Daily & Weekly Market News

Get access to our expert weekly market analyses and discover how your currency has been tracking with our exchange rate tools.

US steadies after sharp January drop. President Trump arrives in Switzerland. ECB meeting today is key for EUR.

By Nick Parsons

January isn’t finished yet but the USD index against a basket of major currencies has now fallen over 3 per cent; its worst start to any year since 1987. Wednesday was the worst day in 10 months for the USD which began at a 37-month low around 89.70 and fell without interruption to a fresh low this Thursday morning of 88.50.

Somewhat predictably after the damage done yesterday, Treasury Secretary Mnuchin at a news conference at the World Economic Forum in Davos, today played down his comments that a weaker dollar was “good for us as it relates to trade and opportunities”. Mnuchin told reporters, “I thought my comment on the dollar was actually quite clear yesterday. I thought it was actually balanced and consistent with what I’ve said before, which is, we are not concerned with where the dollar is in the short term.” Mnuchin said there were “both advantages and disadvantages of where the dollar is in the short-term” and stressed that the United States wanted fair economic competition. “We want free and fair and reciprocal trade. So, I think it’s very clear. We’re not looking to get into trade wars. On the other hand, we are looking to defend America’s interests.”

Airforce One touched down at Zurich airport earlier this morning and President Trump is scheduled to address the WEF on Friday morning local time. The President himself said last August that, “the dollar is getting too strong” and the currency world will be watching to see if he aligns with or distances himself from this talk of trade war. US economic data out today on the trade balance, wholesale inventories and the trade balance are an irrelevance when set against the broader geopolitical and macro backdrop.

The US Dollar index opens in North America this morning at 88.75 with US 10-year bond yields unchanged at 2.64%.

 

 

As the USD has tumbled, so USD/CAD has moved lower. Wednesday, it fell below the immediate post-BoC low of 1.2375 and went on to an intra-day low of 1.2320; its weakest in exactly 4 months. When quoted the ‘other’ way round, then as USD/CAD hit 1.2345, the Canadian Dollar moved on to US 81 cents for the first time since September. Overnight in Asia, USD/CAD has extended losses to just below 1.23 though it needs to reach 1.2195 to be back on 82 US cents.

All negotiators like to claim victory, and there has been no shortage of Canadians lining up to take credit for the CPATPP. International Trade Minister François-Philippe Champagne said his country got a better deal than the one the other nations wanted to sign back in November. "When we were in Danang we stood up for Canada. We said for this agreement to work for Canada we need to address specific issues," he said. "You saw that we were forceful in our position and since then we have worked to get agreements with our partners, notably on the cultural sector ... to protect, defend and promote out culture across Canada."

With NAFTA representatives already embarked on sixth round of talks in Montreal, they at least know Canada and Mexico are signing free trade deals with large new markets in the Pacific Rim though more immediately important for CAD currency traders – who will be digging out their charts to see that last September’s low was USD/CAD1.2104 – are November retail sales data this afternoon and then Friday’s CPI numbers. Consensus estimates are for retail sales to be up +0.7% m/m with the core, ex-autos number up +0.8%.

The Canadian Dollar opens in North America this morning at USD1.2320 and GBP/CAD1.7575.

 

 

The euro couldn’t quite match the strength of the British Pound but it had another strong day on Wednesday, rising to USD1.24 for the first time since December 2014. Overnight it has extended the rally to a best level around 1.2455 before a bit of profit-taking ahead of today’s key ECB meeting.

Whilst the ECB worries about whether EUR strength will hinder progress towards its inflation objective by weighing down on the cost of imported raw materials and forcing exporters into more cost-cutting to remain internationally competitive, it seems to be doing no harm at all to the broader Eurozone economy. The ifo Business Climate Index out this morning rose to 117.6 points in January from 117.2 points in December. This was due to far better assessments of the current business situation, with the sub-indicator hitting a record high. Business expectations for the next six months, by contrast, were slightly scaled back, but remain at a high level. As the ifo puts it, “the German economy made a dynamic start to the year.”

In Davos, German Chancellor Angela Merkel and French President Emmanuel Macron both did the ‘vision thing’, most especially Ms. Merkel who reminded delegates that 2018 marks the 100th anniversary of the end of the first world war. The political actors a century ago ‘sleepwalked’ into a crisis, Merkel said. “This generation born after the second world war will have to prove they have learned the lessons of history. That means remaining committed to multilateralism, working together to solve problems”.

