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By Nick Parsons

US CPI likely holds the key for equity and FX markets. Tuesday’s US NFIB survey brought more evidence of wage pressures.


AUD / USD

Expected Range

Tuesday was the first day for while that the DJIA didn’t move at least 500 points from peak to trough. It’s a reflection of just how much volatility we’ve seen recently that a 250-point high-low range seems very quiet indeed. Although stock index futures remained in the red through most of the European and North American trading sessions – moving only into the green in the last couple of hours – it was a poor day for the US Dollar whose index against a basket of major currencies fell more than half a point to 89.30; its lowest level since last Wednesday. Nearly all the losses were accounted for by the movements in EUR and GBP, whilst the USD actually eked out a small gain versus the CAD. <br><br> We commented here yesterday that the US small business federation NFIB had reported breathlessly on its December survey of members. Yesterday, it outdid itself after its optimism index jumped a further two points to 106.9. “Main Street is roaring,” said NFIB President and CEO Juanita Duggan. “Small business owners are not only reporting better profits, but they’re also ready to grow and expand. The record level of enthusiasm for expansion follows a year of record-breaking optimism among small businesses. Amongst the various sub-indices, ‘Now Is a Good Time to Expand’ registered at 32%, the highest level in the history of the NFIB survey, which began in 1973. ‘Actual Earnings’ climbed up 11 points from December, the highest level reported since 1988. ‘Plans to make Capital Outlays’ jumped up two points, and ‘Plans to Increase Inventories’ gained four points. There’s no disguising where the NFIB’s political allegiances lie. “The historically high index readings over the last year tell us small business owners have never been more positive about the economy… This is in large response to the new management in Washington tackling the biggest concerns of small business owners – high taxes and regulations.” <br><br> Behind the headlines and the political lobbying, the NFIB survey raised a few warning flags for any bond investors who actually bothered to read it. Reports of higher worker compensation rose 4 percentage points to a net 31%, the highest reading since 2000 and among the highest in survey history. 22% (up 3 points) selected “finding qualified labor” as their top business problem, the highest reading since 2000, the peak of the last expansion. Plans to raise compensation rose 1 point in frequency to a net 24% in response to tighter labor markets, the highest reading since 1989. Small firms are raising compensation to attract and keep the employees they need. The focus for most analysts will of course be Wednesday’s CPI data where the headline figure is expected to be up +0.3% m/m to take the annual rate down from 2.1% to 1.9%. The USD index opens in Asia this morning around 89.35.

AUD / NZD

Expected Range

Most of the movement in the New Zealand Dollar is being driven by the AUD/NZD cross rather than by any great shift in sentiment or investor appetite elsewhere offshore. This pair is currently ranging between a 6-month low of 1.0750 and Monday’s high of 1.0840 and as it fell during Tuesday’s Northern Hemisphere session, so NZD/USD has recovered in to the high 72’s and is up almost a cent from last week’s one-month low. <br><br> In political news, New Zealand's opposition leader Bill English is quitting after losing last year's election. The former prime minister said he was resigning as leader of the conservative National Party and leaving Parliament. Mr. English, a long-serving finance minister who took over as prime minister in late 2016 after the resignation of John Key, led the National party to win the biggest share of seats in parliament in last year’s September election but was then unable to form a government. His statement said, “Now is the right time for me to step aside and embark on new professional and personal challenges. I informed the National caucus this morning that I am resigning as leader of the National party… I believe this will give National’s new leader time to prepare the party for the 2020 election.” <br><br> In economic news today, we have food price inflation and the RBNZ’s own quarterly survey of inflation expectations. In last month’s survey the one and two-year expectations were at 1.87% and 2.02% respectively. The New Zealand Dollar opens in Asia this morning at USD0.7275 and AUD/NZD1.0795.

AUD / CAD

Expected Range

The Canadian Dollar seems to be off the radar as far as international investors are concerned. On each of the last four trading days, USD/CAD has briefly broken through the upper end of its 2018 trading range from the mid 1.22’s to the high 1.25’s but on each occasion the rally has faded and quickly reversed. As attention switches away from an almost exclusive focus on the stock market, however, investors are beginning to pay a bit more attention to oil prices. WTI crude is down from a recent high of $66.50 per barrel on January 25th to just under $59.15 today; having printed as low as $58.60 on Friday. The CAD may need support from higher oil prices if it is not to break more decisively above the year-to-date range. <br><br> Speaking at a White House event on his new infrastructure proposal on Monday evening, US President Donald Trump complained about Canadian trade practices. “We lose a lot of money with Canada. Canada does not treat us right in terms of the farming and the crossing the borders… So, they’ll either treat us right or we’ll just have to do business really differently… We cannot continue to be taken advantage of by other countries.” It was not at all clear what the President meant by “the crossing the borders” or by “the farming.” On NAFTA specifically, Trump said he is willing to give his negotiators time to work rather than quickly initiating a withdrawal from the agreement, though he then suggested immediately that he is not worried about the possible harm of a withdrawal. “Hopefully the renegotiation will be successful. And if it’s not, we’ll be more successful”. No wonder currency traders are confused what to make of this… <br><br> Today we’ll get to see the always excellent monthly house price data from Teranet which breaks down the figures by 11 metropolitan areas, as well as nationally. In December, house prices rose 0.2% m/m to take the annual rate of growth to 9.1% nationwide. The Canadian Dollar opens in Asia this morning at USD/CAD1.2600, AUD/CAD0.9900 and NZD/CAD0.9165.

AUD

Expected Range

The Australian Dollar struggled to get much traction on Tuesday and on a day when the US Dollar performed quite poorly, AUD/USD ended pretty much where it had begun in Sydney around 0.7850. The pair had a quarter-cent sell-off early afternoon in Europe as a few Fed headlines hit the newswires but regained all the losses within the space of under an hour. The AUD/NZD cross was again quite lively but in the opposite direction to Monday; falling more than half a cent from a best level just under 1.0840 to the 1.0770 area. <br><br> The NAB monthly business survey was released yesterday. According to the details on their website, the business conditions index jumped 6pts to a strong +19 index points, which is well above the long-run average of +5 index points. The business confidence index also rose by 2pts to +12 index points, its highest level since April 2017. Business conditions are solid to strong across all major industry groups with the exception of retail. The construction industry in particular is performing well. “The improvement in construction conditions over the last twelve months is due to improved trading conditions, profitability and employment, and probably reflects the still elevated residential construction pipeline, infrastructure construction and the gains in non-residential building approvals last year. The lift in employment is particularly significant given the rising share of employment found within the construction industry.” With the RBA most especially focused on wage growth and household consumption, the softness of the retail sector should be watched carefully as a coincident indicator of consumer confidence. We noted here on Monday that CBA have already changed their RBA forecast to no change in rates this year. <br><br> In her speech on Tuesday, RBA Assistant Governor Luci Ellis spoke of the three key issues confronting the economy: How much spare capacity it has; how much wage growth and inflation will pick up; and how resilient will consumption growth be if income growth remains weak. She said Australia has “had especially strong employment growth over the past year – more than double the rate of growth in the working-age population… But that hasn’t translated into strong consumption growth. Household income growth has been weak for a number of years, and that has weighed on consumption growth.” As for the current situation, high levels of household debt – around 188% of income – are already weighing down on spending. Ms. Ellis noted there are already some signs of this in consumption data as “growth in spending on discretionary items, like travel and eating out, has slowed while growth in spending on essentials has held up.” The Australian Dollar opens in Asia at USD0.7855, with AUD/NZD at 1.0795 and GBP/AUD1.7665.

