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US Dollar tumbles on reports China may stop buying US bonds. EUR/USD regains 1.20 as AUD and NZD also rally.

By Nick Parsons

The Dollar hasn’t been able to hold on to Tuesday’s gains which took its index against a basket of major currencies to a high of 92.27; the best since December 28th. It closed in New York down just one-tenth from the high and though it held steady overnight in Asia, it has been battered lower in the European morning after reported comments that officials that who are reviewing China's FX holdings have recommended slowing or halting buying of US Treasuries. As we publish this commentary, the USD index has been sold down to a low of 91.60.

The Chinese comments said that US government bonds are becoming less attractive relative to other assets and that trade tensions with the US may provide a reason to slow or stop buying American debt. The headlines flashing across screens this morning came at a sensitive time for bond markets after the yield on US 10-year Treasuries rose 6bp on Tuesday to 2.54%; the highest since March 2017, whilst the yield curve from two to 10 years steepened by 5.4 basis points, the most in over a year, to 57.4bp. In European today, US 10-year yields added another five basis points to 2.59%.

For the moment, stock markets have shrugged off this development but don’t be surprised to hear it as an explanation the next time that equity indices end lower. And on that subject, a fascinating study from BoA Merril Lynch shows that, “Since March 16, 2016, the S&P 500 has gone for 386 trading sessions without a 5% drawdown. If the trend persists, in just 10 more days this will be the longest stretch without such a drawdown in history.” Wow…

There’s no major US economic releases scheduled today, though we will get to see import prices and wholesale inventories, which feed directly into GDP. The Atlanta Fed’s GDPNow model – which is generally the most accurate and up to date predictor of the US economy – currently estimates the GDP growth in fourth quarter of 2017 at an annualized pace of 2.7%, down from 3.2% on January 3. It will update its forecasts later today after the inventory numbers are published.

The US Dollar index opens in North America this Wednesday morning at 91.60.

 

 

 

After its great start to the New Year 2018, the Canadian Dollar has not done quite so well this week as investors start to question whether a lot of good news is already ‘in the price’ and whether a combination of two very good employment reports and a very upbeat Q4 Business Outlook Survey really does mean that a rate hike at next Wednesday’s BoC monetary policy meeting is a done deal. USD/CAD touched a low of 1.2375 last Friday but has been on a 1.24 handle ever since and yesterday touched a high of 1.2475.

As of today, five of the six major Canadian banks are forecasting a 25bp hike. The first point to make, therefore, is that a rate move is almost fully discounted in investor expectations and market pricing. We then need to look at risks. There’s realistically a zero probability of a 50bp hike, so the risk is BoC does nothing. A risk, of course, is not the same as a prediction though BoC Governor Poloz has previously spoken about the benefits of surprising financial markets rather than flagging its plans well in advance. It is enough to at least sow a few seeds of doubt in the minds of currency traders.

It’s also fair to say that energy prices are also helping support the Canadian Dollar. WTI crude overnight hit $63.41 as an industry report showed the biggest draw in US crude stockpiles for this time of year since 1999. The American Petroleum Institute reported domestic oil inventories tumbled by 11.2 million barrels last week. That was nearly triple consensus estimates and would be the largest draw for this time of year since 1999 if Energy Information Administration data later today confirms it.

We’ll get to see data on Canadian building permits this morning and new house prices tomorrow. Ahead of all this, the Canadian Dollar opens in North America this morning at USD1.2440, GBP/CAD1.6865 and AUD/CAD0.9775.

 

 

After two poor days on Monday and Tuesday, the EUR has rallied in Europe this morning following the Chinese comments on purchases of US Treasuries. On Tuesday in New York, EUR/USD fell to a 2018 low of USD1.1919; its lowest since December 28th and had barely recovered 20 pips to 1.1935 in Europe this morning before suddenly jumping more than half a cent on the China news.

It remains to be seen whether the move can be sustained. It may well be the case that US bonds are unattractive relative to other assets but exactly the same can be said about Eurozone bonds. 10-year US Treasuries may have hit 2.58% today but their German equivalents yield only 0.53%. For sure this is still well above the December lows of 0.30% but the differential with the United States is back over 200bp at the 10-year maturity.

