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CAD beats AUD into top spot, USD has a poor week, GBP edges lower and EUR digests Catalonian election results.

By Nick Parsons

The Dollar had a poor week despite further record highs for the stock market, a rise in market interest rates at all points of the maturity spectrum and generally solid incoming economic data. Its index against a basket of major currencies opened on Monday morning at 93.50 which proved to be the high of the week; it subsequently fell almost without interruption. On Wednesday the US Senate at last approved the $1.5 trillion tax reform bill, which includes permanent tax breaks for corporations and temporary tax cuts for individuals, by a final vote of 51-48. Once enacted, the legislation will represent the most drastic change to the US tax code since 1986. The bill lowers the top individual tax rate from 39.6% to 37% and slashes the corporate tax rate to 21%, a dramatic fall from its current rate of 35%. Speaking at a Press Conference after the vote, Senate majority leader Mitch McConnell hit back against criticism that the tax overhaul was unpopular among the public. “If we can’t sell this to the American people, we ought to go into another line of work.” Let’s see if this line comes back to haunt him at some point in the future. By the end of the day, the US Dollar’s index against a basket of major currencies had fallen to 92.83; its weakest level for a fortnight. It remained stuck at this level right to the end of the week. The bumper crop of economic data in the US on Thursday was somewhat mixed. The second revision to Q3 GDP showed the annualised pace of growth slipped from a previously reported 3.3% to 3.2%, whilst weekly jobless claims rose much higher than expected from 231k the prior week to 241k. Against this very marginal softness, however, the Philly Fed survey jumped from 21.5 in November to 26.2 whilst the November index of leading economic indicators rose 0.4%, in line with consensus forecasts and the 15th consecutive monthly increase. The index was boosted by strong ISM new orders, higher stock prices, the positively-sloped yield curve, elevated consumer confidence and somewhat easier credit conditions. As markets wound down for Christmas on Friday, and the US Dollar remained under pressure, most attention focused on the so-called cryptocurrencies. Bitcoin at one point fell $4,000 on the day, taking its losses from last Sunday’s peak to almost $7,000. We defy anyone to actually try to spend bitcoin for any everyday transaction. It fails the first definition of money which is to be a medium of exchange. As for a store of value, that test remains to be met. It certainly will have brought losses to anyone who bought over the last couple of weeks, whilst the closure of trading platforms during periods of price volatility suddenly makes the more traditional Dollars, euro and pound look so much more attractive. They are a store of value, a medium of exchange and thanks to your OFX account, can be switched instantly at little or no cost 24 hours per day.

The Canadian Dollar took the prize as the best performing major currency last week, just edging the Aussie Dollar out of top spot in what proved to be quite a volatile few days’ trading. The Governor of the Bank of Canada gave an interview to the Globe and Mail newspaper this last weekend in which he played down the importance of so-called forward guidance. “I'm confident that other central banks, now that we are getting much more into normalcy, will gradually temper down the details around their forward guidance, too… I'm not going to judge whether the market got it right or not. But it does seem like the market has a tendency to seize on a new word as if it's a new secret code. Caution does not mean sitting back and doing nothing.” Despite the Governor’s warnings, traders gradually pushed the CAD lower. At lunchtime in London on Tuesday, USD/CAD stood at 1.2860 but barely 2 hours later it was at 1.2891 and on its way to a high in New York of 1.2912; its highest in almost 5 months. As we wrote here, at the time, “We’d love to be able to explain what was behind the move but, as with the US Dollar on Tuesday, there was little or no fundamental driver. It’s certainly likely that ‘stop-loss’ orders were triggered above the end-November high of 1.2900 and the November 1st high of 1.2905 but the pair then gave back 35 pips of its rapid gain equally quickly.” The Canadian Dollar exploded higher (lower USD/CAD) on Thursday after an extremely strong set of economic data on CPI and retail sales. By the end of the day, it was way out at the top of the FX leader board, rising 0.5% against the AUD and more than 1% against all the other major currencies we track here. The Bank of Canada has a 2% target for CPI and in October it predicted it would average 1.4% in the final three months of 2017. Policy makers didn’t expect a sustained return to 2% inflation until the end of next year. Instead, CPI inflation accelerated to 2.1% y/y in November from 1.4% in October. While the jump was due to a surge in gasoline prices (up 19.6% y/y), the increases went beyond energy. Prices were up in seven of the eight major CPI components in the 12 months to November, with the transportation and shelter indexes contributing the most to the increase. Retail sales figures also showed plenty of forward momentum. Statistics Canada reported retail sales rose 1.5% to $49.9 billion in October. Excluding sales at motor vehicle and parts dealers, retail sales increased 0.8%. Sales were up in 7 of 11 subsectors, representing 79% of retail trade. After removing the effects of price changes, retail sales in volume terms increased 1.4%. Slightly softer than expected monthly GDP figures on Friday saw USD/CAD spike 75 points from 1.2705 to 1.2780 but this was largely reversed during the last trading session of the week. The CAD finished in New York on Friday evening at USD/CAD1.2720, AUD/CAD0.9815 and NZD/CAD0.8940.

