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USD struggling despite stock market rally

By Nick Parsons

The memo about buying the dip in the stock market may have arrived 24 hours late but it finally got there. The S+P 500 index finished 21 points higher on the day and up more than 30 points from Wednesday’s intra-day low of 2,556, aided by a few decent corporate earnings and economic reports. Industrial production beat expectations with a +0.9% m/m gain and manufacturing output surged 1.3% against forecasts of a more modest, but still impressive +0.6% increase. Putting it all together, the best day for the stock market in almost 3 months, renewed hopes around tax reform and slightly higher US bond yields all helped the US Dollar though it must be said its performance was ultimately underwhelming. Its index against a basket of major currencies rose barely two-tenths of a point on the day from 93.54 to 93.68 and after sliding in Asia, it reached a low in London this morning of just 93.22. With concerns that its rally since early September might be fading despite talk of tax reform and rate hikes, keep an eye on the 50 and 100 day moving averages at 93.50 and 93.09. The near-5 per cent rally never took the index up to its 200 day average (95.32) and a move below all three main measures will add technical pressure to the more fundamental concerns. On the economic slate today, we have just housing starts (f/c +5.6%m/m after a -4.6% drop last month) and building permits (f/c +2.0% m/m).

The Canadian Dollar is by far the best of the “Commonwealth Currencies” overnight and has made further progress against the US Dollar. We shouldn’t exaggerate its gains; USD/CAD has been stuck on a 1.27 big figure ever since Monday afternoon but it did print as low as 1.2715 overnight before opening in London this morning around 1.2740 and in North America around 1.2750. On an otherwise quiet day for news, ADP launched their first Canadian Employment Report in Toronto yesterday. 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.. For what it’s worth, the new report put the monthly change in Canada’s September non-farm payrolls at -5,700 but an upbeat Press Release said, “The Canadian economy has added more than 250,000 jobs so far this year, which is 25 percent more than the total number of jobs created in all of 2016.” For today, the big focus in Canada is the October inflation numbers. Annual CPI reached a low point in June of just 1.0% and has so far risen for three consecutive months to stand at 1.6% in September. Consensus looks for a very modest +0.1%m/m gain today but because a bigger increase in the same month a year ago drops out of the calculation, the annual rate is expected to slip back to 1.4%. Though the CAD is looking good against the AUD and NZD, its reaction to a slightly weaker inflation print will be a good test of investor sentiment more generally.

The euro spent the whole of the European and North American sessions Thursday grinding gradually lower from nearly USD1.18 down to around 1.1760 but then took off in Asia to add nearly half a cent to an overnight high around 1.1820. It subsequently slipped back to a low just below 1.1780 and opens in North America pretty much in the middle of this range. Mario Draghi, President of the ECB, gave a speech this morning at the Frankfurt European Banking Congress. He noted, “The euro area is in the midst of a solid economic expansion. GDP has risen for 18 straight quarters, with the latest data and surveys pointing to unabated growth momentum in the period ahead. From the ECB’s perspective, we have increasing confidence that the recovery is robust and that this momentum will continue going forward”. Despite his bullishness on the Eurozone economy, Mr Draghi warned that, “from a monetary policy perspective our task is not complete, as we have not yet seen a sustained adjustment in the path of inflation… we are not yet at a point where the recovery of inflation can be self-sustained without our accommodative policy”. We wonder if ECB members have permanent drivers to chauffer them around and never have to fill up their own cars with gasoline. If they did, they’d notice there’s been nearly a 5% jump in prices at the pump. And, when prices rise, so does inflation! If anything, the army of highly qualified economists and statisticians at the ECB might be understating near-term CPI. The euro ends the week in much better shape than it began against both the USD and CAD. EUR/USD is up from 1.1650 to 1.1800 whilst EUR/CAD is up has jumped from 1.4800 to open this morning at 1.5034.

The British Pound couldn’t quite get to USD1.32 in the Northern Hemisphere yesterday but when it did finally reach this level in Sydney overnight, it pretty quickly added another 40 pips or so to be the strongest currency in the Asia session. It extended these gains to 1.3255 in London but has given back around half a cent to open in North America at 1.3195. GBP/CAD at one point overnight was up more than 3 cents from Monday’s low to reach a high of 1.6906 but opens well below its best at 1.6812. It would be a struggle to ascribe this price action to any news flow, though the Guardian newspaper today reported that the 27 EU member states have sought a legal opinion from the European commission on a possible extension of the two years allowed for talks under article 50 of the Lisbon treaty. The member states do not envision a lengthy extension of the two years, however. One EU diplomat said: “We all have our own domestic political situations to deal with and so I can’t imagine us having unanimity on extending article 50. And this extension would only be if we are near striking a deal and need a few extra weeks or months.” Speaking at a Bank of England roadshow in Liverpool yesterday, BoE Governor Carney said, “If the economy evolves broadly in line with our projections we would probably raise interest rates a couple of times over the next few years… But there’s some pretty big forces, some pretty big decisions still to be taken with respect to Brexit by the UK Government and the Europeans and all of those things can affect it”. There has been no UK economic data scheduled Friday so it looks like a relatively calm end to the week unless UK politics suddenly turn nasty.

The Aussie Dollar has had a very rough night, despite there being no fresh economic news flow. Over the course of the week we’ve seen a solid business survey, soft wages and a pretty ordinary labour market report which was neither as good nor as bad as the early headlines might have suggested. AUD/USD had its usual 5 minutes of madness around the employment numbers but actually finished on Thursday exactly where it had begun at USD0.7593. AUD/CAD, meantime had been pretty steady in the high 0.96’s and closed Thursday night in North America at 0.9680. Friday in Sydney actually began pretty well, with AUD popping its head above US 76 cents to reach a high of 0.7607. From then on, however it’s been downhill all the way and the Aussie has lost almost a full cent against an already-weak US Dollar. It’s opening level in NY this morning of 0.7548 is the lowest since late-June whilst AUD/CAD at just 0.9621 is the lowest in over a year. We said here yesterday that, “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 are not coming back.” If it falls just another 50 pips, it will actually be nearer to 70 cents than 80.

The only comfort on a very poor day for the Australian Dollar is that it didn’t do as badly as its Kiwi cousin! We wrote here exactly 24 hours ago that, “international investors selling the NZD feel they’re pushing on an open door”. Looking at the price action overnight, it seems that it opened on to a pretty steep staircase. From a best level of 0.6880 early in the session, NZD/USD has tumbled to 0.6783; a fresh low for 2017. NZD/CAD, meantime, has been down to low 0.8640’s; its worst level in almost 2 years. This move lower in the Kiwi hasn’t been driven by news flow, but an increasingly ugly technical picture. NZD/USD is now stuck firmly below its 20, 50, 100 and 200 day moving averages, it has taken out the May and October lows and approaches a point in the week when liquidity conditions are at their least favourable. New Zealand released overnight its Quarterly International Visitor Survey. It noted visitor spending rose 4% y/y to a record NZ$10.4bn in the year to September. This was driven by an increase in visitor numbers, whereas the average spend per visitor fell 4%. The Ministry for Business, Innovation and Employment (MBIE) which releases the report noted the strong NZD had contributed to a decline in spend per visitor. If the exchange rate moves of the last few weeks continue, there should be some much happier faces in the Ministry and tourist industry.