US Dollar ekes out modest gains on strong data and FOMC Minutes
With gold hitting its highest level since September 15th at $1320 per ounce in Asia yesterday, the AUD has continued to meet with solid investor demand in these first few trading days of 2018. AUD/USD reached a high in the London morning on Tuesday of 0.7842; its highest since October 20th. On Wednesday, after an overnight sell-off it to 0.7807, it got back to 0.7840 and has been on a US 78 cents big figure for all but a few minutes of this first week of the New Year.
The big question now is whether yesterday’s US Dollar bounce can be extended and if so, what might it mean for the performance of industrial and precious metals which have recently drawn lots of investor attention? Gold futures rose for 12 of the last 13 days up until Wednesday and were up for the last 9 in a row; the longest winning streak in more than 6 years. This run came to an end after the latest FOMC Minutes were published, with the yellow metal down almost $10 per ounce.
Taking a longer perspective, gold has risen in January for 9 of the last 12 years with an average gain of just over 4%. The spot price is now above all of its 20, 50,100 and 200 day moving averages and with President Trump having taken to Twitter to boast about the size of his big red nuclear button, traders who have been watching the meteoric rise of Bitcoin over the last few months were said to be turning to a safe haven which at least they feel they understand and have access to in their regular dealing accounts.
Whilst this explains the recent rise in commodities, it leaves unanswered the question of whether it can continue. If not, and in the absence of any improving domestic fundamental news in Australia, it might leave AUD/USD vulnerable to a spell of profit-taking which hasn’t been seen at all thus far during its rise from 0.7505 back on December 8th.
The next local economic data to be released are the performance of services index this morning and the more important November trade figures on Friday. The AUD opens in Sydney this morning at USD0.7825 with AUD/NZD at 1.1040 and AUD/CAD0.9825.
AUD / NZD
Expected Range: 1.0980 – 1.1075
The New Zealand Dollar has largely kept pace with the Aussie Dollar over the last couple of weeks but is just starting to show some signs of under-performance with the AUD/NZD cross edging up to a near 1-month high of 1.1040 overnight. Having reached a high in the London morning on Tuesday of 0.7125, the NZD/USD pair is also struggling to hold on to a US 71 cents big figure.
Just as for its Aussie cousin, the NZD may need the support of improving macroeconomic data both at home, in China and the broader APEC region if its recent gains are to be sustained. There’s no domestic economic data scheduled for release until January 9th, however, and if the USD shows any sign of a turnaround, the NZD could be vulnerable to a bout of profit-taking from recently-acquired long positions.
It’s certainly a long time until the next RBNZ Board meeting on February 8th and they’ve already signaled there’s no hurry to be raising interest rates. The last published forecast doesn’t have a rate hike penciled in until the middle of 2019 and though the new Treasurer has successfully avoided being pinned down on his preferred level for the NZD, it’s hard to imagine with continued subdued core inflation that the Government would prefer anything other than a somewhat weaker exchange rate.
The New Zealand Dollar opens in Asia this morning at USD0.7090 with AUD/NZD at 1.1040.
GBP / AUD
Expected Range: 1.7220 – 1.7350
The pound got off to a very good start to the New Year 2018 on Tuesday and by the London opening on Wednesday it extended its gains further to reach USD1.3608; its highest since the day after the EU referendum back in June 2016. From that point on, however, it was downhill all the way and the pair tumbled more than a full cent, with the pound losing ground against every one of the major currencies we track here.
The latest UK PMI construction numbers were certainly disappointing, and the year finished in a downbeat fashion. The headline index fell to 52.2 in December from 53.1 as a robust rise in residential building contrasted with falling work on commercial projects and stagnating civil engineering output. Survey respondents indicated that house building remained a key engine of growth, with residential work expanding for the sixteenth consecutive month in December. In contrast, latest data indicated a moderate fall in commercial construction, thereby continuing the downward trend seen since July. Civil engineering work stabilised during the latest survey period, which ended a three-month period of decline.
As Markit noted in their Press Release, “construction firms indicated that longer term business confidence is still relatively subdued, largely reflecting concerns about the domestic economic outlook. 37% of the survey panel forecast a rise in construction activity over the course of 2018, while around 11% anticipate a reduction. As a result, the balance of UK construction companies expecting growth in the year ahead remains among the weakest recorded by the survey since mid-2013”.
Ahead of the PMI service sector index on Thursday, the pound opens in Asia this morning at USD1.3510, AUD1.7255 and CAD1.6955.
