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The US dollar gains after news of waning optimism among U.S. businesses

By OFX

The US dollar index increased around 0.15 percent after the release of the “beige book” report from the Federal Reserve in yesterday’s trading session. The report compiles information from business contacts in each of the central bank’s 12 districts. This release showed waning optimism among U.S. businesses as they face the government shutdown, trade disputes, higher borrowing costs, and a volatile stock market. It is normal to see that the American economy continues to grow, but some firms are pulling back on planned investments for 2019, according to the Fed. On top of that, the Fed linked rising student debt to a drop in home ownership among young Americans. This, along with the flight of college graduates from rural areas, were two significant shifts that have helped reshape the U.S. economy.

In contrast, some US dollar pairs were trading at new highs, especially Emerging Market currencies such as the Thai Baht, South African Rand, Chilean Peso, and Mexican Pesos. Fed policy is the main reason for the pause in policy normalization.

The USD/CAD continues rising in slow motion without economic data from yesterday or today. The only driver of the Loonie these two days are the US dollar and the crude oil prices. The next significant economic data release will happen tomorrow where the consumer price index for December is expected to show 1.7 percent year to year, and the core CPI is expected to show 1.9 percent year to year.

The USD/CAD pair is rising strongly by 0.47 percent (weaker Loonie) this morning, which is testing an intraday high of 1.3319. This is amid an almost 2 percent decrease in crude oil WTI prices due to American crude oil production. During the week ending January 11th, this production was the highest national output in the world, and it was a record in the week according to the Energy Information Administration (EIA). Furthermore, the mood in the North American equity market is negative, which does not help the Loonie to appreciate. Today’s negative market sentiment is being driven by Morgan Stanley’s results and its miss of estimates in its earnings release.

Yesterday, the ECB's Villeroy and Nowotny both spoke in a relatively quiet day for European markets. Villeroy stated that any rate increases from the ECB would depend on economic development, while Nowotny talked about how there is no danger of a recession in the Eurozone. This is interesting because Germany could find itself on the brink of a downturn come February when its Q4 GDP numbers are released. Warning about recessions always suggests that there are some underlying concerns.

For the ECB and Mario Draghi himself, it would appear that they are in no rush to hike rates any time soon, but the ECB may have missed the boat entirely when it comes to normalizing rates. We may go through an entire economic cycle without any tightening from the ECB and Draghi at all.

The EUR/USD pair is trading sideways this morning between 1.1375 and 1.1425.

The GBP/USD pair is trading at 1.2910, an increase of 0.24 percent this morning. Markets and the Pound breathed a sigh of relief last night as Prime Minister Theresa May survived the vote of no confidence brought against her government by opposition leader Jeremy Corbyn. In many ways, the events last night highlight many interesting points. Firstly, the Pound does not want a general election. For the last two or so years, the discourse around Pound strength has been around a ‘soft’ Brexit, because it brings consistency and certainty. The same can be said for the current government, and clearly, investors do not want the added uncertainty of a general election. Secondly, from the outset, it seems that the result of the vote was highly anticipated and while the margin was only 19, all MPs voted along party lines, and May’s victory was all but inevitable after the Dup and influential ERG backed the PM. This begs one final point, why did the leader of the opposition bring forward the motion of no confidence if the numbers were so stacked. Moving forward, the Prime Minister now has until Monday to knock out a plan B.

The AUD/USD pair is trading at 0.7155 this morning, a 0.16 decrease. The Aussie dollar looks like it will end the week on the back foot as Westpac’s Consumer Confidence survey fell by 4.8 percent in at the start of the year. Indeed the survey came in below the magic 100 level for the first time since November 2017, and the ‘cautious optimism’ that went through 2018 seems to have evaporated at the turn of the year.

The New Zealand dollar is also struggling overnight. Real estate figures are disappointing, reminding investors of the strain in the global economy at the moment, which is directly impacting New Zealand and the Kiwi. Next week CPI figures for Q4 will be the highlight for the New Zealand dollar.

The NZD/USD pair is trading at 0.6729, a 0.70 percent decrease.