GBP / AUD

Expected Range

The British Pound had a better day on Tuesday, finishing in second place behind the EUR on our one-day performance table, with GBP/USD having been up on a 1.39 handle for the first time since Friday and GBP/AUD having briefly revisited 1.77. <br><br> UK inflation figures were released Tuesday morning, with the headline CPI stuck at 3.0% rather than falling to 2.9% in line with consensus expectations. The Office for National Statistics noted that, “The largest downward contribution to change in the rate came from prices for motor fuels, which rose by less than they did a year ago. The main upward effect came from prices for a range of recreational and cultural goods and services, in particular, admissions to attractions such as zoos and gardens, for which prices fell by less than they did a year ago.” It’s not often that the cost of looking at giraffes and penguins moves international foreign exchange markets, but the GBP got a lift from the fact that inflation didn’t fall as had been anticipated. <br><br> In separate figures, UK house price growth accelerated to 5.2% in the year to December, up from 5.0% in November. The house price index compiled by the Office for National Statistics and the Land Registry shows average UK house price hit £227,000 in December 2017, up £1,000 from the previous month and £12,000 higher than in December 2016. Scotland and the South West experienced the highest annual house price growth, registering 7.7 per cent and 7.5 per cent respectively. Average prices in England rose 5 per cent in the year, to £244,000 while Wales saw house prices increase by 5.4 per cent over the last 12 months to stand at £154,000. The pound opens in Asia this morning at USD1.3875, GBP/AUD1.7665 and GBP/NZD1.9075.

AUD / EUR

Expected Range

After four consecutive days stuck on a 1.22 ‘big figure’, EUR/USD finally moved up to 1.23 on Tuesday and, in doing so, took top spot in our one-day currency performance table. It did so on a day when there were no fresh economic data and amidst a total radio silence from the ECB who had no speakers after the talk-fest of the last couple of weeks. <br><br> Lovers of detailed economic statistics found plenty to pore over in a 100-page monthly document from the EU agency Eurostat which released its less than snappily titled, “Data for Short-term Economic Analysis”. This enables cross-country comparisons of the whole EU as well as the Eurozone but in truth is a very dull and dry publication with nothing in the way of policy clues. More interesting was a video interview with President Mario Draghi published on the ECB’s website in which he answered questions from the public. Speaking about cryptocurrencies and Bitcoin, he said, "Many of you posted questions about whether the ECB is going to ban Bitcoins or it's going to regulate Bitcoins. I have to say it's not the ECB's responsibility to do that.” He cited high volatility and the fact that it was not backed by any Central Bank or Government as reasons to be very cautious, stating proudly instead that “a euro today is the same as a euro tomorrow”. <br><br> A euro today might well be the same as a euro tomorrow, but Mr. Draghi is tasked with ensuring that its purchasing power falls by 2% a year; something his very polite interviewer failed to take him to task on! Today we’ll see final CPI figures for Germany which will show that Mr. Draghi is failing to cut the euro’s value quickly enough; prices there are expected to have risen only 1.4% over the past 12 months. His ECB colleagues Weidmann and Mersch are due to give speeches on Wednesday whilst we’ll also get to see the more detailed breakdown of Q4 GDP. Ahead of all this, the EUR opens in Asia at USD1.2355, AUD/EUR0.6360 and NZD/EUR0.5890.

By Nick Parsons

US stocks recover sharply, lifting AUD to top spot on Monday. NAB Survey due today then watch UK CPI and US NFIB survey.


AUD / USD

Expected Range

The big question for Monday was whether buyers would step into the equity market even after its sharp reversal higher on Friday afternoon in New York. The answer most definitely was ’yes’. DJIA futures were up 175 points by the time of the London opening, 200 points at the opening bell on Wall Street and then 500 points higher early in the New York afternoon. Indeed, the Dow Jones is now up more than 1500 points from last week’s low; having regained almost 50% of its entire peak-to-trough losses. Against this background, it could be said that the US Dollar actually did well to limit its losses to less than half a point on its index against a basket of major currencies. The high last Thursday was 90.25 – its best level since before Treasury Secretary Mnuchin’s comments in Davos two weeks’ earlier – and the USD has retraced only slightly to 89.80. <br><br> US total government debt today stands at $20.49 trillion. The White House Office of Management and Budget yesterday released proposals under which the debt is projected to rise almost 50% over the next decade to $29.9tn in 2028. The annual increases in total debt are sequentially lower but even in Year 10, are projected to add some $352bn to the total stock of debt. The US Government has abandoned all pretense at a balanced budget. Along with the borrowing proposals, the US Administration also published its detailed infrastructure plans. According to Goldman Sachs who have the resources, expertise and connections to know such things, “the low odds of enactment this year have not changed, in our view…in light of the need for 60 votes in the Senate, a lack of bipartisan consensus regarding the appropriate structure for federal infrastructure funds, and political considerations ahead of the upcoming midterm election”. Whilst the odds of enactment are low, the odds of a US debt downgrade seem to be high and rising. Credit ratings agency Moody’s didn’t join S&P in downgrading the US in August 2011 but it seems to be hinting very strongly that it will now do so. Whether or not it actually matters is another question… <br><br> Today in the United States we have the NFIB small business survey which contains an important question on earnings. Last month’s Press Release breathlessly said that, “With a massive tax cut this year, accompanied by significant regulatory relief, we expect very strong growth, millions more jobs, and higher pay for Americans… There’s a critical shortage of qualified workers and it’s becoming a real cost driver for small businesses… They are raising compensation for workers in order to attract and keep good employees, but that’s a positive indicator for the overall economy.” The earnings trends number in the December survey was down 5 points to -15. This could be a key data point today. The USD index opens in Asia around 89.80.

AUD / EUR

Expected Range

Monday was another day when the DJIA moved at least 500 points but, once again, EUR/USD remained firmly on a 1.22 ‘big figure’, albeit the pair ended almost half a cent up from its opening level in Sydney. As the end of the day approached in New York, the EUR had gained against every major currency except the Aussie Dollar and finished in second place on our one-day performance table. <br><br> After all the criticism of the Coalition agreement negotiation by Angela Merkel, in a prime-time ZDF television interview on Sunday, she defiantly brushed aside any suggestion of quick change. “I ran for a four-year term. I promised those four years and I’m someone who keeps promises. I totally stand behind that decision.” Giving Finance to the Social Democrats is “acceptable” and “European policy will be formulated jointly” within the government, limiting the SPD’s ability to set the agenda, Merkel said. <br><br> The world’s biggest hedge fund, Bridgewater Associates, disclosed it now has wagers valued at more than $14 billion that stocks in the Eurozone will decline. The value of the firm’s short bets in Europe has more than quadrupled this month and as well as selling Italian companies ahead of the March elections, it is also betting against energy, manufacturing and construction firms in Europe. There are no economic statistics scheduled for release in the Eurozone today and the EUR opens in Asia at USD1.2285, AUD/EUR0.6385 and NZD/EUR0.5900.

