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USD steadies as 10y bond yield hits 2.80%. Non-farm payrolls could trigger further volatility in stocks, bonds and FX markets.

By Nick Parsons

The US Dollar fell again on Thursday, and though its index against a basket of major currencies didn’t quite make a fresh low for 2018, it was a very close-run thing. Immediately after Treasury Secretary Mnuchin’s comments in Davos last week, the index fell to 88.21. Yesterday it printed at 88.28 before a very modest rally overnight lifted it off the lows. With all eyes on US non-farm payrolls this morning and equity markets now becoming very sensitive to the rise in bond yields, the USD index sits just below 88.60.

Whatever the many reasons analysts advance for the US Dollar’s decline – and many of them would sound more convincing if they had been made before it happened rather than afterwards – the performance of the US economy certainly isn’t one of them. Weekly jobless claims slipped 1,000 to 230,000 for the week ended January 27th. This was the 152nd straight week that claims remained below the 300,000 threshold; the longest such stretch since 1970. Separate numbers showed construction output rose almost twice as fast as expected with a +0.7% m/m gain whilst the January ISM manufacturing index dipped very slightly to a higher than expected 59.1 from a revised 59.3. This marked the 105th straight month of growth for the overall economy. After this latest batch of economic data, the Atlanta Fed published updated estimates of its Q1 GDP forecast. Its first estimate was an already-punchy 4.2% but this has now been pushed up to 5.4%; the highest since Q1 2012.

The big event of the day today is the January labour market report. Most major bank forecasts for non-farm payrolls centre on 180-190k after a very soft December print of just 148k. The unemployment rate is expected unchanged at 4.1% whilst annual growth in average earnings – which is probably far more important for Fed policy, the bond market and the dollar – is seen at 2.5-2.6%. There’s usually plenty of volatility immediately after the payrolls numbers but today could be even worse: the Bureau of Labour Statistics will be publishing its annual revisions to the payroll survey which often result in material adjustments to the historical data. The USD index opens in North America this morning at 88.60 as 10-year bond yields hit 2.80% for the first time in this cycle.

The Canadian Dollar is still anchored pretty solidly on a US 81 cents big figure and will remain so as long as USD/CAD stays below 1.2345. Yesterday evening, this pair extended the recent move down to 1.2260; a level not seen since late-September last year. During the European morning as the USD has recovered somewhat, USD/CAD has just clawed its way back on to 1.23 and we now await the monthly coin-toss on US non-farm payroll figures.

The latest Canadian economic numbers are certainly impressive. Manufacturing PMI picked up to 55.9 in January from 54.7 in December as manufacturers reported a strong start to 2018, underpinned by faster rises in output volumes, new business intakes and staff recruitment. There were also signs that the resurgence in production schedules would continue in the months ahead, with incomplete workloads accumulating at the fastest pace since the survey began in October 2010. Improved demand conditions and sharp input cost inflation meanwhile led to the largest increase in factory gate prices for almost seven years. An incredibly upbeat Press Release noted, “The manufacturing sector is beginning to show signs of firing on all cylinders, as shown by the broad-based improvement in operating conditions during January… Canada’s manufacturing sector has now seen resurgent new business flows for three months running, underpinned by greater sales at home and abroad. Well balanced demand growth and an ongoing improvement in global economic conditions should help manufacturers sustain a strong rate of expansion in the coming months”.

There are no more Canadian numbers to come this week, which is probably a good thing as there don’t seem to be any superlatives left after the PMI report! The Canadian Dollar opens this morning in North America at USD/CAD1.2310, AUD/CAD0.9825 and GBP/CAD1.7495.

The EUR dipped once more below USD1.24 early yesterday morning but since then it’s been on an upward charge; rising a full cent off the low to be within touching distance of the 3-year high of 1.2530 reached during the ECB Press Conference last week. Indeed, the EUR finished at the top of our one-day performance table on Thursday, rising against all the major currencies we track closely here. During the European morning, the EUR has slipped back below 1.25 as traders square their positions ahead of the monthly lottery of US non-farm payroll figures.

ECB Executive Member Benoit Coeure has certainly been testing the limits of his travel bookers. On Wednesday he was in Dublin and this morning he’s been speaking at the conference “Deepening of EMU” in Ljubljana, Slovenia. By its very nature, the speech was long-term and focused on the overall framework of institutional arrangements rather than anything immediately market-specific. Nonetheless, he did make the observation that, “Flexible markets form the first line of defence. They are indispensable for a currency union. They reduce the need for macroeconomic stabilisation and curb contentious debates about crisis management. Markets that can absorb shocks efficiently do not waste costly political capital. And they create more policy space in downturns, for both fiscal and monetary policy”. He didn’t need to mention Steven Mnuchin by name!

The calendar for the week ahead in the Eurozone is packed with ECB speakers, whilst on Wednesday the European Commission will be releasing updated economic forecasts. Before then, on Monday we’ll get to see the service sector PMI’s across the Eurozone. For today, the EUR opens in North America at USD1.2495 and EUR/CAD1.5375.

As recently as Tuesday morning, GBP/USD was below 1.4000 before then jumping almost 2 cents. After a half cent drop post-Fed, on Thursday it added nearly another cent to a high of 1.4275; its best level since the day of the ECB meeting last week. The overnight session in Asia was notable only for the relative calm – GBP/USD, EUR/USD and therefore GBP/EUR were all exactly where they were at close of business Thursday evening – but in Europe this morning the pound at last began to be weighed by poor data and political intrigue.

