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US Dollar off its lows ahead of non-farm payrolls. EUR and GBP both below recent highs

By Nick Parsons

The good news for the US Dollar is that it didn’t make a fresh low yesterday! On Tuesday its index against a basket of major currencies hit a low of just 91.44 but then on Wednesday following strong ISM data and after the FOMC Minutes were published, it managed to reach 91.92. On Thursday it began to turn lower once more and in the London afternoon it slipped back to a low of just 91.49. Overnight in Asia it has risen very marginally to 91.60 and in London it has extended the gain to 97.70 The big story of the day in the United States was further strength in the economic numbers and yet another record high for stock markets. The Dow Jones Industrial Average jumped past 25,000 for the first time on Thursday morning, on track to make the fastest run ever to a fresh 1000-point milestone. If the DJIA closes above 25,000, the jump from 24,000 would have taken 23 trading days, ahead of the 24-day spans that took the index to 11,000 in 1999 and 21,000 in March last year.

On the economy, the latest ADP employment report was much stronger than consensus expectations, showing 250,000 jobs were created in December against forecasts of a more modest, but still impressive, 190,000 gain. ADP’s Press released noted, “Throughout the year there was significant growth in services except for an overall loss of jobs in the shrinking information sector. Looking at company size, small businesses finished out 2017 on a high note adding more than double their monthly average for the past six months”.

Today we’ll get to see whether the private sector gauge of the jobs market tallies with the official labour report. ADP has exceeded 250K on 11 occasions since 2014. In all but one of those months, non-farm payrolls were above 200K. Consensus expectations are for non-farm payrolls to have risen by around 200,000 in December which would mean that for 2017 as a whole, a very impressive 2,116,000 new jobs would have been created. For average earnings – which are probably the key to Fed monetary policy – expectations are for a +0.3% m/m increase which would leave the annual rate unchanged at 2.5%. the unemployment rate is seen holding steady at 4.1%.

For now, the USD index opens in North America this morning at 91.67.

 

 

 

After Wednesday’s pause which saw USD/CAD spent most of the day grinding higher in a 1.2505-1.2540 range, Thursday was a story of renewed strength for the Canadian Dollar. It couldn’t quite crack the 1.25 mark in European trading but overnight in Asia it has been down to USD/CAD1.2485; the lowest level since October 20th.

The first economic data release of the new year showed Canadian producer prices increased in November at their fastest pace in nearly three years due to higher costs related to energy and petroleum. Industrial product prices (which measure the price manufacturers receive once their goods leave the plant) advanced 1.4% in November. The last time the index rose at a faster pace on a month-over-month basis was in February 2015. Meanwhile, the country's raw-materials price index also rose at an elevated pace, jumping 5.5% in November, following a 3.8% increase in October. This pushed the annual increase up to 14.2% in November, after 6.6% y/y the previous month. The increase in the RMPI was mainly due to higher prices for crude energy products (+25.4%), particularly conventional crude oil (+26.7%). Year over year, the RMPI excluding crude energy products rose 6.5%.

For the Canadian Dollar, today will be a tale of two labour market reports: one in the US and the other at home. Remember it was the November employment numbers which first lit a fire under the CAD with a 79,500 monthly increase in jobs. Canada’s employment numbers are released at the same time as US non-farm payrolls, so it could be quite a volatile time around 8.30am this morning. Consensus expectations are for an increase of just 2,000 jobs in December after the previous month’s huge upside surprise with the unemployment rate at 6.0%. Average earnings are expected to increase around 2.9% y/y whereas the Bank of Canada’s policymakers are looking for 3.0%.

Ahead of all the employment numbers, the Canadian Dollar opens in North America this morning at USD1.2512 with GBP/CAD at 1.6940.

 

 

The euro was Thursday’s second-strongest currency after the New Zealand Dollar. Having reached a more than 3-year high of USD1.2077 on Tuesday, then slipped steadily on Wednesday, yesterday it rallied to a fresh cycle high of 1.2082 after publication of the Eurozone aggregate and individual countries’ PMI services reports. Overnight in Asia it traded broadly sideways against the USD in a very tight range from 1.2067 to 1.2077 but has subsequently eased back to 1.2050.