The Australian Dollar extended its gains of the previous week to enjoy its best fortnight in more than three months. The week began with the Government’s Mid-Year Economic and Fiscal Outlook (MYEFO). This update traditionally gives the Government a good opportunity to make soothing noises to the international ratings’ agencies about economic growth and debt sustainability. In this regard, this latest MYEFO was exactly as expected. The Government continues to forecast a return to budget balance in 2019-20 and then a surplus of $10.2bn in the 2020-21 fiscal year. A slowdown in the housing market and slower growth in wages have reduced the estimate of 2017-18 GDP from 2.8% to 2.5% though the unemployment rate is now seen a quarter of a percent lower at 5.5% and CPI has been left unchanged at 2.0%. The initial reaction from the credit agencies was broadly positive. Moody’s said, “Overall, the modest changes in Australia’s fiscal and economic outlook maintain a credit-positive commitment to returning the budget to a surplus in fiscal 2021. The Minutes of the RBA’s December 5th Board meeting showed the 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. 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.” AUD/USD held in a 0.7650-0.7680 range for the first three days of the week but as the US Dollar weakened on Thursday it reached 77 US cents for the first time since way back on November 2nd; rising against every major currency apart from the Canadian Dollar. In thin pre-holiday trading on Friday it extended these gains to a high of 0.7718 with AUD/NZD up just over half a cent at 1.0985 and GBP/AUD down a full cent on the week at 1.7325.

The New Zealand Dollar had a pretty symmetrical week; falling for the first half and regaining pretty much all its losses in the second. There was a flurry of economic data releases locally, which kicked off with the BNZ performance of services index on Monday. This rose 0.7 points to 56.4 last month, above its long-term average of 54.4. All of the five sub-indices were above the 50 reading that separates contraction from expansion and was the seventh consecutive month the new orders index has been above the giddy heights of 60. NZD/USD reached what would be the week’s high of 0.7027. Tuesday brought 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 discernible pick-up in December: a net 37.8% of respondents expected the economy to deteriorate over the year ahead. As investors awaited NZ GDP figures, NZD/USD fell to a low of 0.6960 on Wednesday. Q3 GDP figures were pretty much in line with the market consensus of +0.6% q/q and very much helped by upward revisions to back data. Statistics New Zealand revised up its GDP figures, raising 2015 growth to 3.6 percent from 2.4 percent and 2016 to 4 percent from 3 percent. Against this, the RBNZ’s last Monetary Policy Statement assumed a +0.7% quarterly increase so a slight miss relative to their forecast reinforced expectations that interest rates will be on hold until at least 2019. NZD/USD rose to 0.7015 on the publication of the GDP numbers and as the USD itself had a disappointing end to the week, it extended these gains on Friday to a best level of 0.7023; still shy of Monday’s 0.7027 peak.

The British Pound had a very dull week by recent standards. It’s best day came on Monday but to a great extent it’s performance then was a reaction to the very weak close the previous Friday in New York which had seen USD/GBP tumble more than a cent to 1.3315. Prime Minister Theresa May gave an upbeat and well-received update to the House of Commons on Brexit negotiations saying 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”. GBP/USD rose to the week’s best level of 1.3410 on Monday afternoon. As we pointed out in our morning commentaries, though the speech gave a pre-Christmas lift to Conservative MP’s and their supporters, it didn’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. Michel Barnier, the lead EU Brexit negotiator said at the weekend that “no way” could there be a bespoke trade deal that mixed those that applied to Canada and Norway. “There won’t be any cherry picking,” he said. On Wednesday the IMF released its annual report on the UK economy, with its Managing Director Christine Lagarde in London for a Press Conference. The IMF had been criticised 18 months ago for taking sides with former Chancellor George Osborne in the run-up to the EU referendum. Defending its forecasts, Ms Lagarde said that, “the Brexit referendum result and the decision to invoke Article 50 are already having an impact on the economy even though the UK is not planning to leave the EU until 2019. The IMF’s statement concluded, “Despite a strong recovery in global growth and supportive macroeconomic policies, the impact of the decision to exit the European Union has weighed on private domestic demand. Business investment growth has been lower than would be expected in the context of strong global growth and high levels of capacity utilization, owing to heightened uncertainty about economic prospects.” From Wednesday afternoon onwards, the pound drifted steadily lower and it ended the week at 1.3360 with GBP/AUD at 1.7315 and GBP/NZD1.9020.

The Euro rose for 4 days out of five last week, gaining a net 1 ½ cents against the US Dollar. Having stubbornly refused to take any encouragement from lthe previous week’s crop of positive data, the release of the German ifo Survey this time did provide some support. According to Tuesday’s ifo Press release which was unusually full of seasonal cheer, “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. Having risen to the week’s high of USD1.1883, the EUR The euro was pretty much side-lined on Thursday with no economic data in the Eurozone, and politicians keenly watching elections as the Spanish region of Catalonia went to the polls. The election was called by the Spanish prime minister, Mariano Rajoy, at the end of October when the central government took control of Catalonia and sacked the regional government after it staged an illegal referendum and made a unilateral declaration of independence. To say the least, the election results were complicated to interpret so please bear with us. Pro-independence parties secured 48 per cent of votes, against 52 per cent for parties that oppose independence but the majority of seats actually went to the supporters of independence. Citizens, the centre-right unionist party, came top, with 25 per cent of the vote, which translated to 37 seats out of the 135 in the regional parliament. The leading separatist party was Carles Puigdemont’s Together for Catalonia, with 34 seats, the Catalan Republican Left (ERC) took 32 and the far-left, anti-capitalist Popular Unity Candidacy took four. The Catalan Socialist party took 17 seats, while Catalunya en Comú-Podem – the Catalan version of the anti-austerity Podemos party – took eight. Trailing them was the Catalan branch of Spain’s ruling People’s party, which won four seats – seven fewer than in the last election two years ago. If it’s not immediately clear who won, it is very clear who lost: Spanish Prime Minister Mariano Rajoy. He had banked on the election securing a return to “legality and normality”, but now faces the challenge of having to deal with separatists returning to power in Barcelona. A jubilant Carles Puigdemont spoke from exile in Brussels calling the results “a victory for the Catalan Republic”. Amidst the uncertainties created by the Spanish election, the EUR drifted a little lower on Friday to end the week at USD1.1860, AUD/EUR0.6505 and NZD/EUR0.5920.