistently undershot the central bank’s 2 percent target since mid-2012 and tends to run around 0.3% below core CPI. In this sense, the panic over higher than expected CPI looks a little overdone, even if there’s no denying an upward trend.

As well as inflation numbers, the January retail sales data were also released. These were quite a bit softer than consensus forecasts with the headline number falling -0.3% m/m versus expectations of a +0.2% m/m increase. The ‘core’ number excluding auto sales was unchanged on the month compared to forecasts of a +0.4% increase. This was the first monthly drop in retail sales since last August and was accompanied by downward revisions to some of the back data. Details showed a significant decline in building materials & furniture while online sales and restaurant spending was unchanged. After the data release, analysts rushed to revise down their Q1 GDP estimates. JP Morgan moved from 3.0% to 2.5%, BAML from 2.3% to 2.0% and Morgan Stanley from 3.3% to 2.9%. The Atlanta Fed which just a few weeks ago was up at 5.2% and was 4.0% at the beginning of this week is now down much closer to the pack at 3.2%. The USD index opens in Europe this morning around 88.60.


The calm which had engulfed the euro is now decisively over. EUR/USD traded on three different ‘big figures’ on Wednesday, tracing out a very similar pattern to that described above for the GBP. The pair edged lower throughout the Asian day and European morning, falling from a high just below 1.24 to the mid 1.23’s immediately prior to the US CPI and retail sales numbers. The EUR then dropped over half a cent but within ninety minutes had completely unwound its losses and went on to a best level in the mid-1.24’s; its strongest in 10 days.


Figures released by Eurostat confirmed the January 30th preliminary estimate that GDP in the Eurozone rose 0.6% in Q4 last year. Growth slowed a little in Germany and Italy, while the pace of expansion accelerated in the Netherlands and Portugal. Germany’s upswing - despite a slowdown in quarterly output - continues to be a key ingredient for growth in the euro area. Momentum at the end of last year was driven by a strong increase in exports, according to a national report. Government consumption and equipment investment increased, while private spending remained largely unchanged and construction slipped. The Dutch economy also benefited from buoyant global trade. GDP increased 0.8% in the fourth quarter, exceeding consensus estimates. Italian growth slowed to 0.3%, leaving it lagging behind France and Germany and providing a note of caution ahead of general elections next month. GDP increased 0.7% in Portugal.

A fascinating Bundesbank study published yesterday shows that cash no longer makes up most of the money spent in Germany. Cash accounted for 47.6% of German transactions by volume last year, down from 53.2% three years earlier and below the 50% mark for the first time since polling started in 2008. Cards grabbed a 39.4% market share last year compared to 33.4% in 2014, mirroring a global trend that has long taken hold in many other countries including Sweden and Britain. ECB Board member Yves Mersch is speaking at a conference in Paris today along with Chief Economist Peter Praet but the only economic statistics are the December trade balance which is rarely a market-mover. The EUR opens at USD1.24 and GBP/EUR1.12.


The Australian Dollar swung just as wildly as most of the world’s major currencies yesterday. AUD/USD stood at 0.7860 just before the inflation numbers and, as stocks tumbled, it fell almost a full cent. Two hours later, the pair had regained all its losses and more and by the close of business in New York it was back on a 79 cents big figure for the first time since February 5th.


The latest Labour Force figures were released overnight. Employment increased 16,000 to 12,453,500. Full-time employment decreased 49,800 to 8,460,900 and part-time employment increased 65,900 to 3,992,600. Since January 2017, full-time employment has increased by 293,200 persons, while part-time employment has increased by 110,100 persons. Seasonally adjusted monthly hours worked in all jobs decreased by 24.1 million hours (or 1.4%) between December 2017 and January 2018 to 1,708.2 million hours. This follows a decrease of 8.6 million hours (or 0.5%) from November to December 2017, and four consecutive increases up to November. The average number of hours worked per employee per week fell to a new record low of 31.7. Employees are on average working 2.7% fewer hours than a year ago and that will limit the boost to household incomes from rising employment.

