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US Dollar falls to a 3-month low as AUD and NZD extend their recent gains. EUR/USD holding above 1.19 on bullish ECB Bulletin

By Nick Parsons

The US Dollar’s slide continues. Last week its index against a basket of major currencies fell from 93.50 to 92.85 and it has now fallen every day since Christmas. After a very brief opening rally on Tuesday, the index fell to a 3-week low of 92.73. Yesterday in Europe it traded down to 92.51; the lowest level since December 1st and overnight in Asia it hit 92.32; the weakest since September 25th.

The move lower comes as US yields have slipped back across all points on the maturity spectrum. 2-year notes now yield 1.90%, 10-year Treasuries are down from 2.47% to 2.43% and the 30-year long bond is down 4bp at 2.78%. Despite these declines, the spread between 2-year US and German rates of just over 250bp is the widest in almost 20 years.

The US equity market yesterday found support at last week’s 2678 low on the S+P 500 futures contract before an overnight rally to 2483. If we see a break and a close below 2678, then the technical picture turns much more negative in the short-run and will raise fears of a return to the post-FOMC low around 2650. For the moment, the market is hanging on by its finger tips with many investors hoping for one final upside squeeze in these last two trading sessions of 2017.

There were more US economic statistics released yesterday. The headline Conference Board Consumer Confidence index missed expectations of 128.0; falling instead to 122.1 from 129.5. The 'miss' was driven by a huge drop in "expectations" which tumbled from 113.3 to 99.1; the lowest since November 2016. Indeed, the spread between the present situation (156.6) and expectations (99.1) is now just over 57 points; the widest since the days of the dotcom boom turned to bust.

The US Dollar index opens in North America this morning at 92.40. Later today, we’ll have the advance goods trade balance, weekly jobless claims and the Chicago NAPM index.

 

 

The Canadian Dollar continues to do well, not just against a weak US Dollar but also holding up against the stronger Australian and New Zealand Dollars. NYMEX crude rose $1.50 dollars per barrel to a 2 ½-year high of $59.92 on Tuesday and after slipping a little to $59.55 yesterday, is back up at $59.78 this morning. Ineos said the 450,000-bpd Forties Pipeline System in the North Sea, which shut nearly two weeks ago due to a crack at a section near Aberdeen, Scotland, would be fully back in service by early January. Libyan officials said their export crude pipeline shut on Tuesday after an explosion will be repaired in a week's time. For the moment, however, supply pressures continue and the cold snap which has pushed natural gas to a 3-week high has helped support crude prices too.

The technical picture has definitely shifted in the CAD’s favour. On both November 9th and December 4th, USD/CAD closed in the 1.2670’s before bouncing higher. Yesterday in North America, it broke decisively below this level and closed well below it, making the technical picture far more bullish for the CAD. As markets begin to thin for the New Year there’ll be an obvious reluctance to commit fresh investment capital just yet and some of the ‘fast money’ traders will doubtless be wary of getting hurt just as they were 10 days ago on the break up through USD1.2905. Nonetheless, the CAD does appear to be in much better shape now and it will be a currency to keep a close eye on in the first few days of 2018.

The Canadian Dollar opens in North America this morning at a 2-month low (CAD stronger) of USD1.2615 with GBP/CAD at 1.6940 and EUR/CAD at 1.5045.

 

 

The EUR finished higher against a generally weak US Dollar on Wednesday but did no better than hold its own against the GBP whilst falling against the Australian, New Zealand and Canadian Dollars. It rose to a best level of 1.1907 before again settling back to the high USD1.18’s. The weakness of the US Dollar overnight has pushed EUR/USD back up to 1.1945; not only its highest level this month but the best since November 27th.

The ECB’s Monthly Economic Bulletin expands on the thinking outlined in the latest staff projections presented at the last Council Meeting. It is perhaps the most upbeat assessment in recent memory. “The euro area economic expansion continues to be solid and broad-based across countries and sectors. Real GDP growth is supported by growth in private consumption and investment as well as exports benefitting from the broad-based global recovery. The latest survey results and incoming data confirm robust growth momentum in the near term. Compared with the September 2017 ECB staff macroeconomic projections, the December 2017 projections revised the outlook for GDP growth upwards substantially. Euro area real GDP is foreseen to grow by 2.4% in 2017, 2.3% in 2018, 1.9% in 2019 and 1.7% in 2020.”