AUD / NZD

Expected Range

The Kiwi Dollar has been pretty much out of the spotlight given the volatility in global equity markets and most of its movement is being driven by the AUD/NZD cross than by any great shift in sentiment or investor appetite elsewhere offshore. Last Tuesday saw the pair hit a 6-month low of 1.0750 but having opened in Sydney yesterday around 1.0775, it then rallied almost half a cent to 1.0825. This move pressured the NZD/USD rate from a high around 0.7270 back to Friday’s closing level of 0.7245. <br><br> Statistics New Zealand reported yesterday that consumers spent more on eating out and on hardware, furniture, and appliances in January 2018. This contributed to a 1.4% rise in total retail card spending in the month, when adjusted for seasonal effects. Spending rose across four of the six retail industries last month. The largest movements were: hospitality, up $15 million (1.5%) durables, including hardware, furniture, and appliances, up $14 million (1.2%) and fuel, up $9.0 million (1.5%). Core retail spending (which excludes the vehicle-related industries) rose 1.0% in January, after a 0.2% fall in December 2017. Cardholders made 141 million transactions across all industries in January with an average value of NZ$50 per transaction. The total amount spent across all transactions was NZ$7.0 billion. <br><br> There is no economic data scheduled today but on Wednesday it’s food price inflation and the RBNZ’s own quarterly survey of inflation expectations which is released midweek. In last month’s survey the one and two-year expectations were at 1.87% and 2.02% respectively. The New Zealand Dollar opens in Asia this morning at USD0.7245 and AUD/NZD1.0825.

AUD / CAD

Expected Range

On both Thursday and Friday last week, USD/CAD briefly broke through the upper end of its 2018 trading range from the mid 1.22’s to the high 1.25’s. Yesterday, too, it regained 1.26 but this time managed to stay there, as investors began to take notice of a near-10% weekly drop in crude oil prices. This has taken WTI down from a recent high of $66.50 per barrel on January 25th to just under $59.15 this morning. <br><br> Over the weekend, Canadian Prime Minister Justin Trudeau finished a 3-day trip to Chicago, San Francisco and Los Angeles as he attempts to win support from US lawmakers and businesses to keep President Trump from pulling out of the North American Free Trade Agreement. As reported by Bloomberg, Trudeau spoke on Friday night at the Ronald Reagan Presidential Foundation & Institute, where he hailed Canada-US ties. He recalled meeting Reagan when Trudeau’s own father, Pierre, was Canada’s prime minister. “I’d just received a master’s class in political charisma, and one I like to think kind of stuck,” he said. In Los Angeles he said he didn’t “think anyone can now entirely predict or understand” the impacts on the three countries if NAFTA were to end. “This accord should and can be modernized and updated, with effort, hard work and willingness to compromise on all sides, this is eminently achievable. If trade between Canada and the US is a bad idea, then there are no good ideas.” <br><br> The Bloomberg Nanos Canadian Confidence Index showed continued negative pressure for the sixth week in succession. The BNCCI, a composite of a weekly measure of financial health and economic expectations, registered 58.59 compared with last week’s 58.98. The twelve-month high stands at 62.17. "While household balance sheets remain better off than last year, consumers are factoring in expectations of slowing growth for the economy and real estate holdings, and slightly more risk to their employment situation. It’s likely that any additional financial stress will have a knock-on effect on household consumption”, said the authors of the report. With no further economic news scheduled for Tuesday, the Canadian Dollar opens in Asia at USD/CAD1.25605, AUD/CAD0.9885 and NZD/CAD0.9130.

GBP / AUD

Expected Range

By the time London traders headed for the train home, the DJIA was up almost 400 points so judged against this rally, the pound’s performance was pretty uninspiring. GBP/USD ended the day barely 20 pips higher around 1.3835, with the GBP losing ground against both the EUR and the AUD, though up against the CAD and NZD. <br><br> In UK economic news, household spending fell by 1.2% in January compared with 12 months ago, according to research by Visa, the payments business. It is the first time that there has been a decline at this time of year since 2013. Individuals’ spending has now fallen in eight of the past nine months, with clothing, furniture and household goods bearing the brunt of consumers’ caution, according to figures on spending on Visa cards, which account for more than £1 in every £3 spent in the UK. Analysts at Markit, who compiled the survey said, “Subdued spending trends coincide with a slowing of the overall UK economy during 2017. Lingering uncertainties around the outcome of the Brexit negotiations are also weighing on consumer confidence, which has stayed well below the levels seen prior to the 2016 Brexit vote.” <br><br>a Speaking to MP’s yesterday, BoE MPC member Gertjan Vlieghe expanded somewhat on the conditions that might see a rate hike postponed, saying the Bank of England would likely reconsider its assumption of a “smooth” transition to Brexit if a breakdown in talks between London and Brussels causes big shifts in financial markets and economic indicators. Vlieghe said the Bank would watch surveys of businesses and households for big moves if expectations of a disorderly exit from the European Union became widespread. “And that might be the kind of material change that we’d (need to see to) say our assumption of ... a smooth transition is clearly not tenable any more.” The big event on Tuesday in the UK will be the January CPI figures. Inflation last month slowed from 3.1% to 3.0% and consensus looks for another drop to 2.9% in January. With BoE interest rate policy now aligned very closely with current and expected inflation, it should be a straight read-across for the GBP. The pound opens in Asia this morning at USD1.3835, GBP/AUD1.7625 and GBP/NZD1.9080.

AUD

Expected Range

The Australian Dollar actually finished top of our one-day performance table on Monday, though this might tell us more about how surprisingly quiet foreign exchange markets were than anything particularly new or insightful about the AUD itself. The scale of the absolute movements certainly wasn’t very impressive. AUD/USD opened in Sydney at 0.7810 and closed in New York barely 40 pips higher around 0.8150. Volatility as measured by the VIX index fell back two points to 25.2 and US 10-year Treasury yields edged down around 3bp from their 2.89% intra-day high; both of which helped the Aussie a little. It’s probably also the case that market positioning was still net short after the equity market decline of the last 10 days and there may have been some buying to square off these positions. <br><br> Commonwealth Bank of Australia was quoted on newswires yesterday reaffirming their view that the AUD will strengthen this year. This is predicated on ongoing US Dollar weakness as the global economy continues to recover, which will support commodity prices. The bank says, “Leading economic indicators like the global manufacturing PMI remain consistent with world GDP growth of 3.6% and 3.4% in 2018 and 2019 respectively [but] we do not expect the Fed to shift to tight monetary policy settings and aggressively lift the target range for the funds rate — currently at 1.25-1.50% — above the neutral nominal policy rate of roughly 2.75% because of soft US inflation”. As for their exchange rate forecast, “Our base case scenario remains for AUD/USD to trade closer to 0.8300 by year-end.” <br><br> The main domestic highlight today in terms of economic data is the NAB monthly business survey. Most attention always focuses on the headline-grabbing numbers around business confidence and conditions though there should be more interest on capacity utilisation and wage costs given that RBA policy this year will be determined more by the inflation outlook than by absolute levels of activity in the economy. The Australian Dollar opens in Asia at USD0.7850, with AUD/NZD at 1.0825 and GBP/AUD1.7620.