Data out this morning showed Euro-area inflation slowed to 1.4% last month from November’s 1.5%, and the underlying rate unexpectedly failed to accelerate, instead holding at 0.9%. CPI remains well below the target of “close to but just below 2%”, and the ECB forecasts that gains will remain subdued for most of this year before picking up. The central bank sees core inflation, which excludes volatile items such as food, energy and tobacco, as an important indicator of where the headline rate will settle there will be some disappointment at today’s 0.9% core rate, especially after a stronger-than-expected German inflation reading of 1.6 % last week raised hopes of an upside surprise.

The EUR opens in North America this Friday morning at USD1.2050 and EUR/CAD1.5075.

 

 

After a very strong start to the New Year, the GBP has been spinning its wheels as it tries to gain traction. On Wednesday morning it reached 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 with the pound losing ground against every one of the major currencies we track here. Yesterday, it regained around half its losses after a better than expected set of PMI services numbers though this morning has been hit by a very disappointing – although not wholly unexpected – set of UK car registration figures.

Contrary to popular perceptions about the UK car manufacturing, based on memories of the chaos in the 1970’s and subsequent decline, the automotive industry is one of the economy’s key sectors. It employs more than 800,000 people, 165,000 in manufacturing. The Treasury is dependent on a healthy new car market, relying on £5.5 billion in annual revenues from vehicle excise duty and even more from VAT on sales.

Today’s figures showed UK car sales declined in 2017 after five years of rapid growth. Total sales for last year were 2.54m new vehicles, a decline of 5.6% on 2016, with diesel sales dropping 17%. The Society of Motor Manufacturers and Traders (SMMT), the UK automotive industry’s trade body, has forecast a further 5% to 7% decline in sales in 2018.

The British Pound opens in North America this morning at USD1.3540, CAD1.6940 and AUD1.7265.

 

 

For the last two or three weeks the AUD has been all about industrial commodities and precious metals. The Bloomberg Commodity Index, which tracks returns on 22 raw materials, posted an unprecedented 14 days of gains to Wednesday, closing at the highest since February last year. What is particularly striking is that the global commodity index has not had a down day since the Fed hikes rates in December. This remarkable run helped push AUD/USD up to a high overnight of 0.7868; the highest since October 20th. A poor set of monthly trade figures has since taken some of the shine off the Aussie Dollar and it is around a quarter of cent below its overnight high.

The trade figures were pretty disappointing. October’s tiny surplus was revised away to show a monthly deficit of -$302m. Consensus expectations for November were for a surplus of around $550m. Instead, the balance on goods and services was a deficit of -$628m. Taking the two months together, the overall ‘miss’ compared to expectations was a whopping $1.5bn.

Exports were largely flat on the month - just $141 million higher at $31.8 billion - as a two per cent rise in non-rural goods such as iron ore helped offset a fall in cereals and grain, as well as a 23% drop in notoriously volatile non-monetary gold exports. A 26% rise in metals exports was also partially offset by a two per cent drop off coal, coke and briquettes, as China's environmental focus weighed on thermal coal volumes. Imports, meantime, were up 1.0%, or $467 million, driven by an increase in capital goods, with aviation and telecommunications equipment leading the gains.

We have not seen back-to-back monthly deficits in Australia since October 2016 and unless there is a substantial pick-up in December (which is still possible given what happened to commodity prices during the month), then net trade could be an overall drag on Q4 GDP.

The Australian Dollar opens in North America this morning at USD0.7840 with AUD/CAD at 0.9810 and AUD/NZD1.0960

 

 

The New Zealand Dollar has continued to do well, both against its Aussie cousin and the US Dollar. Overnight, it extended recent gains to USD0.7161; its highest since October 19th and taking its cumulative gains since the low of 0.6800 on November 20th to more than 3 ½ cents. Against a slightly softer AUD, the cross is down at 1.0960; the lowest since December 21st.

It’s very cold in North America right now but in New Zealand it is very wet with an intense Summer storm hitting much of the North Island - a dramatic break in an unusually dry summer, which has led to drought in many farming regions and curbed production of milk. Auckland was hit by two months’ worth of rain in 24 hours on Friday, according to the National Institute of Water and Atmospheric Research, prompting authorities to shut major roads and cancel ferry services and dozens of flights. More than 20,000 households were left without power, including 12,000 in Auckland, according to local media.

As the weekend begins Down Under, the Kiwi Dollar opens in North America this morning at USD0.7155 with NZD/CAD at 0.8950.