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USD falls to 3-week low as stocks extend decline

By Nick Parsons

The “buy the dip” crowd clearly didn’t get the memo Tuesday. Prior to the NY open, futures markets had signaled an opening loss of just 3 points for the S+P 500 index but at no point during the New York day did the market manage to claw its way back into positive territory. Indeed, at one point it was more than 16 points lower at 2566; its lowest point in almost a week. In US economic news, producer prices came in at a much stronger than expected 2.8% y/y; the fastest rate in more than 5 years with core PPI of 2.4% the highest since February 2002. The USD hasn’t really been trading off rate hike expectations recently – a December hike is still priced at 96.7% probability. Instead, the stock market wobble and continued uncertainty over tax reform have continued to weigh on investor sentiment. The USD Index tumbled more than half a point on Tuesday to 93.48; the lowest since October 26th and in London this morning has been down to a fresh low of just 93.18. Futures markets are signaling another 14 points off the S+P with the DJIA 130 points lower. The next test for stocks and the Dollar comes with US CPI data this morning where consensus looks for the y/y rate to be unchanged at 1.7%.

After a mini-wobble in the first two days of this week, the CAD has stabilized a little on global FX markets. The USD/CAD pair moved steadily higher on both Monday and Tuesday to reach 1.2765 at one point in yesterday’s New York session. The CAD then recovered into the close and overnight has moved 40 points lower to open in North America around 1.2725. Against the British Pound, the GBP/CAD cross rate rose from a low of 1.6608 on Monday morning all the way up to 1.6791 yesterday and opens this morning around 1.6764. As well as a few nerves around NAFTA renegotiation which we noted on Tuesday, lower oil prices have undermined some of the support which the CAD had seen ever since the beginning of the month. NYMEX crude oil began the month at $54.76 per barrel and rose as high as $57.58 by last Thursday. Subsequently it has turned sharply lower and though the current price of $55.21 is still around 50 cents up on the month, the positive momentum has been lost and the mood across the whole commodities complex is much more cautious. House price indices and existing homes data released locally this morning are unlikely to offer the CAD much support and its stability against the USD masks a fall on many of its major crosses.

The euro may have been glued for a very long time on a USD 1.16 ‘big figure’ but it didn’t spend very long at all on 1.17! It took barely 12 hours to trade up to 1.18 and since the European open today it has added almost half a cent to a best level of 1.1846. EUR/CAD, too, has moved sharply higher. On Monday morning in Sydney, the euro would have bought CAD1.4790 and today it is up at 1.5078; it’s highest level since the day of the ECB meeting back on October 26th. Yesterday we saw very good GDP figures out of Germany and Italy as well as for the Eurozone as a whole. The comparison with the US tells a clear story: the GDP of the 19 countries using the euro grew by 0.6% from July-September and was 2.5% higher than the same period in 2016. In the United States, the economy grew just 2.3% y/y in Q3 after also growing slower than the Eurozone in Q2. Today brought news of a much bigger than expected Eurozone trade surplus of €25.0bn. Although, we could argue that the pace of EUR appreciation over the last 24 hours leaves it technically overbought, there’ll be few sellers as long as nervousness persists in US asset markets.

The British Pound has had another choppy overnight session though the absolute magnitude of its moves has been much lower than in recent days. GBP/USD recovered off yesterday’s London low of 1.3068 to finish in North America around 1.3116 and has been as high as 1.3191 earlier today before selling off 60 pips to 1.3137. It opens in North America at 1.3170. GBP/CAD Tuesday rallied from its 3-week low of 1.6598 on Monday to end yesterday around 1.6760. This morning, the GBP/CAD rate has traded between 1.6713. and 1.6793 and begins the North American session at 1.6767. Economic data in the UK today were on unemployment and average earnings. The jobless rate was steady at 4.3% though the number of people in employment across the UK fell for the first time in nearly a year. There were 32.06 million people in work in July-September, which is a 14,000 drop on the previous quarter. On wages, meantime, both measures (including and excluding bonus payments) were pretty much in line with consensus expectations at 2.2% y/y. A year ago, the Bank of England forecast earnings would grow 3.0% in 2017 and continues to believe there’ll be a strong pick up over the next 18-24 months. Unless and until they do, then with CPI of 3.0%, the squeeze on real incomes and consumer spending in the UK looks set to continue for some time to come. The GBP will find it difficult to rally unless there’s some unexpected good news on the political or Brexit fronts.

We wrote here yesterday that, “the Aussie has found some welcome support after threatening to break lower and we’ll now look forward to official data on employment and wages to see if its gains can be sustained”. The short response is they couldn’t and in Sydney trading the Aussie Dollar finally relinquished its grip on a US 76 cents big figure; falling to a low of 0.7581. AUD/CAD, meantime, tumbled from 0.9720 to a low of 0.9643 before recovering 30 pips to open in North America around 0.9678. The damage to the AUD came from the Q3 wage price numbers. It had been expected that wages would rise around 0.7% in the quarter to leave the annual rate around 2.2%. Instead, they rose only 0.5% for an annual growth rate of 2.0%. The RBA last week said it wanted to see, “how much wage growth will pick up in response to improved labour market conditions and the associated reduction in spare capacity”. The simple answer is “not very much”. Australians have largely been shielded from the sort of declines in real wages suffered in the UK and total pay is extremely high by international standards. But, with no growth in real earnings and a huge burden of mortgage debt to be serviced, worries about slower household consumption should continue to weigh on the AUD from here.

The Kiwi Dollar has really slipped off the radar these past 24 hours. Price action on Tuesday was driven by better than expected numbers in Australia which pushed the AUD/NZD pair up to a high of 1.1131 but the weaker Aussie wage data overnight has seen the move more than fully reversed and we open in North America this morning with that cross back down at 1.0990; the first time it has been on a 1.09 ‘big figure’ since October 19th. NZD/CAD, meantime, tumbled from a high of 0.8867 Tuesday to a low in early London trading of 0.8734. It has subsequently rallied around 60 points off the low and opens in North America today at 0.8806. There is no economic news now until the concrete production numbers on Thursday morning local time in New Zealand and it would be a big surprise if the market reacted much to them even when they are released. Friday brings PMI and PPI data but with no RBNZ meeting now until February 8th, Kiwi currency traders will likely continue to take their clues from the AUD/NZD cross.