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US Dollar ekes out modest gains after 2 weeks of steady decline. ISM manufacturing and FOMC Minutes awaited.

By Nick Parsons

The US Dollar kicked off 2018 with further losses. Its index against a basket of major currencies opened yesterday around 91.90 and fell all the way to 91.44 by mid-morning in Europe before rallying very slightly to close in New York around 91.52. Overnight it has managed to rally a little further as EUR/USD and GBP/USD are 40 and 20 pips lower respectively.

The USD Index opens in New York this morning at 91.75; hardly an impressive move but one which, if sustained, will at least bring a long streak of daily losses to an end. Once again, the USD weakness on Tuesday came despite a rally in the stock market which saw the S+P 500 and NASDAQ indices make fresh intra-day and closing record highs and the NASDAQ close above 7,000 for the first time in history. It also comes despite higher bond yields at all points along the maturity spectrum and a very solid set of economic data.

For the moment, it seems just that the dollar is falling because it is falling. The technical tail is wagging the fundamental dog. When price action itself is such a dominant feature of trading, investors seek confirmation of the prevailing trend by seeking out the bits of news which support a continuation of the move rather than viewing the incoming information more objectively. Of course, we’ve been here before and a year ago it happened in precisely the opposite direction.

All the news was interpreted as dollar bullish post the 2016 Presidential elections and it rose until January 3rd last year. Here we are on that very same date, with sentiment arguably as bearish today as it was bullish then… The US Dollar index opens in New York this morning at 91.75. This morning brings the ISM manufacturing PMI report and then the Minutes of the December FOMC meeting at which rates were hiked 25bp.

 

 

 

The Canadian Dollar continued its recent very strong run yesterday and once again finished at the top of the one-day FX performance table, hitting USD1.2500 (or 80 US cents when quoted the other way round) for the first time since October 20th. Crude oil on NYMEX has held above $60 ever since last Friday as the cold weather intensifies across North America. Winter Storm Grayson, a very large and powerful weather system is threatening the East Coast of the United States with heavy snow, intense winds, and record-setting low temperatures.

The cold front has sent temperatures below freezing in more than 92% of the Continental United States. Winter storm watches and warnings have been issued for many coastal regions in north Florida to Maine from Wednesday into late Thursday. Hurricane-force wind warnings, meantime, have been posted off the coast of North Carolina where ships could encounter winds of 80 miles an hour and waves as high as 26 feet on Thursday. As well as oil prices, there is some speculation that the Bank of Canada might pull the trigger on another interest rate hike at its January 17th meeting. Markets are currently pricing in about a 45% chance Stephen Poloz will increase the benchmark rate to 1.25 per cent at that meeting and the Governor has previously warned that monetary policy needs to have an element of surprise if it is to be most effective.

The really big test for the CAD will come with December’s employment report on Friday. Before then, the Canadian Dollar opens in North America this morning at USD1.2520 with GBP/CAD at 1.6980.

 

 

After a year in which the euro was the best performing of all the major currencies, it got off to a flying start in 2018; with a high in Europe yesterday morning of 1.2077; the highest in over 3 years. It couldn’t sustain its very positive momentum throughout the day, however, and finished in New York around 20 pips below its best level. In Europe this morning the EUR has faded further to be down more than 60 pips from Tuesday’s high and threatens to be back below 1.20 for the first time since last Friday. The modest pullback in the EUR comes despite a very good set of German labor market data. The seasonally adjusted jobless total dropped by 29,000 to 2.442 million; more than double the 12,000 consensus forecast.

December's unemployment rate was 5.%, the same as a revised reading for November and the lowest level since German reunification in 1990, the office said. In 2017 as a whole, the rate fell to 5.7% from 6.1% the previous year. The detailed numbers showed Germany's workforce expanded last year to a record 44.3 million, whilst the Labor Office said there were 761,000 job vacancies in December, suggesting companies are struggling to find skilled workers quickly. Of course, whilst the German data are very impressive, they have rather lost their power to surprise on the upside, given that expectations are already so elevated.

