The WorldFirst Team take a look at the key trends of January and consider the many diverse events set to shape global currency markets in February.
AUD – +1c, +1c, +1c…
Month in review
With strong domestic data and USD weakness, it has been a robust start to 2018 for the AUD. We’ve seen gains in excess of 3c, the best single month performance since July last year and the first time we have breached 80c since September 2017.
AUD started with a bang as building approvals rose by a stunning 11.7% on the month, compared to an expected fall of 1.3%, followed by retail sales growing 1.2% – the highest growth in five years.
Meanwhile, US filings for unemployment benefits unexpectedly rose to a three-month high. The labour department stated initial claims increased 11,000 to a seasonally adjusted 261,000 for the week ending January 6, putting it at the highest level since late September.
Also getting us to the brink of the 80 resistance barrier were the “phenomenal” job figures. 34,700 new jobs were created in December against the expected 13,200. Followed shortly by the temporary US government shut down before the USD slipped further in response to recent import tariffs and comments from the Trump team on trade – the latter helping the AUD/USD breach the 81c mark momentarily.
Australians are suddenly confident about where the economy is heading amid the recent AUD/USD gains – a chart released from ANZ demonstrated that consumer confidence is at its highest level since 2013 – a sharp turnaround from near nine year lows only six months ago.
Whether we can continue to see this growth remains to be seen, however, if we maintain our current strength, all eyes will be on the 82c barrier, as it has been over two and a half years since AUD/USD has been so strong.
Retail sales and the RBA’s opening rate statement of the year on the 6th of February are likely to be the first significant market impactors domestically for next month, with investors ready to react to any information regarding possible rate hikes. With the RBA’s comfortability for the AUD/USD being closer to 75c (as to provide a balance for both importers and exporters) it will be interesting to see if they take a more dovish approach to any statements regarding a possible rate hike in 2018, in attempt to bring the AUD back down despite the market currently pricing in around a 70% chance of an interest rate hike towards the back end of the year.
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GBP – Support for Sterling grows ahead of a testing month for BoE
Month in review
It’s been an interesting close to 2017 for the UK economy overall, with Brexit talk dominating the UK financial markets throughout – something that market participants have become well accustomed to. Recently, Bank of England Governor, Mark Carney, come under fire from the House of Lords over the Bank’s forecasts ahead of Brexit, saying they correctly showed the economy would suffer.
Carney indicated that the forecasts predicted a sharp decline in sterling, a rise in inflation and a slowdown in growth, all of which we have seen in the past couple of months. Inflation continues to put pressure on the UK household as it remains at a record high of 3%, well above the Bank’s 2% inflation rate target.
If we take a closer look at Sterling over the past month, and in particular against the Euro, there have been signs of support for the struggling pound. EUR/GBP tested over 89p at the start of the year, however, support has been shown for the pound since then with support levels just above 87p mid-January. A similar looking picture against the Aussie Dollar with resistance levels breaking 0.58 only to show a heavy bid on Sterling taking the currency pair to levels as low as .5615.
One currency pair worth keeping an eye on for February is GBP/USD. We continue to see support for the Greenback here, with a continuous upward trend from 1.35 at the start of the year to a new yearly high above 1.4270. Price action for the month ahead remains relatively low given no change is expected on the BoE rate decision, however, if we do see a reduction in inflation, this could support the Sterling. Brexit negotiations will continue to influence the GBP throughout the month.
On the 8th of February, the Bank of England will release their Interest Rate decision with no change expected to the current base rate of 0.5%. Inflation figures will be released on the 13th February. This is something the Bank will be keeping a close eye on. There is no expected change on the current 3% figure, however, a reduction could see support for the pound.
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USD – falling on hard times
Month in Review
The US dollar is off to its worst start in 21 years, with the USDX (US Dollar Index) at December 2014 lows pushing past the key ‘90’ level of resistance. The greenback fell against every G-10 currency, faring worst against the Norwegian Krone and Swiss Franc.
The sell-off in the USD has come off the back of dovish comments from U.S. Treasury Secretary Mnuchin about the benefits of a weaker dollar and protectionist moves by Trump imposing new tariffs on a range of goods. However, the anticipated end of QE in Europe and Japan has also contributed to the sell-off with several bond market yields moving from negative to positive territory.