Today is the first ECB Council Meeting of the year, with President Draghi giving his regular Press Conference at 8.30am Eastern Time. Given the very strong upward momentum in the Eurozone economy, it is very hard to see how he can credibly warn against currency strength and argue for negative interest rates to be maintained until well into next year. This won’t stop him trying and he is a past master at finding new turns of phrase to keep markets where he wants them. It should be a fascinating but potentially very volatile day ahead.

The EUR opens in North America this morning at USD1.2405 and EUR/CAD1.5290.

 

 

The pound has continued its remarkable run which has seen GBP/USD rise for 10 consecutive days without breaking the previous day’s low. From the day the ECB dropped its bombshell about possibly changing the language around forward guidance of monetary policy on Thursday January 11th, (ironically in an attempt to smooth market volatility) GBP/USD has risen almost 9 cents; its biggest 10-day gain since June 2009. In London trading earlier this morning, the pound moved higher still and hit a best level of 1.4325 before then slipping around half a cent.

In an interview with Bloomberg Television in Davos, UK Chancellor of the Exchequer Philip Hammond said, “We’re very happy with where the currency is at the moment… Getting the inflation rate down - and a rising pound helps to do that - helps to drive increases in real wages, and that’s good for our economy and good for our society,” he said.

In economic news today, mortgage approvals by Britain’s banks fell to their lowest level since April 2013 in December, according to trade association UK Finance. Banks approved just 36,115 mortgages for house buying, down from 39,007 in November and 19% lower than a year ago. The RICS survey last week was consistent with even lower levels of activity in this first quarter of 2018. Separately, the CBI’s latest distributive trades survey, showed UK retail sales at a slower pace than anticipated. The survey showed a balance of +12 for January, down from +20 in December. Sales for the time of year were the weakest compared to the norm for more than four years. Orders to suppliers also fell, and looking ahead retailers expect similar growth in sales volumes while orders are forecast to be flat.

For the moment at least, weaker UK economic numbers don’t seem to matter to currency traders. The British Pound opens in North America this morning at USD1.4255, CAD1.7560 and AUD1.7655.

 

 

As the US Treasury and Commerce Secretaries pulled the rug from under the USD on Wednesday, the Aussie Dollar traded up to a high of USD0.8080; taking it above last September’s peak and to the best level since January 2015 when it was around three-quarters of the way through its multi-year decline from an all-time high around USD1.10 to just 70 cents. Early this morning in London, AUD/USD almost hit 0.8120 before then easing back around half a cent.

According to a very upbeat article in The Australian today, the country is expected to see an increase in income of up to 1% of GDP from the new Comprehensive and Progressive Agreement for Trans-Pacific Partnership, which would reduce 98% of all tariffs between member countries. The sectors that stand to benefit the most are beef, dairy, sugar, grain, seafood, manufactured goods, and services industries. The Australian Meat Industry Council has backed the deal, claiming it will create greater opportunities for the red meat industry. To cite just a couple of examples, the newspaper notes that Canada and Mexico currently have import tariffs of 25% on beef but these will be reduced to zero over the next 10 years. Mexico has pledged to abolish its 115% tariff on barley within 5 years and its 67% tariff on wheat within 10 years.

The AUD opens in North America this morning at USD0.8075 with AUD/CAD at 0.9950 and AUD/NZD1.0955.

 

 

The NZD on Wednesday rose to a high of USD0.7433; the first time it has been on a US 74 cents ‘big figure’ since early-August 2017. Overnight in Asia, however, it suffered a very sharp reversal as the long-awaited quarterly inflation numbers fell well short of consensus expectations. NZD/USD immediately tumbled a full cent to around 0.7325 before then recovering just under half these losses.

The median published estimates were for a quarterly increase in CPI of 0.4% which would have left the annual rate at 1.9%. Instead, StatsNZ reported that prices rose just 0.1% in the December 2017 quarter. Higher petrol prices, air fares, and housing-related costs were offset by lower prices for vegetables, new cars, and a range of household goods. The relatively flat result this quarter leaves the CPI inflation rate at 1.6% for the December 2017 year.

In its last published monetary policy assessment back in early November, the RBNZ saw inflation reaching 2 percent in Q2 2018 as opposed to Q1 2019 which they had previously forecast. It also said it no longer sees headline inflation declining. As that forecast now heads to the shredder, analysts have been quick to revise down their interest rate expectations. ANZ, for example, said the data, coupled with their belief the “economy is set to go through somewhat of a near-term growth wobble”, have pushed its expectations for the Reserve Bank of New Zealand to hike the official cash rate back from November 2018 to mid-2019.

The New Zealand Dollar opens in North America at USD0.7375 with NZD/CAD at 0.9085.