On this second trading day of 2018, the EUR opens in North America at USD1.2050 and GBP/EUR1.1285. Germany’s December unemployment figures are published this morning but otherwise it’s a quiet day for economic data ahead of tomorrows PMI services reports.. On this first trading day of 2018, the EUR opens in North America at USD1.2010 and EUR/CAD1.5045.

 

 

The pound got off to a very good start to the New Year 2018 yesterday, second only to the buoyant Canadian Dollar on the one-day performance table. Against a very weak US Dollar it reached an intra-day high of 1.3594 which matched its high for 2017 reached back in mid-September. Overnight in Asia it extended its gains further to reach USD1.3608; its highest since the day after the EU referendum back in June 2016 before losing around half a cent during the European morning.

The latest UK PMI construction numbers were disappointing and the year finished in a downbeat fashion. The headline index fell to 52.2 in December from 53.1 as a robust rise in residential building contrasted with falling work on commercial projects and stagnating civil engineering output. Survey respondents indicated that house building remained a key engine of growth, with residential work expanding for the sixteenth consecutive month in December. In contrast, latest data indicated a moderate fall in commercial construction, thereby continuing the downward trend seen since July. Civil engineering work stabilized during the latest survey period, which ended a three-month period of decline. As market noted in their Press Release, “, construction firms indicated that longer term business confidence is still relatively subdued, largely reflecting concerns about the domestic economic outlook. 37% of the survey panel forecast a rise in construction activity over the course of 2018, while around 11% anticipate a reduction.

As a result, the balance of UK construction companies expecting growth in the year ahead remains among the weakest recorded by the survey since mid-2013”. Ahead of the PMI service sector index on Thursday, the pound opens in North America this morning at USD1.3560, EUR1.1285 and CAD1.6985.

 

 

With gold hitting its highest level since September 18th at $1312 per ounce, the AUD met with reasonable investor demand on the first trading day of 2018. AUD/USD reached a high in the London morning of 0.7842; its highest since October 20th and taking its gains since the recent low on December 8th to almost 340 pips. Overnight in Sydney the pair fell to a low of 0.7805 before rallying back to 0.7835 and has been on a US 78 cents big figure for all but a few minutes of this first week of the New Year. For a currency which is linked to the performance of industrial and precious metals like no other, the price of gold recently is starting to draw lots of investor attention.

Gold futures have risen for 12 of the last 13 days and are up for the last 8 in a row; the longest winning streak since 2011. Taking a longer perspective, gold has risen in January for 9 of the last 12 years with an average gain of just over 4%. The spot price is now above all of its 20, 50,100 and 200 day moving averages and with President Trump now taking to Twitter to boast about the size of his big red nuclear button, traders who have been watching the meteoric rise of Bitcoin over the last few months are turning to a safe haven which at least they feel they understand and have access to in their regular dealing accounts.

The next local economic data to be released are the performance of services index on Thursday and the more important November trade figures on Friday morning. The AUD opens in North America this morning at USD0.7835 with AUD/NZD at 1.1020 and AUD/CAD0.9810.

 

 

The New Zealand Dollar has largely kept pace with the Aussie Dollar over the last couple of weeks but is just starting to show some signs of under-performance with the AUD/NZD cross edging up to a near 1-month high of 1.1040 overnight. Having reached a high in the London morning yesterday of 0.7125, the NZD/USD pair is also struggling to hold on to a US 71 cents big figure.

The Kiwi Dollar didn’t move much after the first Global Dairy Trade auction of 2018 which saw the overall index rise 2.2%, but some big swings for individual markets. Butter milk powder (BMP) took a sharp decrease by 7.3%, having not been on offer at the previous event whilst whole milk powder (WMP) on the other hand rose by 4.2%. After a very strong run recently, however, the NZD may need the support of improving macroeconomic data both at home, in China and the broader APEC region if its recent gains are to be sustained.

There’s no domestic economic data scheduled for release until January 9th, however, and if the USD shows any sign of a turnaround, the NZD could be vulnerable to a bout of profit-taking from recently-acquired long positions. The Kiwi Dollar opens in North America this morning at USD0.7105 with NZD/CAD at 0.8895.