Greenback hits mid-October Low as Crude Holds Above $60.00


The Canadian dollar ended the short holiday week along with the euro at the top of the FX performance table. The recent clear messages from Bank of Canada Governor Stephen Poloz about interest rate policy appeared finally to be gaining some traction with investors, whilst a jump in energy prices and a potentially very significant shift in the technical outlook all offered good support to the currency.

With continued supply disruptions globally, and a ferocious spell of cold weather over much of Canada and North America, NYMEX crude on Friday hit $60.46 U.S. per barrel; the highest since June 2015. Earlier his morning it was higher still at $60.67. For the next few days and into the weekend, the cold snap will become even more extreme. The highest temperature of the day in Toronto on Tuesday is projected at minus 18 degrees centigrade with a low of minus 26.
We’ve been highlighting here that the technical picture has clearly shifted in the CAD’s favour after the decisive close below USD/CAD $1.2760 and it will be a currency to keep a close eye on in these first few days of 2018. Manufacturing Purchasing Managers Index data are released later today but the really big test for the loonie will come with December’s employment report on Friday.

The Canadian dollar opened in North America this morning at a 10-week low (CAD stronger) of USD $1.2530 with GBP/CAD at $1.6985 and EUR/CAD at $1.5130.

USD/CAD: Expected Range $1.247 -- $1.2555

After a very poor pre-Christmas week, the U.S. dollar then did even worse into year-end. Its index against a basket of major currencies fell to a three-month low of just 91.77 before rallying slightly to end the year at 91.91. This meant that for the calendar year 2017, the U.S. dollar fell almost 9%; the first annual decline since 2012.

The U.S. dollar’s fall came despite the stock market recording more than 70 fresh all-time highs during the year and three hikes in interest rates from the Federal Reserve Bank. Donald Trump is still President of the United States, an historic tax reform bill has been passed and the money markets are pricing further interest rate hikes next year. Overnight Fed Funds Futures are pricing in a 95.2% probability of a hike by December 2018, with a 37.1% expectation for rates to be between 1.75 and 2% and 25.8% expectation for rates to be between 2 and 2.5%. For the next ‘live’ Federal Open Market Committee meeting in March, money market pricing reflects a 54% probability of a 25-basis-point hike to 150-175bp.

For the last couple of weeks, none of these potential U.S. dollar positives have seemed to matter and in the first Asian and European sessions of 2018, the greenback is down through last week’s lows. Remember, though, that in 2017 - against a background of near-universal bullishness on the U.S. dollar - its index peaked on January 3 at 103.3 and it was downhill almost all the way from there. U.S. dollar sentiment may not yet be at historically bearish extremes, but it is certainly very depressed. Will the U.S. dollar spring a surprise in the opposite direction this time around or will its losses continue?

The U.S. dollar index opens in North America this morning at a 16-week low of 91.45. Markit’s version of the manufacturing PMI survey is released in the U.S. this morning but most traders still prefer to wait for the Institute for Supply Management survey which is not released until tomorrow.

CAD/EUR: Expected Range $0.6575 -- $0.6645

In the short week of trading after Christmas, the single European currency strengthened steadily with the move accelerating to reach a best level on Friday of $1.2025 U.S., its highest since September 10. Taking the year as a whole, the euro was the best performing major currency in 2017 and it has got off to a flying start in 2018; with a high in Europe this morning of 1.2070; the highest in over three years.

While much of the good news for the euro may already be ‘in the price’, its positive momentum and excellent economic growth story leave it well poised to extend recent gains before the inevitable bout of pre-election jitters in Italy comes towards the end of Q1.

This morning’s final December PMI’s for Germany, France and the euro-zone were released alongside all the individual countries which don’t produce ‘flash’ PMI’s around 10 days before the end of the month. Strong rates of expansion in output, new orders and employment pushed the final IHS Markit Eurozone Manufacturing PMI to 60.6 in December, its best level since the survey began in mid-1997. The PMI was up from 60.1 in November and identical to the earlier flash estimate.

National data signaled further broad-based growth, with business conditions improving across all of the countries covered. PMI readings were at survey record highs in Austria, Germany and Ireland, and remained close to November’s series peak in the Netherlands. Rates of expansion in France and Greece were the fastest for over 17 and nine years respectively. Growth also remained robust, albeit slower, in Italy and Spain.

On this first trading day of 2018, the EUR opens in North America at $1.2065 U.S. and EUR/CAD $1.5130.

