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US Dollar index at a 10-day high. EUR lower on German politics but NZD extends recent gains

By Nick Parsons

We have been expressing our puzzlement and the Dollar’s decline in late December and early in the New Year given the strength of the US stock market, the rise in yields across parts of the maturity spectrum, the passage of a historic tax reform bill and the prospects for upward revisions to growth forecasts in 2018. Perhaps for a moment, we might be allowed to set humility to one side and repeat what we said here last Wednesday: “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…”

We repeat these comments because January 3rd 2018 did, indeed, mark the low point for the USD after its latest sell-off, when its index against a basket of major currencies reached a 14-week low of 91.44. Yesterday’s low of 91.56 was above Friday’s 91.50 low and from that point it moved steadily higher to make it back on to a 92 ‘big figure’ for the first time in more than a week. This morning in London it has reached 92.21 and though it is too early to say with confidence that a decisive turning point has been made, the USD bulls are winning the argument in the near-term.

The Dollar’s rise on Monday came despite a generally very dovish speech on the US economy from Federal Reserve Bank of Atlanta President Raphael Bostic. He urged his colleagues to be patient in raising interest rates, citing some indications that the public’s expectations on inflation could slip below the central bank’s 2 percent target. He said, “I am comfortable continuing with a slow removal of policy accommodation. However, I would caution that that doesn’t necessarily mean as many as three or four moves per year.” The US Dollar index opens in North America this morning at a 10-day high around 92.21.

 

 

 

The Canadian Dollar had a great start to the New Year 2018. USD/CAD tumbled at one point on Friday to 1.2372; the lowest since September 27th, though yesterday it stabilised in a range 1.2385-1.2435. Overnight as the USD has rallied, and after a full session in Asia and the European morning, USD/CAD opens higher at 1.2445.

After Friday’s Canadian employment report, the market-derived probability of a rate hike at the Bank of Canada’s next meeting on January 17th surged to 70%, from 40% earlier in the week. Yesterday, those rate hike odds hit 86% after the Bank of Canada published its Q4 Business Outlook Survey; the last real chance for the Central Bank to communicate something dovish ahead of next Wednesday’s monetary policy meeting.

The Business Outlook Survey indicator rebounded almost to its summer peak, consistent with widespread positive sentiment. “Firms plan to expand operations to accommodate sustained demand, which is evident in a rebound of investment and employment intentions since the autumn survey. Reflecting strong demand and tightening labour markets, indicators of capacity pressures and labour shortages picked up. Survey results suggest that economic slack is now largely limited to the energy-producing regions. Firms expect growth of input prices to rise, owing to gains in commodity prices. Pass-through of input costs and emerging wage pressures to output prices remains limited due to competitive forces. Inflation expectations are modest and unchanged from the third quarter”.

The CAD opens in North America this morning at USD1.2445 with GBP/CAD at 1.6840.

 

 

The EUR had a poor day on Monday, slumping to the bottom of the one-day performance table despite further upbeat survey indicators. This morning, also, it has shrugged off a very solid set of German industrial numbers as markets continue to fret about the political situation in Germany. EUR/USD has slipped to a 2018 low of USD1.1924; its lowest since December 28th.

The German chancellor Angela Merkel said on Monday it would be “an enormous challenge” to bridge political divisions within her own Christian Democrats and with the left-wing SPD in order to re- create the coalition that ran the country from 2013 to 2017. A failure by Mrs Merkel to agree a Große Koalition, or “Groko”, will trigger new elections at a time when her own conservative alliance with the Bavarian Christian Social Union (CSU) is under strain and losing support to right-wing nationalists who took third place in September’s federal election with 5.8 million votes.

The leaders of both the SDP and CSU have said that their political careers would be over if coalition negotiations failed and Germany were once again plunged into divisive elections. Talks are scheduled to continue until Thursday and the longer they go on, the more nervous will foreign exchange markets become. The EUR opens in North America this Friday morning at USD1.1925 and EUR/CAD1.4835.

 

 

After a mixed week in which it raced up to a high of USD1.3608, then came back down equally rapidly to 1.3500 before finishing on Friday evening at USD1.3565, the GBP is back down again today; the second weakest of the major currencies after the European euro. Talk of an imminent Cabinet reshuffle by Prime Minister Theresa May initially hit the pound on Monday. In fact, the Government reshuffle proved to be much less far reaching than most commentators had either hoped or feared.