AUD / USD
Expected Range: 0.7780 – 0.7860
After almost three weeks of steady but relentless selling which took its index against a basket of major currencies down from 93.80 on December 12th to a low on January 2nd of 91.44, the US Dollar finally found support in the Northern Hemisphere yesterday. It wasn’t just about the economic data (see below) as the USD turned higher before the latest US numbers were released. By the end of the London afternoon, however, the Dollar Index had moved up to a high of 91.88 and after the FOMC Minutes were published, it managed to push a little higher still.
We noted here yesterday that “the dollar is falling because it is falling.... The technical tail is wagging the fundamental dog.” Yesterday the dog regained the initiative and we’d note, too, that it marked exactly the one-year anniversary of the last major long-term USD turnaround on January 3rd 2017.
The solid economic news began with the December ISM manufacturing survey which rose to 59.7 from 58.2, above the consensus forecast for an unchanged 58.2. very encouragingly, the New Orders Index registered 69.4; an increase of 5.4 points from the November reading of 64.0. Comments from the panel reflected expanding business conditions, with new orders and production leading gains; employment expanding at a slower rate; order backlogs expanding at a faster rate; and export orders and imports continuing to grow in December.
Away from manufacturing, November construction spending rose a stronger than expected 0.8% after a +0.9% gain in October and was the fourth consecutive monthly increase. The November rise was led by a solid advance in homebuilding and a 4.8% post-hurricane leap in spending on home improvements. Non-residential construction rebounded 0.9% in November after declining four of the last five months, led by office building, which rose 5.5%.
Later in the US afternoon, the Minutes of the December FOMC Board Meeting were published. As ever, there’s something for everyone in these and you can always find a wide spread of views expressed. Some members said a faster trajectory of rate hikes may be needed whilst several officials were concerned by low inflation expectations. A couple were concerned by financial stability risks but most backed gradual rate hikes. The main takeaway, though, is that the two dissenters will not be voting members in 2018 and the market-derived probability of a March rate hike has gone up from 56% to 67%.
The US Dollar index opens in Asia this morning at 91.85; up around 40 pips from its recent low.
AUD / EUR
Expected Range: 0.6480 – 0.6540
After a year in which the euro was the best performing of all the major currencies, it got off to a flying start in 2018; with a high on Tuesday morning of 1.2077; the highest in over 3 years. It couldn’t sustain its very positive momentum throughout the day and finished in New York around 30 pips below its best level. On Wednesday the pullback continued, with a day’s low in the European afternoon of just 1.2006.
The modest pullback in the EUR comes despite a very good set of German labour market data. The seasonally adjusted jobless total dropped by 29,000 to 2.442 million; more than double the 12,000 consensus forecast. December's unemployment rate was 5.%, the same as a revised reading for November and the lowest level since German reunification in 1990, the office said. In 2017 as a whole, the rate fell to 5.7% from 6.1% the previous year. The detailed numbers showed Germany's workforce expanded last year to a record 44.3 million, whilst the Labour Office said there were 761,000 job vacancies in December, suggesting companies are struggling to find skilled workers quickly.
Of course, whilst the German data are very impressive, they have rather lost their power to surprise on the upside, given that expectations are already so elevated. Ahead of Eurozone aggregate and individual countries’ PMI services reports, the EUR opens in Asia this Thursday morning at USD1.2020, AUD/EUR0.6515 and NZD/EUR0.5905.
AUD / CAD
Expected Range: 0.9760 – 0.9860
Having USD1.2500 (or 80 US cents when quoted the other way round) for the first time since October 20th on Tuesday, the Canadian Dollar paused yesterday even as oil prices extended recent gains. USD/CAD spent most of the day in a 1.2505-1.2540 range.
Both Brent crude oil and US benchmark West Texas Intermediate rallied yesterday as the political unrest in Iran (the third largest OPEC producer which pumps around 3.8m barrels per day) came into focus. Brent crude reached $67.62 – up more than 1.5% on the day before easing slightly. WTI rose 1.8% to $61.52, a level not seen since June 2015.
Meantime, the cold weather intensifies across North America. Winter Storm Grayson, a very large and powerful weather system is threatening the East Coast of the United States with heavy snow, intense winds, and record-setting low temperatures. The cold front has sent temperatures below freezing in more than 92% of the Continental United States. Winter storm watches and warnings have been issued for many coastal regions in north Florida to Maine from Wednesday into late Thursday. Hurricane-force wind warnings, meantime, have been posted off the coast of North Carolina where ships could encounter winds of 80 miles an hour and waves as high as 26 feet on Thursday.
The really big test for the CAD will come with December’s employment report on Friday. Before then, the Canadian Dollar opens in Asia this morning at USD1.2540 with AUD/CAD at 0.9825 and NZD/CAD at 0.8900.
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