By Nick Parsons

AUD awaits NAB Survey and Australian jobs data this week. US NFIB and CPI data will be key for inflation worries and the stock market.


AUD / USD

Expected Range

After the previous Friday’s 666-point foretaste of things to come for the Dow Jones Industrial Average, there were two daily 1,000-point declines last week. Friday looked set for another huge drop before the index then bounced sharply off its 200-day moving average to end the day almost 900 points off its midday low. The US Dollar generally does well in times of equity market turmoil and last week was no exception. From its opening level of 88.90 last Monday morning in Sydney, the USD index against a basket of major currencies rose steadily to a high on Thursday of 90.25; its best level since before Treasury Secretary Mnuchin’s comments in Davos two weeks earlier. <br><br> None of the scheduled Fed speakers last week seemed at all concerned by the stock market. Federal Reserve Bank of New York President William Dudley said recent declines weren’t that big and don’t yet change his outlook for the U.S. economy. “This wasn’t that big a bump in the equity market… The stock market had a remarkable rise over a very long time with extremely low volatility…. My outlook hasn’t changed just because the stock market’s a little bit lower than it was a few days ago. It’s still up sharply from where it was a year ago. Having a bump up like this has virtually no consequence on my view of the economic outlook”. This view was largely echoed by Kaplan, Harker, Evans and others. Indeed, there are few signs from the front end of the US money market curve that a 25bp rate hike at the March FOMC meeting is in any more doubt. Two weeks ago, with the stock market at a record high, the market-derived probability of a hike was 76%. Today, it has edged down only very marginally to 72%. <br><br> To the extent that the 2.9% increase in average earnings was the ‘trigger’ for the stock market sell-off, investors will now be acutely sensitive to any inflation data. On Tuesday we have the NFIB small business survey which contains a question on earnings. Last month’s Press Release breathlessly enthused that, “2017 was the most remarkable year in the 45-year history of the NFIB Optimism Index… With a massive tax cut this year, accompanied by significant regulatory relief, we expect very strong growth, millions more jobs, and higher pay for Americans.” NFIB Chief Economist Bill Dunkelberg said, “There’s a critical shortage of qualified workers and it’s becoming a real cost driver for small businesses… They are raising compensation for workers in order to attract and keep good employees, but that’s a positive indicator for the overall economy.” It may not be so good for the stock market which will be on edge, also, ahead of Wednesday’s CPI numbers. The USD index ended last week around 90.00.

AUD

Expected Range

The Australian Dollar remains under pressure. The three main drivers of most of the valuation models of the currency are commodities, interest rate differentials and volatility. When asset markets are quiet, the incremental returns from higher interest rates look quite attractive. As we’ve said before though, when markets are very volatile, this strategy can be likened to picking up pennies in front of a train. Many investors unfortunately got run over last week as volatility surged and all three of the valuation metrics for the AUD turned negative with AUD/USD back on a 77 cents ‘big figure’ for the first time since late December before rallying very slightly into the NY close at 0.7810. <br><br> On Friday, the RBA released its latest Quarterly Statement of Monetary Policy; a 68-page document summarising the current state and future outlook for the Australian economy. Essentially, there is hardly any change from the November view though the one-year forecast for unemployment has been revised down 0.25% to 5.25%. The main phrase for interest rate and currency markets was that, “Over the course of 2017, the unemployment rate declined and inflation increased a little. The accommodative setting of monetary policy has played a role here. Further progress on both fronts is expected over the next couple of years. It will be some time, however, before the economy reaches current estimates of full employment and inflation returns to the mid-point of the target”. It is interesting to see the RBA is now stressing the ‘mid-point’ of the inflation target and it is this which has prompted ANZ Bank to change its interest rate forecasts. It was previously looking for 2 hikes this year but now sees the RBA on hold throughout 2018. <br><br> Away from the turmoil in global equity markets, the two main domestic highlights in terms of economic data this week are the NAB Survey on Tuesday and the labour market report on Thursday. It seems pretty clear from what the RBA have written and said that wage growth probably holds the key to monetary policy. If employment picks up without any upward pressure on pay, then there’ll be no rush to raise interest rates. RBA Assistant Governor Luci Ellis is scheduled to speak this evening and we’ll see what she has to say – if anything – on recent market turbulence and the outlook for interest rates. The Australian Dollar closed in New York on Friday at USD0.7810, with AUD/NZD at 1.0770 and GBP/AUD1.7690.

AUD / EUR

Expected Range

The euro had a relatively calm week stuck between the opposing forces of stock market turmoil which was good for the USD and more strong economic data in the Eurozone. EUR/USD opened on Monday at 1.2450 though this subsequently proved to be within just a few pips of the week’s high. We wrote on Wednesday evening that, “We have seen what happened in the VIX market in the US when investors in a very crowded trade all tried to pile through the exit at once and there were some tentative signs in EUR/USD that the same might be happening in FX.” Strategists at the major banks had been chasing the spot rate higher, moving forecasts ever-upwards on incoming economic data. By midweek, the announcement of a new German coalition government proved the catalyst for a bout of profit-taking on long EUR positions which took EUR/USD down more than 2 cents to the low 1.22’s. <br><br> Whilst there was some relief that Germany had avoided a fresh, destabilising Federal Election, there is concern that Ms Merkel might have conceded too much to the left-wing SPD. Reports suggest that the SPD will be handed the Finance, Labour and Foreign Ministries – a major victory for the Social Democrats – while CSU leader Horst Seehofer, one of the most conservative figures on Merkel's side, would become Interior Minister. Over the weekend, a cartoon in Der Spiegel magazine shows Angela Merkel naked while SPD politicians run away with her clothes, whilst Die Zeit has a cartoon of German eagle crash landing on its head… <br><br> There are plenty of ECB speakers again this coming week, chief amongst them Bundesbank President Jens Weidmann who last Thursday said, “The favourable economic outlook lends credence to the expectation that wage growth and therefore domestic price pressures will gradually increase in keeping with a path towards the Governing Council’s definition of price stability… If the expansion progresses as currently expected, substantial net asset purchases beyond the announced amount do not seem to be required”. As for the currency, ““The recent appreciation of the euro seems unlikely to jeopardise the expansion… Research suggests that the exchange rate pass-through, which is to say the impact of exchange rate movements on inflation, has declined.” The EUR ended in New York on Friday at USD1.2250, AUD/EUR0.6375 and NZD/EUR0.5920.

