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US Dollar at a 14-week low and ends 2017 down 9%; its first annual loss since 2012

By Nick Parsons

The US Dollar is once again lower. 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. On Wednesday in Europe it traded down to 92.51; the lowest level since December 1st and yesterday in New York it hit 92.24; the weakest since September 25th. After the briefest of rallies overnight in Asia, it fell further to 91.95 during the London morning.

With just one trading session left in 2017, the USD index against a basket of major currencies is on track to lose just almost 9%; the first annual decline since 2012. Its high for the year was way back on January 3rd when EUR/USD hit a low of 1.0341. Since that point, the euro is now up more than 13%, its biggest advance since 2003, and is the largest G-10 gainer against the US currency this year.

Today, of all days, brings the potential for some big price swings; the end of the month, the quarter and the calendar year when global portfolio hedges are rebalanced to account for relative performance changes. To some extent the high correlation of assets across geographies should reduce the need for portfolio rebalancing but with a long weekend ahead, this may be the time for clients to lock-in their FX needs if the levels are attractive.

The US Dollar index opens in North America this morning at a 14-week low of 91.95. The 2017 low was 91.00 on September 5th…

On this last full working day of the year, we wish all our clients in the United States and Canada a happy, peaceful and prosperous New Year 2018.



The Canadian Dollar had a very strong day on Thursday, equal top performer with the EUR. NYMEX crude which slipped a little to $59.55 on Wednesday, is this morning up at $60.25; the highest since June 2015. Brent crude futures - the international benchmark - are also up, rising 45 cents or 0.7% to $66.61 a barrel. Brent broke through $67 earlier this week for the first time since May 2015. Since the start of the year, Brent and WTI have risen by 17 and 12 percent, respectively, although the price rises from mid-2017 are much stronger, at nearly 50%.

As well as the supply side of the energy equation, we also have to look at demand. Our Canadian clients will need no reminder that Winter can be severe. However, an arctic blast has sent most of the US Northeast and Midwest into a deep freeze that has set record lows in several places. For most of the region encompassing New England, northern Pennsylvania and New York, the National Weather Service issued wind chill advisories or warnings as temperatures are expected to be below 10 degrees fahrenheit in a wide area. For upstate New York, east of Lake Ontario, the NWS warned of “dangerously” cold wind chills of minus 5 F to minus 30 F through Friday, whilst Erie - a city of about 100,000 on the shores of Lake Erie in northwest Pennsylvania - is already buried under more than 65 inches from a record-breaking storm earlier this week. Wrap up warm this weekend…

We’ve been highlighting that the technical picture has definitely shifted in the CAD’s favour after the decisive close below USD/CAD1.2760 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 10-week low (CAD stronger) of USD1.2535 with GBP/CAD at 1.6930 and EUR/CAD at 1.5025.



The EUR finished equal top of the FX pile with the CAD on Thursday; rising almost three-quarters of a cent from Wednesday’s New York close to reach a high of USD1.1958; matching the best level it touched on November 27th. Overnight it eased very slightly to 1.1938 before rallying back to a high of 1.1988.

The euro is the best performing major currency in 2017. In early January as worries grew about upcoming elections in the Netherlands, Austria and France and the rise of populist anti-EU parties, there were concerns about a true existential crisis for the currency. EUR/USD hit a low point for 2017 of just 1.0341. With the resounding victory for Emmanuel Macron in the French Presidential Elections, it seemed, instead, that the Franco-German axis at the centre of EU politics for two generations would be strengthened and reinforced. The euro has subsequently shrugged off a poor election outcome for German Chancellor Angela Merkel and the dissolution of the Italian Parliament ahead of elections to be held in early March 2018. The economic recovery has gained traction across the whole of the EU and though inflation has not yet followed, it surely will if recent increases in energy prices are sustained.

For today, the EUR opens in North America this morning at USD1.1988 and CAD1.5025.



The British Pound had a much better day than might have been expected on Thursday, lagging behind the EUR and CAD but gaining against all the various dollars. It reached a best level of USD1.3454 early in the London morning but after a 25-pip retracement was back up to the highs in the New York afternoon; overnight it has extended gains up to 1.3507; its best level since the EU/Irish/Brexit deal spike back in early December.

