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USD tied to stock market and tax reform prospects

By Nick Parsons

Wednesday was a day of two halves for the US Dollar. Its index against a basket of major currencies tumbled from 93.53 to a low just ahead of CPI and retail sales data of 93.12. Within a couple of hours, it had regained all its losses and closed in New York exactly unchanged on the day. Overnight in Asia and Europe the index has traded essentially sideways between 93.50 and 93.69; taking some comfort both from yesterday’s rebound and a more positive performance from stock index futures. The S+P 500 closed around 8 points above its intra-day low and this morning is called around 10 higher at the New York open with the DJIA up 65 points. On the economic front today brings fresh data on manufacturing and industrial production as well as the weekly initial jobless claims data. Consistent with the ISM survey, consensus expectations are for manufacturing output to have risen around 0.6% in October. The CME’s online calculator at the start of the day on Wednesday showed the probability of a December Fed hike at 96.7%. By the close of business, it stood at…. 96.7% so it’s obviously not changing interest rate expectations which are moving the USD. Instead, it’s intra-day swings in the stock market which have become the key driver and these, in turn, could hinge crucially on a vote this afternoon in the House on President Trump’s tax-reform bill.

Wednesday was a poor day for the Canadian Dollar, though not for your author who had warned for a couple of days that its recent strong run could be coming to an end. USD/CAD rose to a high of 1.2787 whilst even AUD/CAD managed to close higher on the day after hitting a best level of 0.9711. The CAD was hit by a combination of lower energy prices and a generally poor set of domestic economic data. House prices in Canada fell another 1.0% m/m in October after a -0.8% decline in September which took the annual rate of growth down from 11.4% to 10.0%; a number which we can be virtually certain will fall much more sharply over the next 6-9 months. As prices fell, so too did the pace of transactions with existing home sales up just 0.9% m/m in October after a 2.1% m/m gain in September. Today brings manufacturing sales (f/c -0.5%) whilst ADP will launch their first Canadian Employment Report at a breakfast function in Toronto. Their US report used to be quite widely watched as a lead indicator of payrolls but in fact now it incorporates the last official numbers as in input, making it a much less reliable guide to upcoming data. As their Press Release notes, “Leaders from ADP will speak about the October report, what it means to the Canadian economy, and how to use monthly employment insights to make more informed decisions”, it may get a bit of coverage on an otherwise quiet day. USD/CAD opens in North America this morning around 1.2766 with AUD/CAD at 0.9693.

The euro surged on to a 1.18 ‘big figure’ Wednesday but has found it very difficult to hold on to that level. By the New York afternoon it was back on 1.17 and through the Asian and European sessions overnight the high has been USD1.1799. The move lower certainly hasn’t been driven by any incoming economic news (factory orders in Slovakia are never a market-mover!) and ECB Chief Economist gave a pretty upbeat address to a working group of bank economists in Brussels this morning. He noted that, “domestic demand has become the mainstay of growth in the euro area, making the recovery more resilient to developments overseas. Real GDP growth is projected to remain above potential growth in the coming years. The strength and resilience of the recovery tends to foster our confidence that reflationary forces will gradually support a return of headline inflation towards a level that is below, but close to, 2% over the medium term”. For all the fancy econometric analysis available to the ECB through its vast and highly-qualified Research staff, we’d simply point out that petrol prices are now rising throughout Europe. And when prices rise, so does inflation! ECB Council member Villeroy de Gallau speaks in Amsterdam as we publish this commentary, whilst his colleague Constancio is topping up his air-miles and speaks later in the day in Ottowa. EUR/USD opens in North America at 1.1760 having broken down through the Asian low of 1.1770. EUR/CAD, meantime, is clinging by its finger tips to a 1.50 ‘big figure’ and opens around 1.5006.

Hold the front page! The British Pound has managed to stay on the same big figure against the US Dollar for the whole of the last 24 hours; a big change from the volatility which we’ve seen each day for the last couple of weeks. Admittedly it has been a close call: the low has been USD 1.3100 and the high 1.3197 and it opens in North America this morning around 1.3190. Against the Canadian Dollar, the range over the same period has been GBP/CAD1.6786 to 1.6848 and it opens today very close to the top of this range at 1.6840. Economic data in the UK in the first part of this week showed the cost of goods and services as measured by the CPI, the number of people in work and the amount they were collectively paid. Today we got to see how all that translated into consumer spending. After a -0.8% m/m tumble in September, October rebounded a little to +0.3% m/m; a tenth above consensus expectations. The annual rate of sales is now negative (-0.3% y/y) for the first time since 2013 and the official statisticians comment that, “growth month-on-month in October was particularly strong in the second-hand goods sector”, doesn’t exactly point to buoyant consumer confidence. Speaking about Brexit in Liverpool where he will be joined later today by some of his MPC colleagues, BoE Governor Carney said, “We will do whatever we can to support the economy during the transition - whether there is no deal or a comprehensive deal.” For the moment, it seems the two MPC members who voted to leave Bank Rate unchanged might have called the UK economy correctly.

The Aussie Dollar tumbled on Wednesday to USD0.7575; its weakest point since early July. The pair very briefly traded back on a US 76 cents ‘big figure’ but it soon headed south again; opening in London at 0.7590 and then down to a low of 0.7581. AUD/CAD traded for a short time on 97 cents but it too has slipped lower overnight and opens in North America around 0.9685. Australia’s labour market data were released earlier today. Consensus had looked for an increase in employment around +18k in October but the outturn was a much softer 3.7k rise. Full-time jobs rose 24,300 whilst part-time jobs fell 20,700. But, even with softer employment numbers, the unemployment rate fell a tenth from 5.5% to 5.4%; helped in part by a small drop in the participation rate to 65.1%. Just as we’ve seen elsewhere in the world – and most notably in the US and UK – falling unemployment in Australia is not leading to higher wages. Australians have largely been shielded from the declines in real wages suffered in the UK and with no cheap immigrant labour, 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 days of an 80 cent AUD/USD rate and an AUD/CAD rate above 1.00 seem a distant memory.

Price action in the New Zealand Dollar has been very poor over the last 18 hours. From a high of USD0.6918 just before the latest US economic numbers Wednesday, it has fallen steadily to a fresh November low of 0.6837 at this morning’s North American open. NZD/CAD is lower too, and at 0.8726 is at its lowest level since October 25th. Our economic tongue has been firmly in cheek this week as we’ve spoken about the upcoming NZ concrete production numbers and here’s the chance to report on them: The delivery of ready-mixed concrete in the 3 months to September fell slightly from the June quarter, and is barely above the level it was a year ago. The main centres of population are now showing year-on-year declines; Auckland is down -4.2%, Wellington is down -12.5% and Christchurch down -14.6%. Meantime, separate figures showed the ANZRoy Morgan Consumer Confidence Index eased from 126.3 to 123.7 in November; its lowest in 7 months. Looking ahead, Friday brings PMI and PPI data but with no RBNZ meeting now until February 8th, international investors selling the NZD feel they’re pushing on an open door.