USD steadies after FOMC Statement. GBP awaits PMI data as PM May talks about EU migration.

Key Movers

For global foreign exchange markets, there didn’t seem anything too troubling in either the tone or content of President Trump’s State of the Union address but such is the prevailing negative sentiment amongst analysts that the US Dollar went down anyway. The USD index stood at 88.90 when the President began but it was then downhill all the way until late afternoon in Europe where it finished at 88.52. The USD then began to rally ahead of the FOMC interest rate decision and by the time the Statement had been released and examined, the USD had regained all its earlier losses.

Putting two FOMC Statements side by side always feels a bit like the job the Kremlinologists had back in the Soviet-era when they’d look at a photograph of the Politburo and see who had moved a pace or two to the left or right, who was missing and who were the fresh new faces. The Fed said that, “the labor market has continued to strengthen and economic activity has been rising at a solid rate. Gains in employment, household spending, and business fixed investment have been solid, and the unemployment rate has stayed low. On a 12-month basis, both overall inflation and inflation for items other than food and energy have continued to run below 2 percent”. So far, pretty much exactly what was said in December. But, whereas last month inflation was expected to, "remain somewhat below 2 percent in the near term", this line has been dropped and instead, "Inflation on a 12 -month basis is expected to move up this year”. For choice, your author interprets this is a slightly more hawkish stance.



With the two political and monetary policy set-pieces of this week now out of the way, there’s a whole bunch of US economic data over the next two days. This afternoon brings the weekly jobless claims, both versions of the manufacturing PMI survey (Markit and ISM) as well as construction spending. Tomorrow is the first Friday of the month so it’s the non-farm payrolls and earnings numbers plus factory orders, durable goods and the Michigan consumer confidence survey. The Atlanta Fed will be updating its GDP forecast later this evening and the USD index opens in Europe today at 88.90.


The EUR reached a best level of USD1.2470 by mid-afternoon Wednesday. It then abruptly turned around to lose a quick 70 pips either side of the FOMC Statement. Traders also reflected on comments from ECB executive board member Benoit Coeure, in Dublin for the European Financial Forum. In a TV interview he said, “We have agreements that we should not target our exchange rates… we want to see exchange rates that reflect economic conditions in different places. We are not going to change it.”


Mr Coeuré said the ECB has been clear that it expects interest rates to remain at the current level, very low, for an extended period of time, and well past the horizon for asset purchasers. "Well past means well past. So that is not a discussion we are having, and we really expect interest rates to remain very low for an extended period of time." After Germany’s softer than expected CPI on Tuesday, France came to the rescue yesterday with an above-consensus 1.5% y/y increase in inflation, largely driven by an increase in service sector prices. This meant that the Eurozone aggregate numbers showed a very small drop to 1.3% which was higher than the median estimate of 1.2%. The core rate of inflation excluding food and energy rose from 0.9% to 1.0% and though it’s still some way below where the ECB would like, it is at least now moving in the right direction.


With the inflation numbers now behind us, attention at the start of this new month today will be on the manufacturing PMI’s across the Eurozone. The ‘surprise factor’ is limited by the pre-release of flash estimates in France and Germany but we’ll get fresh information on how other Eurozone countries are faring at the start of 2018. The EUR opens in Europe this morning at USD1.2400 and GBP/EUR1.1430.


Over the past couple of days, the AUD/USD exchange rate has had five moves in excess of half a cent without any obvious correlation to incoming news or economic data. After a decent NAB survey on Tuesday, the Aussie Dollar fell half a cent then recovered. After a softer than expected set of CPI numbers on Wednesday, it managed to fall nearly 50 pips, rally nearly 60 then fall 60. Overnight in Asia, AUD/USD is lower still, and the last move lower when measured from yesterday lunchtime has now extended to almost a full cent.

The first day of the month brings manufacturing PMI surveys around the world. Indeed, as we go to print, there have already been 13 countries which have reported. The first of these was in Australia and is co-produced by Markit and CBA. The headline PMI fell from 57.1 in December to a four-month low of 55.4 in January. The Press Release seemed far more upbeat than the actual numbers and noted, “Growth of Australia’s manufacturing sector was sustained during January, underpinned by strong expansions in both output and new orders. In turn, greater inflows of new business encouraged firms to raise employment… In line with greater production requirements, firms hired additional staff. Although the rate of job creation eased slightly, it remained relatively marked. Payroll numbers have expanded in each month since September 2016”.



We noted here yesterday the split of view on interest rates amongst the major Aussie banks. Writing in the Herald Sun newspaper, veteran RBA-watcher Terry McCrann was in absolutely no doubt: “the RBA will leave its official interest rate unchanged at 1.5% and, more importantly, indicate it has absolutely no intention of changing the rate anytime soon; or indeed even beginning to think about changing it”. The Australian Dollar opens in Europe at USD0.8020, with AUD/NZD at 1.0910 and GBP/AUD1.7675.


Having been in a 1.2280-1.2390 range for almost a week, USD/CAD dipped yesterday back on to a 1.22 ‘big figure’ and in the North American morning extended the move down to 1.2263; a level not seen since late-September last year. After watching President Trump’s State of The Union address, the absence of anything inflammatory on trade in general or NAFTA in particular helped improve sentiment towards the CAD and there was also a decent rebound in monthly GDP.



Stats Canada reported that real gross domestic product increased 0.4% in November, with widespread growth across industries as 17 of 20 industrial sectors increased. Goods-producing industries rose 0.8% after declining 0.5% in October. November's gain was mainly due to increases in the manufacturing and mining, quarrying and oil and gas extraction sectors, partly as a result of restoration in production capacity. Indeed, the manufacturing sector was up 1.8% in November, the largest monthly increase since February 2014 as the majority of subsectors grew. Separate figures showed prices for products sold by Canadian manufacturers, as measured by the Industrial Product Price Index (IPPI), edged down 0.1% in December, mainly due to lower prices for energy and petroleum products and primary non-ferrous metal products.





There are more Canadian numbers to come today when we get the leading indicator and the manufacturing PMI report. The Canadian Dollar opens this morning in Europe at USD/CAD1.2320 and GBP/CAD1.7450.


Having fallen after last week’s very soft CPI figures, the New Zealand Dollar has staged quite an impressive comeback; not just against a generally weak US Dollar but also against its Aussie cousin too. For a few hours around lunchtime in Europe on Wednesday, NZD/USD was back on a 74 cents ‘big figure’ whilst the AUDNZD cross (which on Monday hit a 7-week high of 110.70) is down at 1.0935.


We wrote yesterday how the New Zealand Government had got a boost from credit ratings agency Standard and Poor’s, which reaffirmed its existing sovereign rating for New Zealand, saying, "The economy is wealthy and resilient, reflecting decades of structural reforms… Our ratings reflect solid fiscal performance and our expectation that higher government spending will not materially weaken the country's fiscal profile." Today, it received a further boost from an opinion poll showing support for the governing Labour Party surged to its highest level in more than a decade and approval ratings jumped for pregnant Prime Minister Jacinda Ardern. Support for Labour has surged 5.4 points since September’s fiercely contested election to 42.3 percent, its highest since it last held government in 2007. The number of respondents naming Ardern as their preferred prime minister also jumped 8.3 points to 38 percent since the last poll in September, overtaking National Party leader Bill English on 26 percent.

Friday will be a day with plenty of economic numbers locally. We’ll have consumer confidence, building permits and the net migration statistics for December Ahead of all that, the New Zealand Dollar opens this morning in Europe at USD0.7380 and GBP/NZD1.9215.