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US Dollar can’t sustain overnight gains. Solid China data push AUD and NZD higher. GBP and EUR recover after PMI’s.

By Nick Parsons

After almost three weeks of steady but relentless selling which took its index against a basket of major currencies down from 93.80 on December 12th to a low on January 2nd of 91.44, the US Dollar finally found support in the Northern Hemisphere yesterday. It wasn’t just about the economic data (see below) as the USD turned higher before the latest US numbers were released. By the end of the London afternoon, however, the Dollar Index had moved up to a high of 91.88 and after the FOMC Minutes were published, it managed to reach 91.92. Overnight in Asia and this morning in Europe, however, it has slipped back again to just 91.55.

The solid economic news began with the December ISM manufacturing survey which rose to 59.7 from 58.2, above the consensus forecast for an unchanged 58.2. very encouragingly, the New Orders Index registered 69.4; an increase of 5.4 points from the November reading of 64.0. Comments from the panel reflected expanding business conditions, with new orders and production leading gains; employment expanding at a slower rate; order backlogs expanding at a faster rate; and export orders and imports continuing to grow in December.

After a solid set of construction spending numbers, we then saw the Minutes of the December FOMC Board Meeting. As ever, there’s something for everyone in these and you can always find a wide spread of views expressed. Some members said a faster trajectory of rate hikes may be needed whilst several officials were concerned by low inflation expectations. A couple were concerned by financial stability risks but most backed gradual rate hikes. The main takeaway, though, is that the two dissenters will not be voting members in 2018 and the market-derived probability of a March rate hike rose from 56% to 67%.

We won’t get to see the ISM services report until after tomorrow’s payroll numbers but over the last few weeks – with the exception of the advance goods trade numbers – all the US economic data have been pretty positive. The USD index really needs to hold above Tuesday’s 91.44 low to make the technical picture a little better and if it were to fall below 91.00 then it would look terrible once again.

For now, the USD index opens in North America this morning at 91.58.

 

 

 

Having USD1.2500 (or 80 US cents when quoted the other way round) for the first time since October 20th on Tuesday, the Canadian Dollar paused yesterday even as oil prices extended recent gains. USD/CAD spent most of the day in a 1.2505-1.2540 range and in the Asian and European sessions, it has settled back to the mid-point of that band.

Both Brent crude oil and US benchmark West Texas Intermediate rallied yesterday as the political unrest in Iran (the third largest OPEC producer which pumps around 3.8m barrels per day) came into focus. Brent crude reached $67.62 – up more than 1.5% on the day before easing slightly. WTI rose 1.8% to $61.52, a level not seen since June 2015. In London this morning, it reached $62.10 before slipping back to a still-elevated $61.75.

A quick look at the weather forecast shows the temperature in Toronto is not expected to rise above minus 10 degrees centigrade at any point over the next three days with lows of minus 25 degrees forecast on Friday. Rather than venturing outside, however, currency traders will be warmed by the heat from their computers as they await today’s data on industrial product and raw material prices and Friday’s labor force survey. Remember it was the November employment numbers which first lit a fire under the CAD with a 79,500 monthly increase in jobs.

Before then, the Canadian Dollar opens in North America this morning at USD1.2520 with GBP/CAD at 1.6965.

 

 

Having reached a more than 3-year high of 1.2077 on Tuesday, EUR then slipped steadily to reach a low point of 1.2005 first in yesterday’s European session then again in Asia overnight. This morning it has recovered just over half a cent to a best level of 1.2061 after publication of the Eurozone aggregate and individual countries’ PMI services reports.

The final IHS Markit Eurozone PMI Composite Index posted 58.1 in December, up from 57.5 in November, to register its highest reading since February 2011. The headline index has signalled growth for 54 successive months, with the average level during quarter four the best since the opening quarter of 2011. The trend in new business also strengthened in December. Manufacturers saw the steepest increase since April 2000, underpinned by improved domestic demand and near-record growth in new export orders. Service providers, meanwhile, registered the fastest increase in new work for over a decade.

