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US Dollar falls for a second consecutive week and is down 9% in 2017. AUD and NZD hit 2-month highs, but EUR and CAD are the best performers of this shorter holiday week.

By Nick Parsons

Following a very poor pre-Christmas week, the US Dollar then did even worse in the run-up to year-end. 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 on Thursday it hit 92.24; the weakest since September 25th. Friday was weaker still and its index against a basket of major currencies fell to a low of just 91.77 before rallying slightly to end the year at 91.91. For the calendar year 2017, the USD fell 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. The US Dollar’s decline came despite the stock market recording more than 70 fresh all-time highs during the year and three hikes in interest rates from the Federal Reserve Bank. Donald Trump is still President of the United States, a historic tax reform bill has been passed and the money markets are pricing further interest rate hikes next year. Current overnight Fed Funds Futures are pricing in a 95.2% probability of a hike by December 2018, with a 37.1% expectation for rates to be between 1.75 and 2% and 25.8% expectation for rates to be between 2 and 2.5%. For the next ‘live’ FOMC meeting in March, money market pricing reflects a 54% probability of a 25bp hike to 150-175bp. For the last week, none of these potential US Dollar positives seemed to matter. As the New Year begins, it will, as ever, be fascinating to see how investor sentiment evolves.

The Canadian Dollar ended the holiday week alongside the euro at the top of the FX performance table. The recent clear messages from bank of Canada Governor Poloz appeared finally to be gaining some traction with investors, whilst a jump in energy prices and a potentially very significant shift in the technical outlook all offered very good support to the currency. With continued supply disruptions globally, and a ferocious spell of cold weather over much North America, NYMEX crude on Friday hit $60.46; the highest since June 2015. 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 were expected to be below 10 degrees fahrenheit in a wide area until early in the New Year. As well as the WTI contract traded on NYMEX, Brent crude oil futures - the international benchmark - were 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%. 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. On this last weekend of the year, we wish all our clients in Canada and the United States a happy, peaceful and prosperous New Year.

As the holiday season gets fully underway locally, the Aussie Dollar enjoyed a really good festive period. 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. On Thursday it touched 0.7807; the highest since October 24th and on Friday it hit a best level of 0.7822 before ending the week at 0.7808. The Australian Dollar has never been able to shrug off its label as just a commodity currency; a liquid proxy for metals and energy resources for those who are not able to invest directly in the underlying assets which have recently boomed. Gold is up 4.7% since December 11th and iron ore is up 21% in exactly two months. Copper is up just over 11% in less than 3 weeks, aluminium is up 13% in just under a fortnight whilst zinc is up nearly 8 % since December 7th. 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. But, should volatility pick up sharply or RBA rate hike expectations fade, then the AUD could soon look overvalued. Whatever the medium-term outlook for the currency, we’re here to help with transactions. We wish all our clients in Australia and New Zealand a happy and peaceful New Year 2018.

The New Zealand Dollar managed to keep up with the strength in its Aussie cousin with the AUD/NZD cross in a 1.0970-1.1000 range throughout the holiday-shortened week. NZD/USD reached a best level of 0.7040 on Tuesday and on Wednesday it extended gains to 0.7097; the strongest in 10 weeks. On Thursday it reached a US 71 cents big figure for the first time since October 18th and on Friday it touch a high of 0.7021 before ending the year at 0.7097. 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, the NZD might well need some better domestic economic news if it is to sustain its recent strength into 2018.

The British Pound had a very good Christmas week, rising from a low of USD1.3350 on Tuesday all the way up to a best level on Friday of 1.3536 before ending the year in New York on Friday evening at 1.3513. 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 argued 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 is 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 argued 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. 2018 is certainly shaping up to be a fascinating year for the GBP and one in which volatility seems set to be a permanent fixture.

The EUR finished equal top of the FX performance table in this last, shorter holiday week. From a low point at the start of New York trading on Boxing Day of USD1.1846, the Single European Currency strengthened steadily with the move accelerating through Thursday to reach a best level on Friday of USD1.2025; its highest since September 10th. 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. Whilst much of the good news for the euro may already be ‘in the price’, its positive momentum and excellent economic growth story leave it well poised to extend recent gains in the first part of 2018.