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USD regains Monday’s losses, Fed Powell’s Senate appearance awaited

By Nick Parsons

The US Dollar had a day of two unequal halves on Monday, falling for the first 15 hours after the Sydney open then rallying through the New York day to regain all and more of its earlier losses. Overnight it has extended its rally. From a 2-month low of 92.21, the USD index moved up to 92.61 yesterday and touched 92.76 in London today before opening in North America around 92.75. The first appearance by a Fed member in a busy week for FOMC officials was Dallas Fed President Robert Kaplan, though this came in an essay rather than a speech. ““If we wait too long to see actual evidence of inflation, we may get behind the curve and have to subsequently raise rates more rapidly...This type of rapid rate rise has the potential to increase the risk of recession.” This is hardly the type of self-doubt hinted at by his current boss and other colleagues in last weeks Minutes. Technically, Mr Kaplan’s new boss has been proposed by the President but not confirmed by Congress. As part of this confirmation process, Jerome Powell or “Jay” – as he is known – is today in front of the Senate Banking Committee. For the US Dollar, the key will be how he sees strong activity numbers feeding into inflation and affecting future monetary policy decisions. Before that, we’ll have more data on house prices, consumer confidence and the goods trade balance.

Monday’s trading pattern for the Canadian Dollar was the same as most other FX majors: strengthening through Asia and Europe then reversing these gains during New York hours. Overnight, the reversal has extended quite a bit further and the CAD is the weakest of the major currencies we follow here. From a low of USD/CAD1.2682 Monday, the pair rose to a NY close of 1.2766 and has been up as high as 1.2802 in London this morning. The blame for the CAD’s sharp decline is a sizeable drop in oil prices. Though a concerted effort to talk crude prices higher ahead of Wednesday’s OPEC meeting in Vienna, had been expected, little has actually been heard from the major players about future production cutbacks. NYMEX Crude reached a fresh 2017 high of $58.82 last Friday but fell steadily on Monday to $58.15 and this morning is lower still at $57.60. A very busy week for Canada watchers kicks off with the Bank of Canada’s Financial System Review at 10.30am local time, followed 45 minutes later by a Press Conference from BoC Governor Stephen Poloz and Senior Deputy Governor Carolyn Wilkins. Mr Poloz is a fascinating and engaging speaker who is never afraid to challenge the consensus. It could be another lively session ahead for the CAD…

After Monday’s drop back on to a 1.8 handle, EUR/USD has been up and down like the proverbial fiddler’s elbow in Europe this morning. It first fell to 1.1888, rallied 30 pips to 1.1937 then gave all the gains back to open in North America just below 1.1890. It has also seen choppy trading against the CAD but on balance EUR/CAD remains around 15 pips above last night’s 1.5185 New York close. There are no fresh Eurozone data or ECB speakers today so the focus instead remains on the unfolding Coalition talks in Germany. Angela Merkel has said only that global challenges such as relations with Russia and the US needed a Germany “able to act… President Macron’s plans for EU reform had led to an “expectation that we draw conclusions and position ourselves”. In words which were widely interpreted as a call for a Grand Coalition, she said, “given the conflicts we have in the Middle East, given the situation in Russia, the situation in the United States of America, I think it is good if Germany is able to act. That is why we believe that such a stable government should be formed, in terms of Europe, in terms of our economic strength, in view of the new challenges we face”. We’ll now have to see if this helps EUR/USD stabilise after the reversal lower in the first 36 hours of this trading week.

The pound has mostly moved lower this Tuesday morning in Europe. It is down from a best level of USD1.3340 to just below 1.33 and is lower against the NZ and Australian Dollars. It is steady against the EUR at 1.1190 whist GBP/CAD is little changed from last night’s close at 1.7005. Away from the Royal Wedding announcement, the UK Press today is all about the Bank of England’s annual Financial Stability Report. It’s fair to say there are some very grumpy journalists: they were in a locked room from 5am to write up their stories ahead of an 0700 GMT embargo. Quite why the BoE chose this method of announcement is somewhat baffling, especially as it could do with a little goodwill from the hacks gathered there. In its FSR, the BoE said the UK’s biggest lenders were “resilient” to a raft of adverse scenarios, including deep simultaneous recessions at home and abroad and hefty falls in the price of assets. For the first time since the inception of the stress tests in 2014, the major lenders have not been required by the regulator to raise billions of pounds more of capital to strengthen their finances. The seven biggest banks passed a stress test that was as tough as if the UK crashed out of the European Union, the BoE said, with sterling slumping, interest rates rising to 4 per cent and a record housing market crash. It is undoubtedly good news that the UK financial system is seen as resilient but the almost exclusive focus on downside risks – the whole purpose of the FSR – nonetheless risks sowing the seeds of doubt among currency investors and keeping the GBP capped below the best levels of last week.

AUD/USD has spent most of the past 24 hours on a US 76 cents big figure, though it did dip in London this morning to a low of 0.7593 and the AUD/NZD cross has moved down from a 1.10 to a 1.09 big figure. In a new opinion poll published this week by Roy Morgan, only 31 per cent of people think 2018 will be “better” than 2017 – the lowest figure recorded since the survey began in 1980. Younger Australians are more positive than older generations, with almost half (46%) of 18-24-year-olds expecting next year to be better, while just 20 per cent of over 65s feel that way. Perhaps the younger respondents feel that housing might at last become less unaffordable; not a problem if existing homeowners have little debt, but potentially a major issue for the economy if they do. Aside from exports of iron ore, the Australian economy is hugely driven by the residential property market which according to a BIS report earlier this month has had a 55-year bull market; the longest of any country in the world. So important is housing that the total value of all properties is around four times the size of GDP. By way of comparison, in the UK it’s around 3.5, in Canada around 2.4 and in the US around 1.6 times GDP. A huge amount of debt has had to be taken on by homeowners to accumulate this property wealth. After Switzerland, Australia has the greatest proportion of household debt to GDP in the world; a little over 120%. What is more, there is more debt held by older homeowners than anywhere else on the planet. This, of course, is all fine and well as long as there’s a steady stream of new entrants to the market, interest rates don’t go up and prices don’t fall. The simple problem for Australia is that it has been actively discouraging overseas property buyers, whilst prices are still too high for locals and the monetary policy debate has shifted to when and by how much interest rates will go up. Bigger picture, keep an eye on property prices for clues to the Aussie Dollar outlook…

It’s been a rare sight recently to see the New Zealand Dollar at the top of the one-day performance charts but this is exactly what happened Monday. Around lunchtime in London, the AUD/NZD cross finally broke out of last week’s 1.1060-1.1120 range and by close of business, the pair had fallen all the way down to 1.1005; its lowest level in almost 6 weeks. Overnight it has extended losses to a London low of just 1.0965 and opens in North America around 1.0980. NZD/USD is up at 0.6925 whilst NZD/CAD is up at 0.8855; nearly 130 pips above yesterday’s low. The big surprise is that this move took place in a total news vacuum. There was simply nothing. No economic data, no political announcement and no big-hitting analyst research report. We haven’t yet had the weekly CFTC Commitment of Traders report on speculative positioning in currency markets as it has been delayed due to the Thanksgiving holiday last Thursday. We do know from the last one released November 17th that the market’s net short of NZD was the largest since the week of May 19th; having turned around 180 degrees from the big net long state of late July. As AUD/NZD broke out of the last week’s trading range, a likely big volume of stop-loss/stop-entry orders were triggered which then fed through into NZD strength against all the other currencies as any available Kiwi liquidity was sucked up. Let’s see if can sustain these gains when the RBNZ Financial Stability Report is published Wednesday morning local time…