As the markets awake from the New Year slumber, 2017 started with the Aussie suffering its largest losses against the US dollar but managing to enjoy some gains against the Euro, the Pound and the Yen.
In the first monthly currency update for the year we take a look at the key trends of December 2016 and the look ahead to the events shaping global currency markets in January 2017.
AUD: Into the Wild Trump Era
Month in Review
The Australian dollar, after all the commotion of the US November election, settled back into a routine of being bullied by the whims of iron ore and impeccable US dollar strength. Iron rallied at the start of the month to its largest percentage increase since April. Oil also gained strongly as the members of OPEC, despite their animosity, managed to get a deal done to cap production. Having said this, the good news was short-lived as the Aussie was hindered by the Reserve Bank of Australia’s predictions of a slowing of GDP into the year’s end held true – GDP fell to its first slump since the 2008 financial crisis. The big news of the month was, of course, the Federal Reserve interest rate hike which saw the US dollar streak higher and the Aussie push lower.
The Key Trends
Starting with iron ore; it was once again the footings beneath the Australian dollar as it powered to a two year high. To put the strength of iron ore into perspective, since its low on 11 December last year at $38.30 a tonne, it has now surged a remarkable 115% in 2016. However, as the month came to a close iron ore slipped as a forced environmental shutdown of several steel mills came into effect, seeing the price slip below the $80 mark. As expected, the Federal Reserve raised their benchmark rate by 25 basis points to a range of 0.5 to 0.75 percent.
This was only the second hike in a decade but what is more important to note is the ‘dot plot’ which was released with the hike. The ‘dot plot’ is formed by each of the 17 members of the Fed providing their predictions for the target Fed funds rate in the short and long term. The new dot plot is somewhat more hawkish with the longer term target showing rates rising to around 1.5% by the end of 2017, suggesting three hikes of 25 basis points next year. As a result, the Aussie got hammered and the US dollar continued to rally and doesn’t look like its slowing down.
As Christmas came in 2015 and the idea of Trump becoming President was largely being ignored, the Chinese stock market was falling and iron ore was at its lowest level since the middle of 2009. Now, one year later, the price has reached a 26 month high. The questions investors and markets alike are asking now about where the Australian dollar will go next revolve around what fiscal policies Trump will decide upon after his January inauguration and whether the Australian dollar will continue to prop up or deflate our currency. What is certain is that while the Australian dollar is quiet over the holidays, when markets return later this week, the suspects of interest rate speculation, local data and commodity prices will move it once more.
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USD: Rate Hike Trumps Fed
Month in review
With December having come to an end we can reflect on a month that can be largely defined as a ‘coming to terms’ with what an unexpected Trump presidency is going to look like. Trump’s victory has been an injection of volatility into an already volatile global economy that is still reeling from the wake of Brexit. Moreover, there still remains questions over whether China can sustain its voracious economic growth as many commodities have fallen off the back of decreased demand from their manufacturing sector. This adds further fuel to the volatility fire and this will always translate to a rush of money to safe havens like gold, the Japanese yen and of course – the greenback.
The Key Trends
It is with a touch of irony then perhaps that a large contributing factor to US Dollar strength, is in fact, the volatility caused by Donald Trump’s victory in November. Coupled with this has been encouraging economic data such as a strong US durable goods order and the highest consumer confidence in the US economy in 15 years. Moreover, the US Federal Reserve finally stopped rattling the sabre and confirmed what was largely a given at this point and raised rates from 0.5% to 0.75%. All this has meant the USD has posted large gains against all major currency pairings for back to back months.
With Trump so trigger happy on twitter and with a few of his tweets raising question marks over whether his staff are monitoring much of what is coming out of the President-elect’s page, it is important to remember that Trump will always be poised to throw a proverbial spanner in the works. Will this mean a knock to consumer confidence in the future? What we do know is that for now, Americans are spending big and that Trump remains a big boost for the USD.
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GBP: UK Manufacturers’ Mood Improves
Month in Review
Sterling is higher and that will come as some relief. December 1st’s PMI release from the UK manufacturing saw the index fall to 53.4 from 54.3 the month before. Notes and numbers from the sector are starting to show already that any Brexit manufacturing boost is coming under pressure from costs increases and slowing export order book growth.
The UK government losing a by-election has not damaged GBP in the slightest but a vote that was meant to be about Heathrow runway expansion became almost entirely about Brexit and Article 50. Similar battles are likely to be fought for many a year and the loss of a Tory MP brings the government’s majority down to 10.