CAD/GBP: Expected Range $0.5865 -- $0.5905

Whilst most British people took an extended Christmas break – using up only three days’ holiday allowance gave a 10-day vacation – the pound had a good week against a very soft U.S. dollar but was otherwise pretty mixed with losses against the CAD, AUD and NZD. The New Year has seen this trading pattern continue. GBP/USD reached a high of $1.3562 in London this morning; just shy of its mid-September high of $1.3690 which, in turn, was its strongest point in the whole of 2017. Against the buoyant euro it is down 20 pips at 1.1230 and is unchanged against all three other versions of the Dollar: the Canadian, Australian and New Zealand varieties.

This mixed price action comes against a backdrop of a softer than expected manufacturing PMI report which printed at 56.3 in December; well down from November’s 51-month high of 58.2. Although December saw rates of expansion in output, new orders and employment slow from November’s highs, growth in all three components remained solid and well above long-run trends. And, despite the uncertainties of Brexit, the headline PMI has now remained above the 50.0 no-change mark for 17 consecutive months.

On the inflation front – which will be crucial for the Bank of England’s Monetary Policy Committee in 2018 – Markit reported the rate of increase in input costs eased to a four-month low in December, but remained marked overall. Companies linked higher costs to rising raw material prices, input shortages, suppliers raising their prices and the exchange rate. The cost of chemicals, electrical goods, electronics, metals, paper, plastics, timber and utilities were all reported as higher.

Part of the increase in purchase prices was passed on in the form of higher output charges in December. Selling prices rose for the 20th successive month with companies linking the latest increase in charges to stronger demand.

Ahead of the construction PMI tomorrow and the service sector index on Thursday, the pound opens in North America this morning at $1.3540, 1.1220 euro and $1.6980 Canadian.

CAD/AUD: Expected Range $1.015 -- $1.0225

Just over three weeks ago, on December 11, the Australian dollar stood at $0.7507 U.S. Only 20 days later, with gold up from $1,242 to $1,305 it was on a 78-cent U.S. big figure for the first time since October 23 and trading above its 20-, 50-, 100- and 200-day moving averages. This morning in Europe, AUD/USD has traded as high as $0.7842.

Whilst some of this strength is merely the flip-side of a weak U.S. dollar, we should note that AUD/CAD has held absolutely steady over the past 10 days even as the CAD has performed extremely well. There isn’t much Australian economic data to be released this week but as well as the obvious influence of commodity prices, the Aussie dollar still remains sensitive to Chinese numbers.
These are important for Australia as China is the number-one export destination, the largest market for agricultural goods and the most valuable inward tourism market. Australia needs a strong Chinese economy if it is to grow itself and after the Aussie’s recent strong run it is likely going to need some more fundamental support if the positive momentum is to be sustained.

Fortunately for the AUD, the first Chinese numbers of this New Year were pretty good. The so-called Caixin manufacturing PMI jumped from 50.8 in November to 51.5. The latest data highlighted faster growth of output, total new work and export sales.
Greater production led to a further rise in buying activity, with the rate of growth quickening to a four-month high. Improved sales and stronger underlying market demand were cited as key sources of growth in December. Furthermore, total new orders expanded at the steepest pace since August, with export sales also rising at a faster pace at the end of the year.

The AUD opens in North America this first morning of 2018 at $0.7832 U.S. with AUD/NZD at $1.1010 and AUD/CAD $0.9821

CAD/NZD: Expected Range $1.1175 -- $1.126

As the Aussie dollar has surged over the past few weeks, the New Zealand dollar has done very well to generally keep up with the pace. For sure, the AUD/NZD cross has risen from 1.0870 back on December 13 to $1.1010 which signals some modest NZD underperformance but NZD/USD has spent most of the first 18 hours of 2018 on a 71-cent U.S. big figure, reaching a high in the London morning of $0.7125.

Just as with Australia, the kiwi 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. For all the focus on domestic economic policy after the September elections, recall that the countries of Asia-Pacific Economic Cooperation (APEC) take more than 70% of New Zealand’s exports, provide 71% of tourism arrivals, and account for around 75% percent of New Zealand’s foreign direct investment.

There is a very wide spread of opinion amongst the local and international banks about the prospects for the Kiwi dollar in 2018. At the bullish end of the spectrum, ING bank looks for a year-end rate of U.S. dollar 76 cents. Local specialist BNZ forecasts 70 cents whilst JP Morgan picks 64 and Morgan Stanley goes for a very bearish 61 cents.

The Kiwi dollar opens in North America this morning at USD0.7110 with NZD/CAD at 0.8915.