AUD / NZD

Expected Range

After the first 1,000-point drop of the week for the DJIA last Monday, the NZD was boosted by some technically driven selling of the key AUD/NZD pair which fell through a big support level of 1.0850 and tumbled all the way to a 6-month low of 1.0750. Indeed, on Tuesday the NZD was the best performer of all the major currencies we follow closely here. From a high of USD0.7345, however, it was then downhill all the way to a low on Thursday around 0.7180; the weakest in almost 4-weeks, before a recovery on Friday took the pair up to 0.7250. <br><br> The RBNZ’s formal comment on the currency in its monetary policy Statement last week was, “The exchange rate has firmed since the November Statement, due in large part to a weak US dollar. We assume the trade weighted exchange rate will ease over the projection period…. Monetary policy will remain accommodative for a considerable period. Numerous uncertainties remain and policy may need to adjust accordingly.” Speaking to reporters at the Press Conference, Governor Grant Spencer then said that the bank was not concerned about the New Zealand dollar, "We're comfortable with where it is," adding that the NZD strength was largely on the back of weakness in the US Dollar. <br><br> The RBNZ claims to be living in “central bank nirvana” and for all the volatility in global asset markets, it does seem there’s nothing much to trouble policymakers locally this week. Today brings data on credit card spending and on Wednesday it’s food price inflation before the manufacturing PMI survey on Friday. None of these are likely to trouble those in charge of setting interest rates though there’ll be some interest (no pun intended!) in its own quarterly survey of inflation expectations which is released midweek. The New Zealand Dollar finished a very lively week on Friday at USD0.7250 and AUD/NZD1.0770.

GBP / AUD

Expected Range

The GBP had a very choppy, and ultimately pretty bad week. GBP/USD began at 1.41 exactly, and against a persistently stronger USD, fell to a low on both Wednesday and Thursday of 1.3850. After Thursday lunchtime’s much more hawkish tone from the Bank of England, GBP/USD then surged to a high just over 1.4050 before a complete reversal as the US stock market suffered its second 1,000-point drop of the week. On Friday the pound was sold heavily as a result both of very poor UK merchandise trade figures – which showed the scale of the Brexit challenge – and on a more forceful tone adopted by chief EU negotiator Michel Barnier (see below). GBP/USD tumbled to a 3-week low of 1.3770 before rallying slightly to close on a 1.38 handle. <br><br> In his Thursday Press Conference, the BoE Governor was keen to play down the scale and speed of interest rate hikes and despite much probing from journalists, refused to admit directly that interest rates are likely to rise in May. The Statement noted, “Any future increases in Bank Rate are expected to be at a gradual pace and to a limited extent”. Market pricing doesn’t yet have a May hike as a done deal, though the implied probability of a 25bp increase has increased from just under 50% to something nearer 70%. All this, of course, is predicated on Mr. Carney’s two Brexit assumptions – that there is “a smooth transition”, and that it leads to an “average of potential outcomes”. By Friday, rate hike talk had been pushed into the background as EU Chief Negotiator Michel Barnier warned that a transition period immediately after Brexit in 2019 is "not a given". He outlined continuing disagreements between the UK and EU over issues like freedom of movement during the period and said the UK's decision to leave the EU single market and customs union meant border checks at the Irish border were "unavoidable". <br><br> The weekend Press in the UK seems to have taken a break from bashing the government, though this is more likely to be a tactical retreat rather than any great change of strategy. Having said nothing of any substance on Brexit since a speech in Florence back in September last year, UK PM Theresa May is set to give her next major set-piece in Berlin in three weeks’ time. Before then, senior ministers are due to set out this week Britain’s “road to Brexit”, with Foreign Secretary Boris Johnson said to be making the case for a “liberal Brexit” designed to reassure Remain voters. In economic news, the big event will be Tuesday’s CPI figures. Inflation last month slowed from 3.1% to 3.0% and consensus looks for another drop to 2.9% in January. With BoE interest rate policy now aligned very closely with current and expected inflation, it should be a straight read-across for the GBP. The pound finished a very turbulent week in New York on Friday at USD1.3825, GBP/AUD1.7690 and GBP/NZD1.9060.

AUD / CAD

Expected Range

The Canadian Dollar began last Monday around USD/CAD1.2430 but as the week progressed and the USD was persistently well-bid, so USD/CAD moved sequentially higher. On both Thursday and Friday, it briefly broke through the upper end of its 2018 trading range from the mid 1.22’s to the high 1.25’s but settled back to 1.2580 by the New York close. <br><br> In truth, there were few highlights in a generally dull week for Canadian news and the Canadian currency. Bank of Canada Senior Deputy Governor Carolyn Wilkins gave an interview to Reuters Thursday evening saying Canada’s high household debt is the biggest vulnerability facing the economy, while uncertainty about NAFTA is weighing on the outlook. “Every household is going to find it more or less difficult, so some households might find it extremely difficult, others will just need to tighten their belt a bit, but overall as you can see from our projection, we expect the economy to continue to grow, we expect consumption to continue to grow. I think we are being very clear that the biggest vulnerability to the Canadian economy is coming from high household indebtedness.” Wilkins declined to give “a running commentary” on recent economic data, but said that although GDP growth in the fourth quarter got off to “not the strongest start,” the latest data remained in line with forecasts. <br><br> The only important data point was Friday’s employment report where consensus looked for a 10k rise after a 78k gain in December. Instead, Stats Canada reported employment fell by 88,000 in January. Part-time employment declined (-137,000), while full-time employment was up (+49,000). At the same time, the unemployment rate increased by 0.1 percentage points to 5.9%. On a year-over-year basis, employment grew by 289,000 or 1.6%. Gains were driven by increases in full-time work (+414,000 or +2.8%), while there were fewer people working part time (-125,000 or -3.5%). Over the same period, hours worked rose by 2.8%. USD/CAD surged to 1.2645 when the numbers were announced as computer-driven algorithms responded to the headlines but within a few minutes, nearly all the gains had evaporated when it was realised that all the job losses were in part-time and seasonal employment. The Canadian Dollar ended the week at USD/CAD1.2580, AUD/CAD0.9830 and NZD/CAD0.9125.

By Nick Parsons

Amidst a further sell-off in US equity markets, AUD back at 77 cents. RBA SoMP now awaited.