The Key Trends
In a similar fashion to December’s US inflation figures, the Bank of England’s decision to hold rates recently was never going to rock the boat. The easing plans enacted in the wake of the referendum will still be trickling through to the real economy and economic conditions are yet to shift meaningfully (either positively or negatively) to justify the bank taking further action. This neutrality among the Bank’s policymakers will likely persist until after Article 50 has been triggered, whether that’s in March this year or beyond. The Bank took a somewhat negative view on inflationary pressures in 2017, trimming forecasts due to the modest recovery in the pound against the dollar and the euro over the past two months, prompting a spell of sterling weakness – most pronounced against its US counterpart.
The Bank of England meeting will be largely overshadowed by events in the US, but there is always the possibility of some volatility. Accusations will fly that the Bank of England is behind the curve with rates so low and inflation peaking higher, but they will wait for a long time before shifting policy given fears of further downside risks crystallising in 2017.
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EURO: Further Declines as Political Uncertainty Builds
Month in Review
It was another disappointing month for the EUR/USD, finishing down 0.66% and ending 2016 with a third consecutive monthly decline. The main driver of the month was once again the strength in the US dollar, as has been the overriding theme in FX markets since Trump’s historic election victory. Not even an announcement from the ECB that the bank would be reducing the amount of bond purchases (from €80bn to €60bn after March through to December and beyond if necessary) could muster any sustainable support for the EUR. This may have been down to President Draghi’s post meeting comments where he noted that while deflationary risks had abated, there was still quite a lot of uncertainty and that the recovery likely remains fragile.
The Key Trends
The EUR/USD slipped below 1.05 for the first time since January and went on to reach levels not seen since 2003 (touching a low of 1.0352). On the technical front there is some reason to be bullish, with the pair failing to hold below 1.04 on three separate occasion as traders have looked to take profits each time we’ve traded down there. There was some excitement on the final trading day of the year, with a lack of liquidity leading to the exchange rate surging as much as 132 pips – or 1.2 percent – in the span of two minutes. There were no obvious headlines promoting the dramatic move and gains were short lived.
The other big story that emerged last month was the banking crisis in Italy, with the nation’s biggest lender Monte dei Paschi requiring a bailout expected to cost about €6.6 billion, according to the country’s central bank. The market’s reaction to this story has been relatively subdued thus far, but it still has the potential for surprise. Looking further ahead, the political situation in Europe is expected to further weigh on the currency outlook for the first half of the year, especially with Brexit coming back into focus. However, the prospect of ECB tapering in 2018 could provide some support for the single currency, especially at a time when the USD appreciation cycle may be near
completion. The next potential move lower for the EUR will probably depend on key data releases on Friday the 6th, with European inflation data and the all-important US non-farm payrolls on the slate.
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NZD: Parity Bro?
Month in Review
As with all the majors, the most significant influence on NZD movements was the decision by the FOMC to raise interest rates. Accompanied by an unexpectedly hawkish announcement on monetary policy the result was a 5% decline in the Kiwi against the USD. Some upbeat data leading into Christmas did lend some support however the month ended with most of the losses being consolidated.
The NZD remained quite subdued against the Aussie dollar for the month trading in a 1.5% range.
As the old adage states, the trend is your friend. And when it comes to the Kiwi leading into the new year the trend is up. A raft of positive data has the New Zealand economy looking good heading into 2017. Business confidence rose in December, as did the ANZ activity index and consumer confidence, driven by the recovery in the all-important dairy industry. The numbers are looking good across the ditch, however like Australian concerns persist about a possible housing bubble. Something that will need to be carefully considered moving forward.
Aussie importers beware! The Goldman Sachs FX strategy team has another attempt at parity between the Australian and New Zealand dollar occurring in the near term. While many attempts have been made, the NZD has yet to trade through parity with the AUD. Despite the obvious technical resistance, Goldman are bullish on NZD/AUD positions. Both economies are on the path to recovery with upbeat growth and inflation forecasts, however data suggests that momentum is with the Kiwis. It is important to note however that this is a short term view, and that within 3 months it is expected that a substantially improved current account position will lead to the Aussie outperforming its New Zealand cousin. In fact, Australian 30 Day Interbank Cash Rate Futures are currently pricing in increases to the Cash Rate by August 2017.
Phone: + 61 2 8298 4930
Connect with Tim Macdonald on LinkedIn
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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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