The positive economic environment led to improved business confidence in the euro area. Optimism rose to its best since September, after strengthening to a joint-record high in Germany and three-month highs in France, Spain and Ireland. We said yesterday that “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.” Nonetheless, the Markit Press Release was remarkably upbeat, saying, “A stellar end to 2017 for the eurozone rounded off the best year for over a decade, continuing to confound widely-held fears that rising political uncertainty would curb economic growth… Manufacturing is enjoying its best growth spell since data were first collected over two decades ago while the service sector closed off its best year since 2007.” The language is enough to melt the heart of even a hardened trader !!

The EUR opens in North America this Thursday morning at USD1.2060 and EUR/CAD1.5095.

 

 

After a strong start to the New Year, the GBP extended its gains yesterday morning to reach USD1.3608; its highest since the day after the EU referendum back in June 2016. From that point on, however, it was downhill all the way and the pair tumbled more than a full cent by the New York close, with the pound losing ground against every one of the major currencies we track here. This morning it has regained around half its losses after a better than expected set of PMI services numbers.

The UK Services PMI® Business Activity Index registered 54.2 in December, up from 53.8 in the previous month, to signal the second-fastest upturn in service sector output since April 2017. Higher levels of business activity have now been recorded for seventeen months running, supported by the resilient economic backdrop and rising consumer spending. However, service providers noted that Brexit-related uncertainty continued to hold back clients’ willingness to spend at the end of 2017. New business volumes increased at a solid pace in December, but the latest upturn was the slowest recorded since August 2016. Reports from survey respondents suggested that subdued business investment and cost consciousness among clients were factors that had weighed on sales growth in December.

The pound opens in North America this morning at USD1.3550, EUR1.1235 and CAD1.6960.

 

 

As gold hit its highest level since September 15th at $1320 per ounce in Asia yesterday, the AUD has continued to meet with solid investor demand in these first few trading days of 2018. AUD/USD has been on a US 78 cents big figure for all but a few minutes of this first week of the New Year. Overnight in Asia the AUD has rallied further to 0.7853, driven this time not by commodity prices, but a very good set of Chinese PMI numbers.

We said here earlier this week that, “the Aussie Dollar still remains sensitive to Chinese numbers. These are important for Australia as China is the number one export destination, the largest market for agricultural goods and the most valuable inward tourism market. Australia needs a strong Chinese economy if it is to grow itself”. The Caixin China Composite PMI data (which covers both manufacturing and services) signaled a solid upturn in Chinese business activity at the end of 2017. At 53.0, the Composite Output Index picked up from 51.6 in November to indicate the fastest rate of activity growth for a year.

Steep increases in activity were registered across both the manufacturing and service sectors during December. Notably, services companies recorded the quickest expansion in activity since August 2014. Meanwhile, manufacturing output increased at a pace that, though modest, was the strongest seen for three months. Business confidence in the 12-month outlook for activity improved across both the manufacturing and service sectors at the end of the year. Services companies expressed the greatest degree of optimism since June, while sentiment at manufacturers picked up from November’s joint-record low.

Ahead of Australia’s November trade figures on Friday morning, the AUD opens in North America this morning at USD0.7845 with AUD/NZD at 1.1015 and AUD/CAD0.9815.

 

 

The New Zealand Dollar is beginning to show some of the day-to-day volatility which characterized it in early December when it would regularly swing from being the day’s strongest currency to the very worst. Yesterday it showed some signs of under-performance with the AUD/NZD cross moving up to a 1-month high of 1.1050 in the New York session and the NZD/USD pair struggling to hold on to a US 71 cents big figure. Overnight, however, it is at the top of the FX pile with AUD/NZD down to 1.1010 and NZD/USD back up to 0.7125.

As with the Australian Dollar, the lift to the Kiwi came not from domestic economic data, but the strength of the Chinese PMI numbers. Buried beyond the headlines, the report noted, “Average input costs faced by services companies in China increased at a solid and accelerated rate in December. Furthermore, the rate of inflation was the joint-quickest since February 2013 (on par with March 2017). Raw materials, transportation and salaries were all cited as having gone up in price in the latest survey period.” One country’s input costs are, of course, another country’s exports and both NZ and Australia send a large portion of their goods in to China; industrial metals for Australia, dairy and lumber for New Zealand.

The Kiwi Dollar opens in North America this morning at USD0.7125 with NZD/CAD at 0.8915.