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USD gives back most of Monday’s late rally. EUR higher after ifo Survey, AUD and NZD both doing well

By Nick Parsons

The Dollar had a poor day on Monday though it is hard to pin the blame on any specific factor. Indeed, we’d repeat the wise words of Janet Yellen at her last FOMC Press Conference that “correlation does not imply causality”. Having opened in Sydney at 93.50, the USD’s index against a basket of major currencies reached a high of 93.55 in the first couple of hours of trading but from then on it was downhill all the way; falling in all three time-zones to a low of just 93.03 before rallying to close down a quarter of a point at 93.25.

The blame for its decline cannot be placed on the equity market. The S+P 500 index added almost 20 points to yet another all-time record high with the Dow Jones Industrial Average up almost 200 points to make its 70th record close of the year. Nor can the finger of blame be pointed at the bond market. Ten-year US Treasuries were steady at 2.38% whilst 2-year yields climbed a couple of basis points to 1.83%. If political nerves were the culprit, this would surely have been reflected in a lower, not a higher, stock market. As for the day’s economic data, the NAHB homebuilders index smashed consensus expectations of 70 and rose to 74; its highest since December 1999.

Having traded up to an overnight high of 93.30 in Asia, the US Dollar index opens this morning in North America at 93.15with all eyes still on the passage through Senate of the tax reform bill. US economic data today are housing starts and building permits; rarely market movers but – as we saw Monday – sometimes markets move for no obvious reason at all.

 

 

The Canadian Dollar is not heavily traded in offshore markets, but price movements in Asia and Europe overnight have been minimal even in the face of a crude oil price which has traded in an 80 cents range over the past 24 hours. The CAD spent all of Monday trapped in a range from USD1.2848 to 1.2878; shrugging off a fall in oil prices but failing also to get any real traction from Stephen Poloz’s call on interest rates that, “We need to get ourselves up there for real, and to the 2% zone, so we have room to manoeuvre for the next shock that comes along."

After an overnight trading range in Asia which saw USD/CAD stuck between 1.2860-1.2873, the CAD strengthened very marginally in Europe as oil prices rose and ahead of the release of a clutch of domestic economic data this week. Wednesday is wholesale trade, Thursday is CPI and retail sales and on Friday it’s the monthly GDP numbers for October.

Yesterday we learned that foreign investment in Canadian securities reached $20.8bn in October, up from $16.7bn in September. Overall, foreign investors acquired Canadian bonds and, to a lesser extent, equities but reduced their exposure to money market instruments. Non-resident investors purchased $6.0bn of federal government bonds, a fourth consecutive month of significant investment. Since July, foreign investors have increased their holdings of federal government bonds by a very impressive $27.8bn. On the other side of the ledger, Canadian investment in foreign securities reached $16.5bn in October, the highest investment since December 2015. Canadian investors acquired $14.2bn of foreign equities, following acquisitions of $1.1bn in September. The bulk of the investment was in US shares; a pretty good call given that the Dow Jones Industrial Average on Monday hit its 70th record close of the year.

The Canadian Dollar opens in North America this morning at USD/CAD1.2860 with GBP/CAD at 1.7200.

 

 

The Euro had a good day on Monday, rising first in Asia, then in Europe and early in the New York day reaching its best level since just before last week’s ECB meeting. From an opening level around 1.1745, it reached 1.1818 before sliding back late in the day to the high 1.17’s. This morning in Europe it is back on a USD 1.18 handle and is the strongest of all the currencies we monitor here; albeit in relatively quiet markets.

The main European data release for this Tuesday morning was the German ifo Survey which in November jumped to an all-time high of 117.5. According to their Press release, “Sentiment among German businesses is excellent ahead of Christmas, but no longer quite as euphoric as last month. The ifo Business Climate Index edged downwards to 117.2 points in December from 117.6 (Seasonally adjusted) points in November. This was due to less optimistic business expectations. Assessments of the current business situation, by contrast, were more positive this month. German businesses are full of festive spirits.

In manufacturing the index dipped down from its record high. Manufacturers are no longer quite as optimistic about the months ahead. However, they are more positive about their current business situation, primarily due to an upturn in orders. Both indices close the year way above their long-term average. Manufacturers expect prices to continue to increase”. The EUR opens in North America this morning at USD1.1815 and CAD1.5190.