Trump will deliver his first State of the Union address to Congress on Tuesday. Traders will expect the political grandstanding over the successful tax reforms and share market returns, however, more importantly, will be focused on any details surrounding the infrastructure bill and future trade relations.
The first meeting for the FOMC takes place on Wednesday, however, is unlikely to be a material driver of the USD. This will be the last FOMC meeting led by Fed Chair, Janet Yellen.
Once the dust has settled after the State of the Union Address, the USD sentiment is likely to be driven by data releases. The headline PCE (Personal Consumption Expenditure) price index is projected to have increased 0.1% on the month (1.7% y/y) and core PCE to have risen a strong 0.1% m/m (1.5% y/y) in December. The ECI index (Employment Cost Index) due to be released Wednesday will also be watched, as it closely reflects wage pressures and trends in core inflation. The first nonfarm payrolls number is due to be released on Friday and is projected to rise by 175k on the month, the unemployment rate to decline to 4.0% from 4.1% in December, and average hourly earnings to rise 0.3% m/m and 2.6% y/y.
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EUR – Euro triumphs as ECB inches towards the end of quantitative easing
Month in review
The European Central Bank meeting from December was a place setter for 2018 and the minutes of that meeting, released mid-January, allowed the euro to move higher as AUD/EUR tumbled towards the 0.6450 range. The main quote emanating from the ECB was that “the view was widely shared among members that the Governing Council’s communication would need to evolve gradually, without a change in sequencing if the economy continued to expand and inflation converged further towards the Governing Council’s aim. The language relating to various proportions of the monetary-policy stance and forward guidance could be revisited early in 2018”. This is central bank speak for an element of confidence and a wider expectation of the language from policymakers to echo this.
Much like we have seen in the US and UK following the termination of their QE programs, a strong argument is to expect that ‘forward guidance’ will come back to the policy arena and this has set a strong tone for the start of the year. The ECB’s first policy decision of 2018 to keep interest rates unchanged has indicated that they expect borrowing costs to stay at present levels until well past the end of net bond purchases.
Another argument is that investors will be betting on a likely strengthening in the single currency in 2018 after a great 2017, despite the issues surrounding its biggest powerhouse – Germany, as well as the once prevalent Catalonia crisis which has seemingly been quietened by the Spanish government. This has been the most surprising for investors as questions over the stability of the European Union have still allowed the single currency to soar.
The ECB earlier stuck by its plan to continue buying 30 billion euros of assets a month until at least the end of September and has reiterated that interest rates will stay low, well beyond that. Communication from the ECB will be key if the euro is to remain on its current positive trend, however a 6% surge since mid-December is threatening to become a thorn in the economy’s side if it curbs exports and dampens prices.
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NZD – Looking steady
Month in review
Overall, it has been a positive start to 2018 for the Kiwi dollar.
The Kiwi is up more than 1% on the Aussie Dollar, thanks to Australia’s softer than expected inflation figures released on 31st January. The release brought the AUD two-year swap rates crashing down to meet NZD swaps (which had previously tumbled after New Zealand’s CPI figures missed expectations last week).
In turn, the Kiwi has soared on the back of this, rising three times as fast as the next best G-10 currency and continuing to test support levels. In the broader sense, NZD has held its ground against other major currencies over the past month, particularly the Yen.
Looking at NZD/USD, the Kiwi gave back some gains it had made on the US Dollar at the end of January. This was on the back of comments from the outgoing Federal Reserve President, Janet Yellen, who played a straight bat in her final policy review – keeping rates on hold while adding emphasis on plans to raise interest rates. The Kiwi fell to 73.53 US cents on February 1st, from a high of 74.19 cents overnight on the 31st January.
The key emphasis on the Kiwi Dollar this month will not necessarily weigh on New Zealand’s economic performance, however, more on its counterparts. Economic conditions in the US will continue to shape the performance of the NZD, with particular emphasis on the Payrolls and other key data over the course of the month.
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These comments are the views and opinions of the author and should not be construed as advice. You should act using your own information and judgement.
Whilst information has been obtained from and is based upon multiple sources the author believes to be reliable, we do not guarantee its accuracy and it may be incomplete or condensed.
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