The outlook for the British Pound over the next year has rarely been so polarized. On the one hand (as the economists say!) is a view that a 2-year transitional deal on Brexit can be relatively swiftly concluded which would see the UK adopt the policies and rules of the EU from the formal date of leaving in March 2019 out to March 2021. This, it is argued, would be the best – or least worst – outcome for British business and allow more time to plan for a post-Brexit world of new trade and customs arrangements with the European Union. Under this scenario, it is further agued that the GBP can regain most of its post-referendum losses and see GBP/USD return to $1.50 with GBP/EUR closer to 1.20 than 1.10.

On the other hand are not only four fingers and a thumb, but a view that the EU has little incentive to agree either a favourable or an early trade deal for the UK. Playing tough would reduce the attractions for other nations of leaving the EU whilst benefitting from the powerful cyclical economic upswing within the Eurozone. Under this scenario, it is agued that hard-line anti-EU Conservative MP’s would refuse to back a ‘shadow EU’ arrangement and would instead split the party and force a General Election on the issue. Whatever the anti-Brexit equivocations of the Labour Party, it is feared that a change of government would see the pound plunge to its post-referendum lows below USD1.20 and EUR1.10.

As far as the Bank of England’s monetary policy is concerned, UK overnight interest rate swaps are currently pricing in a 69.1% probability of a rate hike by December 2018, with a 40.4% expectation for rates to be at 0.75%, and 21.5% expectation that rates will be at 1% by the end of 2018. Once again, reasonable people can differ on the weight they ascribe to these market-derived probabilities.

Amidst all these future uncertainties, the pound opens in North America this last trading day of the year at USD1.3507, EUR1.1265 and CAD1.6930.



The Aussie Dollar has enjoyed a really good festive season. December 26th saw AUD/USD hit a high of 0.7730 - its best level in 2 months. On Wednesday during the New York morning, the pair extended its gains to a near 10-week high of 0.7777 and yesterday it touched 0.7807; the highest since October 24th. Having subsequently sold off a quarter of a cent, this morning in London it is back on a US 78 cents handle with a high so far of 0.7822.

The AUD is still viewed as a commodity currency, even when it doesn’t produce some of the commodities which are going up in price! For sure, gold is up 4.1% since December 11th and iron ore is up 22% in exactly two months. Copper is up just over 12% in less than 3 weeks, aluminium is up 13% in just under a fortnight whilst zinc is up 7% since December 7th. When commodities all rise strongly together, so too does a “commodity currency”.

There is a very wide spread of views as to what 2018 holds in store for the Australian Dollar. Morgan Stanley, for instance, sees AUD/USD at 0.67 by the end of next year whilst BoA Merril Lynch has 0.77 and UniCredit goes for 0.82. We’d note that in an environment of generally low asset market volatility and strongly rising commodity prices, the extra yield available in Australia looks very attractive. Experience also teaches us that it looks very attractive until it doesn’t and that reversals can be swift and sudden. No asset class is more fickle and subject to the whims of fashion than foreign exchange. As the old saying goes, “it never looks more bullish than at the top of the market”.

The AUD opens in North America this morning at USD0.7820 with AUD/NZD at 1.0980 and AUD/CAD0.9800.



The New Zealand Dollar is still keeping up 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, by yesterday it had extended gains to 0.7097; the strongest in 10 weeks and overnight it has just reached a US 71 cents big figure for the first time since October 18th.

Whilst the gains in the Australian Dollar are largely linked to commodity prices, this most certainly is not what has been driving the New Zealand Dollar higher recently. Instead it is a combination of factors: a global investor base which was running short or underweight positions in the currency after the uncertainties of the September election, the announcement of a new but highly experienced Governor at the RBNZ and the extra yield available on New Zealand’s money and bond markets which looks attractive in an environment of generally low asset market volatility.

We’d note the short position appears now to have been unwound, the change of personnel at the RBNZ is no longer news and the yield advantage in NZ is pretty slim by historic standards. This doesn’t of itself signal the top for the Kiwi Dollar as momentum is itself a powerful force in foreign exchange markets. After a very strong run recently, however, clients with foreign exchange business to transact would be well-advised to think whether now is the time to lock-in their FX requirements.

The Kiwi Dollar opens in North America this morning at USD0.7120 with NZD/CAD at 0.8925.