 

 

The British Pound had a good start to this pre-Christmas week. It opened on Monday morning at 1.3320 and by mid-afternoon London time had reached a best level of 1.3415. It gave up some of these gains in New York but nonetheless finished as the day’s strongest performer amongt the major currencies we track closely here. Today it given back some of these gains as investors reassess the Prime Minister’s report to Parliament yesterday.

The published text of her remarks to Parliament says, “the guidelines published by President Tusk on Friday point to the shared desire of the EU and the UK to make rapid progress on an implementation period, with formal talks beginning very soon… We will now work with our European partners with ambition and creativity to develop the details of a partnership that I firmly believe will be in the best interests of both the UK and the EU”.

Though this speech gave a pre-Christmas lift to Conservative MP’s and their supporters, it doesn’t take much textual analysis to spot the two big problems: The phrase “very soon” is not defined and could actually mean many months pass before even the most tentative agreement is reached. More importantly, there appears no desire on the EU side to work with creativity.

In what is billed as an exclusive in this morning’s Guardian newspaper, the European Union’s chief Brexit negotiator, Michel Barnier, said Britain cannot have a special deal for the City of London. “There is no place for financial services. There is not a single trade agreement that is open to financial services. It doesn’t exist.” He said the outcome was a consequence of “the red lines that the British have chosen themselves. In leaving the single market, they lose the financial services passport.”

With no economic data scheduled for release in the UK today, the Pound opens in North America this morning at USD1.3375 and EUR1.1320 with GBP/CAD at 1.7195.

 

 

The Australian Dollar had quite a good day on Monday although it couldn’t quite get back to Friday’s 0.7688 high - which was the best level since November 10th – on a day when the US Dollar itself was the weakest of all the major currencies. Each of the three main global time zones saw AUD/USD trade sequentially higher and it finished in New York around USD0.7665.

Overnight, the Minutes of the RBA’s December 5th Board meeting have been released. The Central Bank was generally upbeat on the labour market, noting conditions had remained positive and had been stronger than expected over the previous year. Employment had increased a little in October and growth over the previous year had been well above average. Full-time employment had risen sharply and was growing at around its fastest pace in a decade. The unemployment rate had edged lower to be 5.4 per cent in October, which was its lowest level since 2013, and unemployment rates had been on a downward trend in most states. Forward-looking indicators of labour demand suggested employment growth would be somewhat above average over the next few quarters.

For all the strength in employment, however, “growth in consumption was expected to have slowed in the September quarter and the outlook for household consumption continued to be a significant risk, given that household incomes were growing slowly and debt levels were high.” The RBA, it is clear, will not be raising rates until wages pick up: “How far and when stronger conditions in the economy and labour market might feed through into higher wage growth and inflation remained important considerations shaping the outlook.”

The AUD opens in North America this morning at USD0.7680 with AUD/NZD at 1.0950 and GBP/AUD1.7415.

 

 

After its very strong performance last week, the New Zealand Dollar was much more mixed on Monday. It rose against the US and Canadian Dollars, was down a little against the euro and Australian Dollar and fell somewhat more against the British Pound. As with the AUD, it couldn’t get back to Friday’s highs against the USD with an intra-day high of 0.7027 a couple of pips shy of last week’s best level.

Overnight we have seen ANZ’s business confidence survey. It was this which did the greatest damage to the Kiwi Dollar a month ago when the headline measure plunged 29 points to an 8-year low of -39. Unfortunately, there was no discernable pick-up in December: a net 37.8% of respondents expected the economy to deteriorate over the year ahead. Digging into the details of the survey reveals one bright spot. Business expectations for their own firms to grow in the next year picked up to a net 15.6% of respondents, from 6.5% in November. The historical average for this series is +28. As the ANZ noted in their Press release, “The economy is doing the hard yards at the moment. Positive forces remain, but the turn in housing, flattening off in net migration and lack of capacity in the construction sector are all dampening near-term growth."

NZD/USD opens in North America this morning at 0.7015 with NZD/CAD at 0.9020. In a busy week for New Zealand economic data, tomorrow brings the trade balance and finally on Thursday we’ll get Q3 GDP.