Tempering the economic optimism somewhat, an opinion poll published in Die Welt newspaper on Wednesday showed that if Angela Merkel becomes German chancellor again, 47% of respondents wanted Merkel to step aside before 2021, when her fourth term would end - up from 36% in a poll taken at the beginning of October. By contrast, only 36% want her to serve a full four years, compared to 44% three months ago. Meantime, a poll in Bild magazine put Merkel’s conservatives up 2 points at 33% and the SPD down 0.5% at 20.5%. The far-right Alternative for Germany (AfD) which entered parliament for the first time in September, was down 1 point at 13%.

For today, the EUR opens in North America this morning at USD1.1930 and CAD1.5045.

 

 

The GBP had a day of two halves on Wednesday in the Northern Hemisphere. In London trading, the pound moved sharply higher once stops were hit around last Friday’s intra-day high of 1.3390. GBP/USD reached a best level of 1.3425 before giving back almost all the gains in the North American time zone. Overnight, as the US Dollar hit a fresh 3-month low, GBP/USD reached a best level of 1.3454, though the pound is otherwise mixed: up against the AUD, unchanged against EUR and CAD and lower versus the NZD.

The latest figures on UK housing market activity released this morning were pretty depressed. British banks approved the fewest mortgages in 15 months in November, when the Bank of England raised interest rates for the first time in more than a decade. Banks approved 39,507 mortgages for house purchase last month, down from 40,417 in October and 5% fewer than in November 2016, trade association UK Finance said.

More comprehensive lending figures from the Bank of England are due next Thursday and despite the Chancellor’s attempts to boost the number of first-time property buyers, it is very unlikely there will be any significant pick-up, if at all, until later in the Spring.

The pound opens in North America this Thursday morning at USD1.3435, EUR1.1265 and CAD1.6940.

 

 

The Aussie Dollar has had a very good post-Christmas run. Boxing Day saw AUD/USD hit a high of 0.7730 - its best level in 2 months. Yesterday during the New York morning, the pair extended its gains to a near 10-week high of 0.7777 and overnight it touched 0.7807; the highest since October 24th.

The price action was first driven a couple of weeks ago by a squeeze on short positions in the institutional and hedge fund community, but the AUD has over recent days been helped by higher commodity prices. Gold has recovered almost $50 per ounce from its mid-December lows to $1,292 whilst the price of three-month copper on the LME rose to a three-and-a-half-year high of $7,201 a tonne yesterday and iron ore is up almost 25% over the past two months.

It remains to be seen whether this recent strength in the AUD can persist, especially as 10-year Australian bonds now yield only 28bp more than their US equivalents and 3-month rates are only 11bp higher. And, with higher commodities now arguably ‘in the price’ of the Australian Dollar, it’s a struggle to see where the next positive surprise might come from.

The AUD opens in North America this morning at USD0.7785 with AUD/NZD at 1.0990 and AUD/CAD0.9815.

 

 

The New Zealand Dollar has largely kept pace with the strength in its Aussie cousin with the AUD/NZD cross in a 1.0970-1.1000 range since Friday last week. NZD/USD reached a best level of 0.7040 on Tuesday, yesterday it extended gains to 0.7075 and overnight it has been up to 0.7096; the strongest since October 19th.

Arguably there is perhaps more substance to the Australian Dollar recovery than to the Kiwi; higher commodity prices have helped the AUD whereas the last Global Dairy Trade (GDT) auction just before Christmas showed prices falling by 3.9%. The average price per tonne on the GDT index was US$2969 (NZ$4247), with the key price indicator whole milk powder (WMP) at US$2755, a drop of 2.5%. This was the fourth drop of at least 2.4% in recent months - with a fall of 2.4% on October 3, 3.5% on November 7 and 3.4% on November 21. The next GDT auction doesn’t come until the New Year and will be keenly watched for any sign of pick-up in prices.

The Kiwi Dollar opens in North America this morning at USD0.7085 with NZD/CAD at 0.8930.