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USD rises for five straight days. EUR gets no support from economic data. AUD and NZD both edge lower. GBP rallies then tumbles on Irish deal.

By Nick Parsons

Something unusual happened to the US Dollar last week: it rose for five consecutive days. Friday’s gain might need the aid of a magnifying glass to be accurately observed, but the USD index ended the week at 93.50 having begun around 92.80. The dramas of Trump/Flynn faded as quickly as they had flared over last weekend and the stock-market sell off proved to be very brief. By Monday’s close of business, the S+P 500 index was at a fresh all-time high, talk of a Presidential impeachment had disappeared and the dollar’s troubles were behind it. A decent US service sector PMI report on Tuesday was followed on Thursday by the third straight decline in weekly jobless claims and was the 144th consecutive week that claims remained below the 300,000 threshold. That is the longest such stretch since 1970, when the labour market was of course much smaller. Friday’s employment report showed non-farm payrolls rose 228k versus expectations of a more modest 195k increase whilst the unemployment rate remained at a post-GFC low of 4.1%. This seems only a pause in a downward trend; if payrolls continue to rise at the average pace of the last 3-6 months, then the unemployment rate will fall around one-tenth each quarter. It is against this backdrop that the Fed begins its two-day FOMC meeting on Tuesday. It is a near-certainty that rates will be raised 25bp and, if the equity market holds up, then so too could the US Dollar. Bulls will take comfort from the amazing statistic that in data going all the way back to 1928, December has never been the worst month of any year for the stock market…

Forget about the immediate economic data. The last week was once again dominated by Brexit and the three-way discussions between Dublin, London and Ulster’s Democratic Unionist Party. Having opened at USD1.3450, the pound jumped to 1.3512 then fell half a cent on Monday on news that UK Prime Minister Theresa May was unable to offer an agreement on the Irish border issue to European Commission President Jean-Claude Juncker. On Tuesday it fell further than rallied in the belief that a form of words would somehow be found to bring the Government’s DUP coalition partners back with their support. By Thursday morning it was down at the week’s low of 1.3333 before then rallying sharply on rumours of a deal. Friday was the day of highest drama. The Prime Minister flew to Brussels at 4.30am and at 6am it was announced that enough progress had been made on the Irish border, the divorce bill and the rights of EU citizens to move on to the second phase of Brexit talks and a 2-year transitional trade deal. The pound moved exactly back to Tuesday’s 1.3512 high and then fell almost 1 ½ cents into the close. This classic “buy the mystery, sell the history” price action came as investors reflected on what seemed a poor and expensive deal for the UK and whether indeed all the Government’s own MP’s would agree upon its terms. This is a story which seems to have many twists and turns still to come…

It was a pretty poor week all round for the Australian Dollar, which drew no comfort at all from the events on the pitch in Adelaide. It began on Monday clinging on to a US 76 cents big figure as it awaited the final RBA Board meeting of the year and the high of the week at USD0.7650 came as investors scoured the Statement for clues about monetary policy. In truth, there were only some very minor tweaks to the Central Bank’s language. “Recent data suggest that the Australian economy grew at around its trend rate over the year to the September quarter. The central forecast is for GDP growth to average around 3 per cent over the next few years. Business conditions are positive and capacity utilisation has increased. The outlook for non-mining business investment has improved further, with the forward-looking indicators being more positive than they have been for some time… Employment growth has been strong over 2017 and the unemployment rate has declined. Employment has been rising in all states and has been accompanied by a rise in labour force participation. The various forward-looking indicators continue to point to solid growth in employment over the period ahead.” Wednesday’s GDP figures pushed the AUD down to 0.7560. Most analysts’ forecasts had pinned Q3 GDP growth around 0.7-0.8% q/q so the headline gain of just 0.6% was a clear miss. The annual rate of growth had been expected at 3.0% but printed only at 2.8%. Thursday’s trade numbers were yet another disappointment, falling to a surplus of just $105 million in October from $1.6 billion the previous month. AUD/USD broke through technical support at 0.7540 and with pressure continuing on Friday, it reached a low of 0.7503; the weakest since early June. For the busy week of international events ahead, the main focus locally will be Thursday’s Australian employment report.