Commonwealth Bank of Australia have already changed their interest rate forecasts to remove the two hikes they previously had penciled-in for 2018. Westpac haven’t yet done this but note, “the Bank’s forecasts are not entirely out of line with our own view and, arguably, consistent with steady rates over the next few years.” NAB, meantime, still has two 25bp hikes in its forecast profile for H2 2018. Amongst the offshore commentators, Capital Economics say, “while the continued strength of the labour market will provide at least some support to income and consumption growth this year, without much more wage inflation the RBA isn’t going to raise interest rates. We expect the RBA will keep interest rates at 1.5% until the second half of 2019.”


The Canadian Dollar had pretty much exactly the same price action as all the other major currencies on Thursday (though of course we have to invert it for comparison) but having reversed all its losses in the immediate aftermath of the US economic data, (which again took USD/CAD on to a 1.26 big figure), it took several hours to catch up with movements elsewhere. Eventually it broke down through 1.25 and this morning sits in the high 1.24’s; the CAD’s best level since Monday last week.

In economic data, January’s Teranet National Composite House Price Index rose 0.3% from the previous month, a touch higher than the historical average for January and a second consecutive monthly increase. The composite index was up 8.7% from a year earlier, the smallest 12-month rise since May 2016 and a seventh consecutive deceleration from the record 12-month gains of 14.2% last June. Moreover, only four of the 11 metropolitan markets surveyed showed gains – the first time since January 2016 that a rise in the Composite Index has had so little breadth. The rise was due mainly to a second straight monthly jump of the index for the important Vancouver market (1.2% in January on the heels of 1.3% in December). The Toronto index rose 0.2%, the Victoria index 1.0% and the Montreal index edged up 0.1%. For Vancouver, January was a ninth consecutive month without a decline. The cumulative rise over that period was 14.5%; comprised of 18.2% for condo units and 11.4% for all other housing. Vancouver and Montreal were the only markets surveyed whose index reached an all-time high in January

Today we’ll get to see the ADP payrolls report but coming almost a week after the official labour market data, it’s unlikely to have a great deal of market impact. At lunchtime locally there’s a speech from Bank of Canada Deputy Governor Lawrence Schembri.


The New Zealand Dollar traced out pretty much the same pattern as its Australian cousin in the wild period either side of the US CPI figures. The NZD/USD pair stood at 0.7325 just before the numbers then plunged around three-quarters of a cent. Two hours later it was more than a cent off the low at a 10-day high and finished the day as the top performer of all the major currencies we track here with NZD/USD in the high-73’s and the all-important AUD/NZD cross down near a 6-month low of 1.0745.



Overnight we’ve seen new figures on house sales from the Real Estate Institute of New Zealand. In a snappy Press Release they say that, “As the mercury rose during January to produce the hottest month on record, sales volumes across New Zealand rose when compared to the same time last year for the first time in 19 months”. The number of properties sold in New Zealand during January 2018 increased by 2.7% when compared to January 2017 (4,366 up from 4,251). The number of properties sold in Auckland increased 0.9% year-on-year to 1,157 up from 1,147. REINZ said, “January can often be a quiet month for the industry as people spend much of their time at the beach. However, clearly the warmer weather has helped sales, as it’s the first time we’ve seen a positive year-on-year sales increase in seven months. There were some really positive figures from around the country, with 11 out of 16 regions experiencing an increase in sales when compared to the same time last year.” The median house price for New Zealand increased by 7.1% to $520,000, up from $485,500 in January 2017. Auckland’s median price decreased by 1.2% to $820,000 down from $830,000 at the same time last year.

Tomorrow we’ll get to see New Zealand’s manufacturing PMI survey and the Kiwi Dollar opens in London at a 2-week high versus the USD and close to it strongest level in almost a month against the GBP.