The UK Construction PMI posted 50.2 in January, down from 52.2 in December, reflecting a fractional rate of growth that was the weakest for four months. A return to contraction in residential building activity was accompanied by near-stagnant commercial and civil engineering activity. New orders declined, linked by many companies to market uncertainty after the collapse of major contractor Carillion last month. The rate of job creation eased to an 18-month low in line with the reduced growth of building activity. Whilst some firms hired additional staff in anticipation of future new project wins, others reported job shedding in response to lower workloads. Summing it up neatly, the Press Release was titled, “Construction output growth fades to near-stagnation in January”.

On the politics of Brexit, plenty of seemingly irreconcilable differences seem to be emerging. Yesterday the Prime Minister said that that EU citizens who arrive during the post-Brexit transition period must not have the same rights as those who came before. Sure enough, within a few hours, the European Parliament’s Brexit negotiator, Guy Verhofstadt, replied that, “The maintenance of EU citizens’ rights during the transition is not negotiable… We will not accept that there are two sets of rights for EU citizens. For the transition to work, it must mean a continuation of the existing acquis [EU law] with no exceptions.” Overnight, international trade secretary said Britain must “take control” by seeking trade deals across the world which are impossible within EU arrangements. “It’s very difficult to see how being in a customs union is compatible with having an independent trade policy. The weekend Press is unlikely to be kind to the government, the question is whether it will have any lasting impact on the GBP. The Pound opens this morning in North America at USD1.4225, GBP/AUD1.7810 and GBP/NZD1.9340.

During the European morning on Thursday, the AUD traded down on to a 79 cents handle for the first time in over a week. As has been the case with many currencies recently, though, just as they seem technically poised to break lower, there’s a sharp bounce higher. This is exactly what happened to the AUD with a quick half cent rally to 0.8045. Overnight in Asia, however, it has given back all yesterday’s gains and is now poised somewhat nervously just below 0.8000.

The RBA’s commodity price index increased by 7.1% in SDR terms in January, after increasing by 4.5% in December. Coking coal and iron ore prices led the increase, whilst the rural and base metals sub-indices also increased in the month. In Australian dollar terms, the index increased by 4.6% in January. Commodity prices were certainly one of the factors which helped the AUD rise last month, along with lower volatility across asset classes. We’ve already seen a big jump in volatility over the past few days and if commodities don’t sustain recent rises, then the outlook for the AUD will look much less positive.

The next big focus for the AUD will be what the RBA has to say – if anything – about the value of the currency when it sits down to its first Board meeting of the new year next Tuesday. Members will surely note in private that the AUD/USD exchange rate alone gives a misleading impression of overall currency performance as that pair is all about specific USD weakness. And, to the extent that commodity prices are higher, it is hard to see the overall level of the AUD as either unjustified or unwelcome. They might well choose to say nothing at all in public, though it probably wouldn’t take much to knock the AUD lower from here if it can’t hold the psychological US 80 cents level. The Australian Dollar starts in North America this morning at USD0.7990, with AUD/NZD at 1.0860 and AUD/CAD0.9830.

The New Zealand Dollar has done pretty well after its mauling a week ago. It only briefly got back on to a US 74 cents big figure and hasn’t been able to sustain that level but at USD0.7360 it is still higher than it was after the CPI figures were released. Against the Aussie Dollar its’ performance has been far more impressive. As recently as Monday, the AUD/NZD cross hit a 7-week high of 110.70. It has fallen steadily this week and overnight hit a low of 1.0850; below where it was before the soft NZ CPI figures last Wednesday evening and the best level for the NZD in exactly 3 weeks.

The official statisticians today released their net migration numbers. Annual net migration in the December 2017 year numbered 70,000. Migrant arrivals were 131,600 and migrant departures were 61,600. This was down from 70,600 in the December 2016 year, a drop of about 600. Migration saw a net gain of 71,100 non-New Zealand citizens and a net loss of 1,000 New Zealand citizens in the December 2017 year. Migrant arrivals were mostly from Australia (20 percent), United Kingdom (12 percent), and China (10 percent). Three in every five migrant arrivals from Australia were returning New Zealand citizens. Most migrants arrived in New Zealand on work and student visas. Arrivals on work visas rose 11 percent in the year ended December 2017. The largest increases in work visas were from the United Kingdom and the Philippines.

Separate figures showed in the last calendar year 3.73 million people visited New Zealand, 6.7% more than in 2016. Just over half of these overseas visitors were holidaymakers, and 30% travelled to New Zealand to visit friends and family. New Zealand residents took a record 2.9 million trips overseas in 2017, 9.3% more than in 2016. New Zealanders holidaying overseas accounted for 44 percent of all resident departures. Australia was the top source of visitors and the top destination for New Zealand-resident travellers in 2017. Over the year, 40% of overseas visitors were from Australia and 45% of all trips by New Zealand residents were to Australia. The second-highest source of visitors was China (11 percent). No wonder there’s such interest in the AUD/NZD exchange rate! The New Zealand Dollar opens this morning in North America at USD0.7360 and NZD/CAD0.9055.