AUD / USD

Expected Range

We said at the top of our report today that the latest plunge in US equity markets came with little or new fresh news, and amidst a general feeling that many of the forced buyers of VIX had already covered their short positions in the week. Instead, there’s now a worry that the so-called ‘risk-parity’ funds might be the next wave of forced sellers, liquidating positions as both equities and bonds are delivering simultaneous negative returns. The US Dollar tends to do well in periods of asset market chaos and so Thursday was another day of general USD strength, albeit still in very choppy market conditions. The USD Index reached a 2-week high of 90.25 in the European morning but by the New York afternoon stood at 89.90. <br><br> Federal Reserve Bank of New York President William Dudley said recent stock-market declines weren’t that big and don’t yet change his outlook for the U.S. economy. “This wasn’t that big a bump in the equity market… The stock market had a remarkable rise over a very long time with extremely low volatility…. My outlook hasn’t changed just because the stock market’s a little bit lower than it was a few days ago. It’s still up sharply from where it was a year ago. Having a bump up like this has virtually no consequence on my view of the economic outlook”. In US stock markets over the past two decades, there has been lots of talk of the “Greenspan put”, the “Bernanke put” or the “Yellen put” to describe how stock market traders feel they are insured against declines by the Federal Reserve Bank. Perhaps the strike price on the “Powell put” is a bit lower than they’ve become used to… <br><br> There are no top-tier US economic data releases scheduled for today and FX traders have never, ever been interested in wholesale sales numbers. However, the inventories number feeds directly into the Atlanta Fed GDP model which will be updated later on Friday afternoon. The USD index opens in Asia this Friday morning around 89.90.

AUD / CAD

Expected Range

Stepping back from the minute-by-minute movements and taking a bigger picture view, since the beginning of 2018, USD/CAD has been largely contained in a range from 1.2260 to 1.2600 even though we have seen extreme volatility in equity markets, a 25bp rate hike from the Bank of Canada and ongoing uncertainty over the renegotiation of NAFTA. In yesterday’s New York session, the pair rose briefly to a high of 1.2610 but the break lasted less than two hours and soon returned to the 1.2575 area. <br><br> In its latest monthly poll, Reuters reports the Canadian dollar is forecast to strengthen over the coming year as expected Bank of Canada interest rate hikes and broad pressure on the US dollar offset uncertainty over the future of the NAFTA trade deal. The poll of more than 40 foreign exchange strategists predicted that the loonie will edge up to C$1.250 to the greenback, or 80 U.S. cents, in one month, from around C$1.255 on Wednesday. After a period of stabilisation, it is then expected to climb to C$1.230 in a year. A cynic might well observe that these moves can be seen in less than one day, let alone a year… <br><br> For foreign exchange markets, the speech by Senior Deputy Governor Carolyn Wilkins was something of a disappointment. Making no reference at all to monetary policy, instead she said evidence suggests innovation has been a driver of rising income inequality in advanced countries in recent decades, with technology benefiting skilled workers more than others. This is neither surprising nor insightful, though Ms Wilkins did say the Bank of Canada is currently looking at what impact digitalization and automation might be having on the labour market and the transmission of monetary policy. Ahead of the employment report today, where consensus is looking for only a 10k rise after a 78k gain in December, the Canadian Dollar opens in Asia at USD/CAD1.2595, AUD/CAD0.9820 and NZD/CAD0.9100.

AUD

Expected Range

The volatility across asset classes continues with the Dow Jones Industrial Average down 600 points in just 4 hours during the North American morning and 800 points in the last 24 hours. The latest move lower came with little or new fresh news, and amidst a general feeling that many of the forced buyers of VIX had already covered their short positions in the week. Instead, there’s now a worry that the so-called ‘risk-parity’ funds might be the next wave of forced sellers, liquidating positions as both equities and bonds are delivering simultaneous negative returns. The US Dollar tends to do well in periods of asset market chaos and so Thursday was another day of general USD strength. AUD/USD traded down on to a US 77 cent ‘big figure’ for the first time since December, reaching a low around 0.7785. <br><br> NAB’s Quarterly Business Survey was released Thursday. The bank notes that, “The business conditions index (an average of trading/sales, profitability and employment) rose 1 point, to +15 in the December quarter – which is well above the long-run average – driven by improvements in employment, while trading conditions eased slightly and profitability was steady. Employment conditions have been holding up at levels that suggest we are likely to see further improvement in unemployment over coming quarters. Meanwhile, the business confidence index eased slightly to +6 points in the quarter, which is only a little above the average.” Almost all industries reported very elevated levels of business conditions for the December quarter, but despite some improvement since Q3 (inching back into positive territory), the retail sector continues to lag well behind the rest. NAB says, “The health of the retail sector remains quite critical to the economic given that consumption makes up the lion’s share of the economy. If subdued business conditions are telling us something about the mindset of the consumer, then faster and more sustainable growth will be more of a challenge if things don’t improve.” <br><br> In his speech to the A50 Australian Economic Forum dinner, RBA Governor Phil Lowe did not sound a man in any hurry to raise interest rates. He said, “given recent developments in Australia and overseas, it is likely that the next move in interest rates in Australia will be up, not down. If this is how things play out, the likely timing will depend upon the extent and pace of the progress that we make. As I have discussed, while we do expect steady progress, that progress is likely to be only gradual. Given this, the Reserve Bank Board does not see a strong case for a near-term adjustment in monetary policy. It will of course keep that judgement under review at future meetings.” The Australian Dollar opens in Asia at USD0.7790, with AUD/NZD at 1.0790 and GBP/AUD1.7855.

GBP / AUD

Expected Range

The GBP was a bit firmer Thursday morning in London as investors looked forward to what’s become known as ‘Super Thursday’; a Bank of England MPC meeting with a rate announcement, published Minutes then a Press Conference to introduce the new Quarterly Inflation Report. In his appearance before a House of Lords Select Committee last week, BoE Governor Carney had hinted that the Bank was preparing to upgrade the forecasts in its Inflation Report and this is exactly what happened; albeit the language was more aggressive than had been expected. GBP/USD surged more than 1½ cents from 1.3890 to a high just over 1.4050. So far, so easy to explain…. Within the space of four hours, however, as the carnage continued in US asset markets, GBP/USD had reversed all its gains, coming back to its launching point with the precision of a Falcon-Heavy booster. GBP was still the best performer of the day although its 200+ pip gains against both the AUD and NZD were more than halved. <br><br> In revising up both its UK and world growth forecasts, the Bank of England said that, “Over the past year, a steady absorption of slack has reduced the degree to which it was appropriate for the MPC to accommodate an extended period of inflation above the target. Consequently, at its November 2017 meeting, the Committee tightened modestly the stance of monetary policy in order to return inflation sustainably to the target. Since November, the prospect of a greater degree of excess demand over the forecast period and the expectation that inflation would remain above the target have further diminished the trade-off that the MPC is required to balance. It is therefore appropriate to set monetary policy so that inflation returns sustainably to its target at a more conventional horizon. The Committee judges that, were the economy to evolve broadly in line with the February Inflation Report projections, monetary policy would need to be tightened somewhat earlier and by a somewhat greater extent over the forecast period than anticipated at the time of the November Report, in order to return inflation sustainably to the target.” <br><br> In his subsequent Press Conference, the Governor was keen to play down the scale and speed of interest rate hikes and despite much probing from journalists, refused to agree that interest rates are likely to rise in May. The Statement noted, “Any future increases in Bank Rate are expected to be at a gradual pace and to a limited extent”. Market pricing doesn’t yet have a may hike as a done deal, though the implied probability of a 25bp increase has increased from just under 50% to something nearer 70%. All this, of course, is predicated based on two Brexit factors – that there is “a smooth transition”, and that it leads to an “average of potential outcomes”. Let’s see now what the politicians can do to facilitate this… GBP opens in Asia this morning at USD1.3925, GBP/AUD1.7845 and GBP/NZD1.9255.

