Happy New Year to all. Markets kicked off the 2019 year with a bang as news on the 3rd of January sent currencies into a frenzy. Currencies usually operate in thin/low volume conditions around the Christmas and New Year part of the year with this year being no exception. Apple revenue profit warnings hit the airwaves on the 3rd of January bolstering fears of a global slowdown with markets reacting negatively with currency moves around 2-3% unexpected in just a few minutes. The Japanese Yen making the biggest gains as markets turned heavily to a risk off theme. The Australian Dollar fell the largest dropping from 0.7000 to 0.6730 against the greenback, before quickly recovering. The wild ride continued into Friday with US jobs data coming in a lot stronger than expected at 312,000 for December easily beating the forecasted 184,000. Average earnings also rose 3.2% and the participation rate to 0.2% to 63.1%. The unemployment rate increased from 3.7% to 3.9% but was seen as positive since participation figures increased. Equities recovered off 3rd lows- the DOW up 3.3% from a drop of 2.8% the previous day and risk sentiment improved with it. Fed chair Powell made comments that the Federal Reserve is now unlikely to raise interest rates in 2019- clearly reflecting slowing market conditions. He said they would react if needed to any economic developments which eventuate over the coming months. The kiwi dollar has recovered off its slide to 0.6560 against the big dollar up 2 cents to the 0.6760 level. President Trump speaks today around 3pm on matters concerning the current government shutdown as his government and the Democrats remain divided on building a wall at the Mexico border. Looking ahead we have limited data to print – The Bank of Canada is expected to raise the interest rate from 1.75% to 2.00% with further Fed speak later in the week from Carney, Powell, Bullard, Evans and Clarida. Aussie Retail Sales for December should release well.
The Australian Dollar has not started 2019 well earning the tag of the worst performing currency to date along with the Loonie (CAD). Incredibly it dropped 7% last Thursday versus the Japanese Yen after a massive risk off surge saw investors exit the Aussie and buy the Yen. In thin markets the Aussie recovered well as risk sentiment improved. Finding support that further trade talks would continue between the US and China and stronger PMI out of China and further Chinese monetary policy easing, the Aussie rallied. Dovish remarks from Fed chairman Powell towards the 2019 outlook also benefiting the currency. Equities and commodity currencies traded higher which saw the Aussie jump to 0.7145 this is 6.5% up from the Thursday low in a remarkable turn of fortune. The currency will be driven by offshore developments this week with only Retail Sales to print later tin the week.
The New Zealand Dollar has held up extremely well over the Christmas/New Year period entering 2019 in good form. A flash crash dropped risk associated currencies when Apple sales forecasts spooked markets highlighting the increased likelihood of a global economic slowdown. In thin volume markets currencies were spun to fresh lows across the board with the NZD dropping to 0.6570 against the greenback. The ongoing US government shutdown continues to keep markets on edge with President Trump expected to speak around the Mexico Wall standoff. The Global Dairy Auction (GDT) results of last week showed an increase of 2.8% on the index with whole milk up 1.2% – this is a good start to 2019 after falling for most of 2018. No news on the NZ economic calendar this week should see the kiwi impacted by offshore risks.
The US President will pay a visit to the southern border later this week as the White House and Democrats remain divided. The Federal remains in “shutdown” over issues of how to address the demands of the President on a Mexican border wall. The visit follows a weekend of stalemate negotiations which has been raging on now for 17 days and is the 2nd longest US Government shutdown in US history. Trump is unmoved from his demands of his 5.6B to fund a wall. Meanwhile 800,000 government workers remain working without pay with key government services under increased strain. Friday’s comments by Powell triggered a boost to risk appetite with the Fed Chairman making it clear he was listening to market concerns. He continues to support confidence in the US economy even though no further rate hikes should eventuate in 2019. We have a bunch of Fed officials speaking later in the week with Powell speaking again tomorrow to further gauge direction for 2019.
The EUR has started the year on the front foot extending gains and recovering off last week’s lows. Against the US Dollar the currency traded down to 1.1310 before climbing back to 1.1450. German and eurozone retail sales beat estimates but factory orders disappointed. This was the first fall in four months. A drop in sales of iPhone in China was the blame for lower forecasted sales figures by Apple creating a flurry of price moves as markets interpreted the news as confirmation of a global economic slowdown. Investors are becoming increasingly worried of the long term effects on economies and the toll of the US/China trade war is causing the slowdown in China. Appetite for risk rebounded this week after Powell reassured financial markets of future rate policy and his willingness to continue to gauge risks. The Italian government agreed late December to reduce the 2019 deficit from 2.4% to 2.04% bringing much apprehension over whether the target could be achieved. Figures have showed the third quarter GDP for 2018 has improved to 1.7% of GDP taking off 0.1% compared with a year earlier so not a bad result all things considered. No significant data to release in the Eurozone over the rest of the week.
The British Pound has performed well this week extending gains from last week’s lows after the flash crash on the 3rd of January. After reaching a low of 1.2440 against the big dollar it recovered travelling over 300 points to 1.2780 where it looks comfortable. The question now to be asked is can it maintain momentum through 1.3000 as we approach the meaningful vote in the Commons next week. Volatility remains high with any Brexit news weighing on the currency. Consensus is building that a ‘no deal” is on the cards for a March exit when the UK gets bounced out of the EU. Apparently British and EU officials are discussing the possibility of extending “article 50” with fears a deal will not be agreed upon by the March 29 deadline. UK GDP prints Friday along with Manufacturing data, we expect GDP to print ahead of expectations based on positive December numbers.
With risk sentiment the recent theme based on US news and falling equities dampening the outlook for growth we have seen the Japanese Yen the beneficiary of the safe haven buy in thin markets. This year the Yen is 1% stronger than the British Pound and has appreciated 1.4% against the US Dollar. All and all the Yen has had a quiet last couple of days post Japanese Consumer confidence figures which fell short of the estimated 42.8 estimate at 42.7. Average Cash Earnings for November printed up at 2.0% based on 1.3% forecast showing the improvement in spending and potential for wage growth into 2019. Risk appetite could take a pounding later today when President Trump address the nation on the topic of US Govt shutdown and the Mexico wall. If his speech is dovish we could see investors back into Yen. US/China trade talks will take a back seat until US and Chinese officials meet later in the week in an effort to reduce global trade tensions. Japanese Current Account prints Friday but is not expected to be a price mover.
The Canadian Dollar has been the strongest performer in the New Year surviving the “flash crash” of last week. It has appreciated 2.52% over the Euro and 1.0% against the Japanese Yen. The Loonie has fought back well from multi year lows with a lot of assistance coming from the recovery in the price of Crude Oil and US Dollar sentiment from the latest round of comments from US Fed chairman Jerome Powell. Crude oil has come off its low of 44.45 from the second of January to trade back at 48.69 currently. Jobs data come in benign after releasing at 9,300 based on the forecasted 6,800 people who were added to the workforce, importantly the unemployment rate dropped to 5.6% from 5.7% also. Interest lies with the Bank of Canada (BoC) rate release Thursday with the BoC expected to raise the cash rate from 1.75% to 2.00% with attention aimed at the growth outlook for 2019.
Major Announcements last week:
• US Non Farm Payroll prints up on expectation of 179,000 to 312,000
• Canadian Unemployment drops to 5.6% from 5.7%
• US Fed Chairman Powell tells markets the Fed is flexible on policy heading into 2019
• US Manufacturing prints down at 57.6 based on 57.6 predicted
• Australian Building Approvals way down at -9.1% after -0.3% markets were predicting