There were no changes in any of the three big jobs - Chancellor of the Exchequer, Foreign Secretary or Home Secretary – but plenty of movement lower down the pecking order; the immediate impact of which was not particularly obvious. But, to the extent that it didn’t increase the chances of rebellion or mutiny, investors nerves were somewhat soothed by the lack of major changes. The pound regained its morning losses by the end of the European afternoon and stood where it had begun at 1.3560. This morning, as the reshuffle is examined more closely, the consensus amongst political pundits is that it exposed the weakness of the Prime Minister and laid bare the few options open to her.

Amongst the UK newspapers, The Guardian predictably headlined “May reshuffle disarray. The Times notes, “An event that could have been used to clarify the direction of the government after a difficult few months served only to highlight the incoherence at Number Ten” whilst the Daily Telegraph, calling it the night of the blunt stiletto, says “Theresa May’s hopes of asserting her authority with a Cabinet revamp fell flat after senior ministers derailed her reshuffle by refusing to budge from their jobs”. The British Pound opens in North America this morning at USD1.3540, CAD1.6830 and AUD1.7300.

 

 

The Australian Dollar hasn’t been able to extend last week’s gains. Though it remains on a US 78 cents ‘big figure’, it ended the first day of this week the second-weakest of all the major currencies we follow closely here. Overnight it Asia it recovered somewhat to USD0.7862 before slipping back again in the European morning today.

The main reason for the modest rally in the AUD was a better than expected set of numbers on building approvals; the first stage of any construction process. The number of dwellings approved rose a seasonally adjusted 11.9% in November 2017 and has risen for 10 months, according to the Australian Bureau of Statistics (ABS).

Dwelling approvals have continued to rise in recent months, which has been driven by renewed strength in approvals for apartments. Approvals for private sector houses have remained stable, with just under 10,000 houses approved in November 2017. The value of total building approved rose 1.5%in November, in trend terms, and has risen for 11 months. The value of residential building rose 2.3 % while non-residential building rose 0.2%.

We said at the very beginning of trading on Monday that the AUD “may now need better domestic data, continued support from higher commodity prices or a further collapse of the USD if it is to build on recent gains.” Buildings approvals managed to tick the first of these boxes, even if the other two weren’t forthcoming. It opens in North America this morning at USD0.7825 with AUD/CAD at 0.9730 and AUD/NZD1.0910.

 

 

We have been warning for a while that the New Zealand Dollar was becoming more volatile. For two of the last three trading days it has been top of the performance table even though there has been a complete absence of domestic economic or political news to drive the currency. Overnight, NZD/USD has extended recent gains to a fresh 12-week high of 0.7194 whist AUD/NZD is at 1.0910 having at one point earlier this morning fallen to 1.0902; its lowest since December 14th.

We haven’t had any fresh economic news but yesterday we did get the usual detailed and always fascinating annual summary of the past 12 months and 3-month weather outlook from New Zealand’s National Institute of Water and Atmospheric Research. Obviously for an economy so dependent on farming, forestry and agriculture the weather forecast is massively important. NIWA reported that 2017 was “a year of extremes” with New Zealand recording its fifth warmest year in more than a century.

Annual rainfall was above normal across the country and for some regions including Auckland, Waikato and coastal Canterbury, as much as 149% higher. Only the years 2016, 2013, 1999, and 1998 were warmer than 2017, whilst the nationwide average temperature was 13.1°C or 0.5°C warmer than average. The ‘Tasman Tempest’ in March and cyclones Debbie and Cook in April contributed to record or near-record rainfall yet by the end of 2017, 11 out of New Zealand's 16 geographical regions were experiencing meteorological drought and it was the second warmest December on record.

For the 3 months January - March 2018, temperatures are forecast to be above average, with high confidence for all regions of New Zealand. Rainfall totals are most likely to be in the above normal range in the North Island and about equally likely to be near normal or above normal in the South Island. After another good run overnight in Asia and Europe, the New Zealand Dollar opens in North America this Tuesday morning at USD0.7180 with NZD/CAD at 0.8920.