AUD / NZD

Expected Range

The New Zealand Dollar has not been immune to the volatility seen across all assets and geographies. It was falling even before Thursday morning’s RBNZ interest rate announcement and then proceeded to fall even further as investors reflected on the contents of the Statement and the subsequent Press Conference. AUD/USD rose all the way from 1.0750 to 1.0885 whilst NZD/USD dropped to a 3-week low of 0.7180 early in the London morning. By the end of the day in Europe, however, AUD/NZD had reversed all its gains and was back on a 1.07 ‘big figure’ and NZD/USD was back on 72 cents. <br><br> The RBNZ left interest rates unchanged at 1.75% but cut its inflation forecasts and predicted it won’t reach the 2-percent midpoint of its 1-3 percent target range until late 2020, more than two years later than previously expected. Despite that, it maintained its projection that the official cash rate will remain on hold this year and start to rise in mid-2019. The RBNZ has been weighing the potential impact of Prime Minister Jacinda Ardern’s policies around immigration, housing, welfare and industrial relations on economic activity. The RBNZ said it has reviewed its estimates and “the net impact of these policies has been revised down in the near term.” The economic growth profile is “weaker in the near term but stronger in the medium term”. For the currency specifically, RBNZ said, “The exchange rate has firmed since the November Statement, due in large part to a weak US dollar. We assume the trade weighted exchange rate will ease over the projection period…. Monetary policy will remain accommodative for a considerable period. Numerous uncertainties remain and policy may need to adjust accordingly.” <br><br> Overall, the RBNZ statement reads pretty dovishly. Assistant Governor John McDermott said the bank’s stance on rates is neutral. “There is a significant probability that the next rate move could be an increase sometime in the future, and there’s also a substantial probability that the next move could actually be a cut.” So, rates could go up or down, inflation expectations are well anchored and will reach the mid-point of target in 2 years’ time; a situation he summed up in the Press Conference by saying “That’s central bank nirvana.” The New Zealand Dollar opens in Asia today at USD0.7220 and AUD/NZD1.0790.

AUD / EUR

Expected Range

We noted here yesterday that there were some tentative signs that investors might have been lightening up their positions in what had been one of the most crowded trades in the investment universe: long EUR/USD. On Wednesday, the pair fell on to a 1.22 handle for the first time in two weeks and – remarkably, given the volatility elsewhere – it has stayed on the same big figure for every minute of the past 24 hours. <br><br> ECB Chief Economist hosted a Q&A session on Twitter yesterday morning; an innovative and transparent method of improving central bank communication. He said the salary increase secured by Germany’s largest trade union this week is “fully in line” with the European Central Bank’s inflation forecasts. His comments dampened speculation that the 4.3% pay rise negotiated by labor union IG Metall and the Suedwestmetall employers’ federation in Germany – which we spoke about here earlier in the week – would prompt the ECB to raise its inflation forecasts and to tighten policy faster. Asked what he would choose if he could pick just one measure of inflation, he said, “If I really had to pick one, I would take the simplest one: core inflation.” Asked about economic models, he said, “Models are important to help us think about economic developments in a structured way, but the real economy is always more complex than models. Always to be complemented by other approaches, conjunctural analysis, and even anecdotal evidence!” <br><br> Mr Praet even displayed a great sense of humour for a central banker. One questioner asked, “Peter, how do we pronounce your name? Is the 'e' silent?” and received the classic reply, “In Praet indeed, but not in Peter.” Not to be outdone, his colleague and Executive Board member Yves Mersch said at an event in London that, “At these speeds, if you bought a bunch of tulips with Bitcoin, they may well have wilted by the time the transaction is confirmed”. Let’s hope that their peers around the world can make similarly witty and interesting observations as they try to explain the somewhat arcane business of monetary policy. The EUR opens in Asia at USD1.2265, AUD/EUR0.6365 and NZD/EUR0.5895.

By Nick Parsons

AUD/USD falls to 4-week low on broad-based USD recovery. Speech awaited from RBA Governor Phil Lowe this evening.


AUD / EUR

Expected Range

After yesterday’s exceptionally quiet session in Asia (with barely 20 pips separating the high and low in EUR/USD), the Northern Hemisphere day was much livelier as investors tried to digest news of the new Coalition government in Germany. We have seen what happened in the VIX market in the US when investors in a very crowded trade all tried to pile through the exit at once and there were some tentative signs in EUR/USD that the same might be happening in FX. The EUR fell over a full cent in the late European afternoon to a low of 1.2260; its first time back on a 1.22 handle in two weeks. <br><br> On the one hand – as the economists say! – there was some relief that Germany might avoid a fresh, destabilising Federal Election, but on the other is a concern that Ms Merkel might have conceded too much to the left-wing SPD. Early reports suggested that the SPD would be handed the Finance Ministry – a major victory for the Social Democrats – while CSU leader Horst Seehofer, one of the most conservative figures on Merkel's side, would become Interior Minister. The SPD also look set to keep control of the Foreign Ministry and the Labour Ministry, with party leader Martin Schulz reportedly keen to be Foreign Minister. The SPD leadership confirmed the Coalition agreement in a group WhatsApp message, which began, "Tired. But satisfied." <br><br> Today brings the ECB’s Economic Bulletin while there are no less than four Governing Council members all giving speeches during the European morning. The EUR opens in Asia at USD1.2260, AUD/EUR0.6375 and NZD/EUR0.5910.

AUD

Expected Range

Something different began to happen in Wednesday’s trading in the Northern Hemisphere day. During the previous few days of extreme equity market volatility, the USD tended to do well as stock markets fell, with its best session (the European morning on Tuesday) coming as equities were smashed and US 10-year yields fell back to 2.70%. As the US indices recovered sharply Tuesday afternoon, so the US Dollar gave back all of its morning gains. This pattern continued into Wednesday, as the early call for the DJIA to open 200 point slower helped underpin the USD. But, as stocks extended gains and bond yields rose back to 2.79%, so the US Dollar continued to rise and finished the day at the top of our one-day performance table. We mention this at the top of our report because it goes a long way to explaining the performance of AUD/USD which yesterday tumbled over three-quarters of a cent from the high in Sydney to a 4-week low around 0.7825. AUD/EUR and AUD/NZD, by contrast, finished little changed on the day. <br><br> Bloomberg reported yesterday that Commonwealth Bank of Australia – the nation’s largest bank – has reduced its exposure to apartment developers by more than A$1 billion ($789 million), or 23%, according to data included in its first-half earnings report, released today. It’s also pulling back on loans to property investors, which rose just 0.5 percent compared to 7.5 percent growth for owner-occupier loans. Data released last week showed Sydney house prices, which surged 75% between February 2012 and July, have now dropped 3.1% from their peak. As the other major banks report their numbers over the next few weeks, analysts will be looking for any further signs of caution on the property market which has been a major driver of household consumption and consumer confidence over the past few years. <br><br> The main event for the rest of this week is on Friday when the RBA releases its latest Quarterly Statement of Monetary Policy, but before then in Sydney this evening, Governor Phil Lowe is scheduled to give a speech. He is usually full of interest and insight and this first set-piece event since the summer holidays at the A50 Australian Economic Forum dinner is sure to be closely-followed. The Australian Dollar opens in Asia at USD0.7825, with AUD/NZD at 1.0790 and GBP/AUD1.7735.

