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Canadian Dollar surges after stunning labour market data. AUD and NZD rise against US Dollar as non-farm payrolls disappoint. Strong EU economy is offset by German political worries.

By Nick Parsons

The first week of the New Year wasn’t short of news for the US Dollar, though its index against a basket of major currencies ended only a couple of tenths lower around the mid-point of its weekly trading range. On Tuesday the Dollar index fell to a 14-week low of 91.44, Wednesday it rallied back up to 91.92 and on Thursday it was back down to 91.50 before ended the week at 91.66. In economic news the December ISM manufacturing survey 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. The Minutes of the December FOMC Board Meeting were published on Wednesday. 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, was that the two dissenters will not be voting members in 2018 and the market-derived probability of a March rate hike went up from 56% to 67%. On Thursday, the big story of the day in the United States was yet another record high for stock markets. The Dow Jones Industrial Average jumped past 25,000 for the first time on Thursday morning, and by the close of business it had made the fastest run ever to a fresh 1000-point milestone. The jump from 24,000 too just 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. Friday’s labour market report was generally viewed as a disappointment. Non-farm payrolls rose just 148,000, compared with the 190,000 consensus estimate. The jobless rate was at 4.1% for a third month, while average hourly earnings increased by 2.5% from a year earlier, after a 2.4% gain in November that was revised downwards. The December numbers, while below forecast, brought the 2017 total to 2.06 million jobs; below 2016 but slightly more than analysts had been expecting at the start of Donald Trump’s first year as president. After a very busy first week of 2018, all eyes next week will be on Friday’s CPI to see whether or not the strength in economy and labour market is at last feeding through into higher prices.

The Australian Dollar has been on a US 78 cents big figure for all but a few minutes of the holiday-shortened week. The trend was solidly upwards, though, and from a staring point of exactly USD0.7800, it moved steadily higher to reach a best level on Friday of 0.7874; its highest since October 20th. Overall, the AUD ended the week higher against the USD, GBP and EUR but down against the NZD and CAD. There were two main drivers of the Aussie Dollar: commodity prices and the Chinese economy. 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. On Thursday it was flat and on Friday it finally closed lower; breaking a remarkable streak which had not seen a down day since the Fed hikes rates in December. As for China, we said 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 released on Thursday (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. Friday brought a pretty disappointing set of trade figures. 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. With the help of a soft US employment report (see below), the Australian Dollar ended the week at USD0.7863, with AUD/NZD at 1.0965 and GBP/AUD1.7255.

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. On Wednesday, it showed some signs of under-performance with the AUD/NZD cross moving up to a 1-month high of 1.1050 and the NZD/USD pair struggling to hold on to a US 71 cents big figure. On Thursday, however, it surged to the top of the FX pile with AUD/NZD down to 1.0985 and NZD/USD back up to 0.7160. Friday saw it extend gains against both the AUD and the USD to end the week the second-best performer after the Canadian Dollar. 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. There’s very little economic data scheduled for release in New Zealand over the coming week and the currency will likely be driven by offshore events and news flow. The day-to-day volatility we have seen for almost a month now is unlikely to subside and clients may find it useful to leave firm orders in advance to benefit from any large swing in their favour, rather than trying to follow choppy markets in real-time.

The British Pound had an up and down week and finished just above the mid-point of its range against the US Dollar. GBP/USD began the New year at 1.3515 and amidst a general sense of optimism around the prospects for a Brexit trade deal and with many banks favouring long-GBP as their top currency trade for 2018, it raced up to a high early n Wednesday morning of 1.3508. From then on it was a rapid slide back down to 1.3500 on a combination of poor UK construction data and very strong US numbers ahead of the FOMC Minutes.

On Thursday, the GBP was well-bid as 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. Friday, however, brought a very poor but not unexpected set of new car registration data. 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. The latest 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 pound ended the week at USD1.3565. Overall it rose against the USD and EUR but fell against the AUD, NZD and CAD.

The EUR had a very mixed week; at one point reaching a fresh 3-year high against the US Dollar but then slipping back on Friday to be below the mid-point of its weekly trading range. Indeed, for all the optimism around the Eurozone economy, the EUR rose only against the USD and was down against all the other major currencies we follow here. Having reached a more than 3-year high of USD1.2077 on Tuesday, then slipped steadily on Wednesday, on Thursday it rallied to a fresh cycle high of 1.2082 after publication of the Eurozone aggregate and individual countries’ PMI services reports. The final 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 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.” For the week ahead, the calendar is quite busy with a string of second-tier economic releases but a growing concern for currency traders might be the progress – or otherwise – of talks to form a coalition government in Germany. Chancellor Angela Merkel has been the dominant figure on the European political scene for the last decade and uncertainty about her future is likely to weigh down on the EUR despite the solid economic news.

The Canadian Dollar had yet another very good week, finishing way at the top of the performance table after further gains in energy prices and a second consecutive labour market report which was considerably stronger than consensus expectations. Having briefly dropped below USD/CAD1.2500 on Thursday, the pair tumbled to 1.2372 on Friday; the lowest since September 27th. Both Brent crude oil and US benchmark West Texas Intermediate rallied last week 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 $68.10 on Thursday whilst WTI rose to $62.07, a level not seen since June 2015. Meantime, the cold weather intensified across North America. Winter Storm Grayson hit 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. As we write this weekend update, a quick look at the weather right now shows the temperature in Toronto is MINUS 21 degrees centigrade. One month ago, it was the November employment numbers which first lit a fire under the CAD with a 79,500 monthly increase in jobs. In December, the jobless rate fell to 5.7%, the lowest in the current data series that begins in 1976. The number of jobs rose by 78,600, smashing expectations and bringing the full-year employment gain to 422,500, the best annual increase since 2002. Since September, the Canadian

economy has added 193,400 jobs; the biggest 3-month gain in over 40 years. The yield on 2-year Canada bonds jumped 6bp to 1.77% on Friday, close to a seven-year high whilst the market-derived probability of a rate hike at the Bank of Canada’s next meeting on January 17th surged to 70%, from 40% in the week. It was a very happy New Year for the Loonie.