The New Zealand Dollar ended the week lower on net, but with some pretty large intra-day volatility which was never fully explained by the incoming economic data. NZD/USD began at 0.6880 and ended at 0.6837 but it jumped around from top to bottom of each day’s performance tables in what at times looked quite a random fashion. RBNZ Acting Governor Grant Spencer’s gave a speech on Tuesday on “Low inflation and its implications for monetary policy”. He told the Institute of Directors in Auckland a series of factors "may be reducing the leverage monetary policy has over inflation" and said the bank's flexible inflation targeting approach is becoming more flexible and relatively more weight is being attached to "output, employment, and financial stability." The Governor painted different scenarios where both rate cuts and rate hikes might be necessary, but said the central bank is now "assuming greater persistence in low global inflation" and that is contributing to its current flat interest rate track. It was all pretty standard stuff but after Monday’s tumble to 0.6840, the NZD then jumped to 0.6902 on Tuesday and on to a high for the week on Wednesday of 0.6907. Economic data on job vacancies, construction work done, and wholesale trade were all pretty good but Thursday saw the NZD down to USD0.6824 and it recovered only marginally into the close on Friday evening after the performance of manufacturing survey was published. For the week ahead, the focus is mostly on fiscal policy with the Half-Year Economic and Fiscal Update on Thursday.

The Euro had a bad week though even with the benefit of pure 20:20 hindsight, it is not clear why this should have been the case. There were no ECB speakers resetting or finessing investors’ monetary policy expectations and the incoming economic data were almost without exception positive. EUR/USD began at 1.1875 and this proved to be its best level of the whole period. Surveys of confidence and activity showed the economic recovery in the Eurozone to be broadening and deepening. The composite PMI index was confirmed at 57.5 with the Press release noting, “The rate of euro area economic expansion moved up a gear in November. Output growth accelerated to the fastest in over six-and-a-half years, while rates of increase for all of the main survey indicators covering demand, employment and inflation also hit multi-year highs… Growth was again led by a resurgent manufacturing sector. Manufacturing production rose at the quickest pace in almost seven years in November and the headline index from the manufacturing survey – the Manufacturing PMI – posted a level bettered only once in its 20-year history.” None of this helped the EUR at all. It traded sideways on Monday, lower on Tuesday with accelerating downside momentum dragging it to a low of 1.1737 on Friday morning before closing in New York at USD1.1775. For the week ahead, there’s an ECB Council Meeting on Thursday at which new staff economic projections will be unveiled whilst we’ll also get the ‘flash’ December PMI’s. Let’s see if the incoming data can be more help to the EUR than they were over last week.

The Canadian Dollar had a much calmer week, even if calm doesn’t necessarily mean good. It opened at USD1.2704 and by Tuesday morning reached a best level of USD1.2644 as investors anticipated the possibility of a hawkish surprise from Wednesday’s Bank of Canada policy meeting. Its review of incoming economic data noted they were, “in line with October’s outlook, which was for growth to moderate while remaining above potential in the second half of 2017. Employment growth has been very strong and wages have shown some improvement, supporting robust consumer spending in the third quarter. Business investment continued to contribute to growth after a strong first half, and public infrastructure spending is becoming more evident in the data. Following exceptionally strong growth earlier in 2017, exports declined by more than was expected in the third quarter. However, the latest trade data support the MPR projection that export growth will resume as foreign demand strengthens. Housing has continued to moderate, as expected”. There was nothing too troubling in that assessment. Instead, the CAD was hit by the line that, “While higher interest rates will likely be required over time, the Governing Council will continue to be cautious, guided by incoming data in assessing the economy’s sensitivity to interest rates, the evolution of economic capacity, and the dynamics of both wage growth and inflation”. USD/CAD jumped up to 1.2800 almost immediately and by the New York close on Friday it was up at 1.2850; almost exactly where it was just before the stunning Canadian employment report 10 days ago.