GBP / AUD

Expected Range

Yesterday morning in Europe, GBP/USD made another attempt to get back on to a 1.40 ‘big figure’ but could get no higher than 1.3995 before then losing more than a full cent against a strongly recovering US Dollar. Despite the weakness in the ‘cable’ rate, the British Pound actually ended the day higher against NZD, AUD and the EUR, whilst little changed against the CAD. <br><br> The EU’s leaked position paper – ‘Transitional Arrangements in the Withdrawal Agreement’ – which we highlighted here yesterday had the very rare impact of uniting the whole of the UK political spectrum against it. This unity probably won’t last long. Even the Liberal Democrats qualified their opposition by saying it proved the need to have a second referendum. Nonetheless, it would have provided a welcome respite for the embattled Prime Minister Theresa May, even if it will only last until her own Cabinet start tearing lumps out of each other once again. When pressed on the clause at parliamentary question time, the PM promised a “robust” response, even though to nearly all observers she seems to be in the position of a poker player bluffing with a pair of two’s… <br><br> There’s a Bank of England MPC meeting today. In his appearance before a House of Lords Select Committee last week, BoE Governor Carney hinted that the Bank is preparing to upgrade the forecasts in its Inflation Report. “I would expect that in 2019 we will see a pick-up in this economy all things being equal – strong global growth, greater certainty... A disorderly Brexit, not a likely scenario at all, is less likely than at the time we did the assessment in the fall.” We’ll wait to see whether his bullish talk has survived the harsh reality of this week’s Brexit-speak. For today, the GBP opens in Asia at USD1.3875, GBP/AUD1.7725 and GBP/NZD1.9120.

AUD / USD

Expected Range

As we explained in detail at the top of today’s report in the AUD section, something different began to happen in Wednesday’s trading in the Northern Hemisphere day. As stocks extended gains and bond yields rose back to 2.79%, so the US Dollar continued to rise and finished the day at the top of our one-day performance table. It’s index against a basket of major currencies is now up from a low last Thursday of 88.25 to 89.95 and is now back above the level from which it began to fall a couple of weeks ago when Treasury Secretary Mnuchin made his infamous comments in Davos. <br><br> Dallas Federal Reserve Bank President Robert Kaplan said Wednesday, the recent selloff is "basically a market event and these things can be healthy." Federal Reserve Bank of St. Louis President James Bullard said the latest market decline was no surprise given the elevated valuations of technology stocks and absence of any recent drops. “This is the most predicted selloff of all time because the markets have been up so much and they have had so many days in a row without meaningful down days”. Federal Reserve Bank of New York President William Dudley, meantime, said recent stock-market declines weren’t that big and don’t yet change his outlook for the U.S. economy. “The stock market had a remarkable rise over a very long time with extremely low volatility… My outlook hasn’t changed just because the stock market’s a little bit lower than it was a few days ago. It’s still up sharply from where it was a year ago.” There’s certainly no sign here either of concern about a deeper stock market correction, nor any desire at all to signal rates won’t be raised at the March FOMC meeting. <br><br> There are no top-tier US economic data releases scheduled for the rest of the week in the US, though it will be interesting to see if weekly jobless claims later today can extend their recent decline even further into record-setting territory. After its strong run of the past few days, the USD index opens in Asia around 89.90.

AUD / NZD

Expected Range

The NZD couldn’t sustain Tuesday’s strength. The AUD/NZD made an early attempt to probe into fresh 6-month lows but having reached 1.0750, it then reversed around 30 pips higher. Against the US Dollar, it broadly tracked the movements of its Aussie cousin, falling almost a full cent from its Asian high of 0.7345 to a 3-week low of 0.750. <br><br> New Zealand’s fourth quarter labour market report showed the seasonally adjusted unemployment rate fell to 4.5% in the December 2017 quarter, down from 4.6% in Q3; the lowest since the December 2008 quarter, when it was 4.4%. Although good news, the unemployment rate remains considerably above New Zealand’s lowest unemployment rate, which was 3.3%, recorded a decade ago in the December 2007 quarter, immediately before the global financial crisis. The employment rate held steady at 67.8 percent, the equal highest rate since the series began in 1986, as employment kept pace with the expanding working-age population. Women also remained at their highest ever rate of employment at 62.4 percent. <br><br> Ahead of this morning’s first RBNZ policy meeting of the year, it was interesting to see the official statisticians point out prominently in their data release that, “the underutilisation rate was just over 12 percent – reflecting about 340,000 New Zealanders with potential to work more. This measure is just as important as the unemployment rate”. Analysts are unanimous that there will be no change in official interest rates with most attention focused on the new forecast track that the RBNZ will be publishing and whether or not there is any explicit attempt to talk the currency lower. The New Zealand Dollar opens in Asia today at USD0.7250 and AUD/NZD1.0785.

AUD / CAD

Expected Range

In the space of just three trading days, USD/CAD rose exactly three cents from a low of 1.2260 last Thursday evening to 1.2560 on Tuesday morning. Mostly this was a story of USD strength, though the Canadian Dollar had also slipped on some of its major crosses with EUR/CAD, for example, up around half a cent over the same period. Taking a bigger picture view, since the beginning of 2018, USD/CAD has been in a range 1.2260-1.2580 and in yesterday’s New York afternoon held below the top of this range even as the USD jumped. <br><br> Statistics Canada yesterday reported monthly and annual figures for building permits. The municipalities issued $8.1 billion in building permits in December, up 4.8% following a 7.3% decline in November. The December increase stemmed from higher construction intentions in the residential sector. Across Canada, all components climbed in 2017, up 10.4% from the previous year. The value of permits in the residential sector has increased every year since 2009. In 2017, the residential sector increased 7.8%, pushed up primarily by the multi-family component (+13.7%). <br><br> The next big event in domestic economic news will be the employment report on Friday where consensus is looking for only a 10k rise after a 78k gain in December. Before then, Bank of Canada Senior Deputy Governor Carolyn Wilkins will give a speech today which could offer the next clues on the outlook for interest rates. The Canadian Dollar opens in Asia today at USD/CAD1.2570, AUD/CAD0.9830 and NZD/CAD0.9125.

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