Though ECB Council member Ewald Nowotny said in an interview published on January 2nd that QE could end in 2018 if the euro zone economy continues to grow strongly and on Sunday, the Bundesbank’s Jens Weidmann said the ECB should set a date to end QE, the market is still not fully pricing a rate hike until early 2019. Strong economic data are certainly helping the EUR but the yield differential is now creating quite a headwind for the exchange rate against the US Dollar, notwithstanding today’s comments by Chinese officials.

The EUR opens in North America this Wednesday morning at USD1.2010 and EUR/CAD1.4940.

 

 

The pound generally struggled on Tuesday and ended the day the second-weakest of the major currencies after the euro. Overnight in Asia this morning it was bottom of the pile; down against all the currencies and made a fresh 2018 low of 1.3486 before jumping half a cent on the Chinese comments about buying US binds. It is interesting to note, however, that even after reaching 1.3555, the pound is little changed from Tuesday’s close and sits only very slightly above the US Dollar at the bottom of the one-day performance table.

After the poorly-received Government reshuffle, those Ministers who kept their jobs are back at work. Two of them with the highest profiles – the Chancellor of the Exchequer and the Minister for Exiting the EU - are in Germany today to make a direct appeal to business leaders to help secure the future of Britain’s financial services within a Brexit deal. They said they were seeking a bespoke deal with the EU described as “the most ambitious in the world that should cover the length and breadth of our economies including the service industries — and financial services”.

In a joint article for the German newspaper Frankfurter Allgemeine, Philip Hammond and David Davis argue that Britain and Germany should use “imagination and ingenuity” to craft a “bespoke solution” to maximise economic co-operation. The EU’s Brexit negotiator Michel Barnier warned the UK last month, however, that “There is no place for financial services. There is not a single trade agreement that is open to financial services. It doesn’t exist.” Yesterday he said that, “Britain’s financial services cannot benefit from a passport in the single market nor from a system of generalised equivalence of standards”. This issue is not just a debating point, it is key to whether the UK can make a success of its post-Brexit status. The Pound’s fortunes should closely track the progress that either side makes in the negotiations around the inclusion of financial services in a new free trade agreement.

The British Pound opens in North America this morning at USD1.3555, CAD1.68460 and AUD1.7250.

 

 

The Australian Dollar didn’t have a great day on Tuesday though it did manage a 10th consecutive day on a US 78 cents ‘big figure’. It also struggled in Asia overnight todaydespite a very good set of job vacancies numbers with AUD/USD printing a low of 0.7810. For much of the London morning it languished in the low 78’s before rallying in line with all the other major currencies on the reported Chinese comments about buying of US Treasury bonds. It hit a high of USD0.7861 and AUD/CAD0.9773.

As for the economic numbers, job vacancies in Australia climbed to their highest on record in the three months to November, a sixth straight quarter of gains. Total job vacancies rose 2.7% to 210,300 in the Sep-Nov quarter, from 204,800 in the previous quarter. That was the highest reading since the series began in 1979 and left vacancies a healthy 16 percent higher than a year earlier. Vacancies in the private sector climbed 3.8% to 192,000, again the highest on record. That was up 17.3% on the previous year. In contrast, public sector vacancies fell back 7.6 % in the November quarter to 18,300.

The AUD opens in North America this morning at USD0.7855 with AUD/CAD at 0.9775 and AUD/NZD1.0890.

 

 

Once again, the New Zealand Dollar was top of the one-day performance table on Tuesday. It has now topped the table for three of the past four trading days even though, once more, there was no domestic economic or political news to drive the currency. The flightless bird has had another good day thus far on Wednesday, reaching a high in the London morning of USD0.7216; the first time it has been on a US 72 cents big figure since way back on October 1st.

On the basis that ‘if there’s nothing to say, then don’t say it’, our NZD commentary will necessarily be somewhat shorter today. After extensive research using a popular internet search engine, we could reveal the most rejected baby names in New Zealand in 2017 (spoiler alert: Royal and Prince) or two New Zealand rugby players have failed drugs tests but these are literally the top stories in the news. Other than that, absolutely nothing of interest.

There’s no economic news scheduled for release locally on Thursday though we will get the first private sector numbers of the year with the QV house price data and ANZ job advertisements. The official statisticians told us on Tuesday that there are an estimated 1,734,800 households in New Zealand and 1.855,500 private dwellings but there are no market-moving data until well into next week.

The New Zealand Dollar opens in North America this Tuesday morning at USD0.7215 with NZD/CAD at 0.8975.