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By Nick Parsons

Employment data offer no support to the AUD which finished Thursday in equal bottom spot with the USD. GBP and EUR extend their gains.


AUD / NZD

Expected Range

The New Zealand Dollar had another good day on Thursday, which seemed yet again to have been driven by developments in the key AUD/NZD cross. This moved down to a fresh 6-month low around 1.0710 during the European afternoon; the weakest since August 7th. Even as AUD/USD fell, this meant that NZD/USD was able to eke out a daily advance, just getting back to the US 74 cents level which had briefly been seen during the London morning. <br><br> Yesterday we saw new figures on house sales from the Real Estate Institute of New Zealand. In a snappy Press Release they said that, “As the mercury rose during January to produce the hottest month on record, sales volumes across New Zealand rose when compared to the same time last year for the first time in 19 months”. The number of properties sold in New Zealand during January 2018 increased by 2.7% when compared to January 2017 (4,366 up from 4,251). The number of properties sold in Auckland increased 0.9% year-on-year to 1,157 up from 1,147. REINZ said, “January can often be a quiet month for the industry as people spend much of their time at the beach. However, clearly the warmer weather has helped sales, as it’s the first time we’ve seen a positive year-on-year sales increase in seven months. There were some really positive figures from around the country, with 11 out of 16 regions experiencing an increase in sales when compared to the same time last year.” The median house price for New Zealand increased by 7.1% to $520,000, up from $485,500 in January 2017. Auckland’s median price decreased by 1.2% to $820,000 down from $830,000 at the same time last year. <br><br> Today we’ll get to see the manufacturing PMI survey. The New Zealand Dollar opens in Asia this morning at USD0.7405 and AUD/NZD1.0715.

AUD / CAD

Expected Range

The Canadian Dollar ended the day pretty much unchanged having traded in a range from USD/CAD1.2465 to 1.2530. Oil prices had begun to rally sharply on Wednesday afternoon and from a low point for WTI crude of $58.15, hit a high on Thursday of $61.40 which offered some support to the CAD. <br><br> There were no economic statistics published Thursday, but there was a very interesting speech from Bank of Canada Deputy Governor Lawrence Schembri in which he reviewed the success of Canada’s inflation targeting monetary policy regime. Whilst winning no prizes for humility, he noted, “Three main factors have contributed to the framework’s credibility and success. First, we have a clear, simple and well-understood inflation target, whose focal point is 2 per cent. Second, the framework has political legitimacy, is coherent with other public policies and is implemented with effective tools. And third, we have a formal review process for continually improving the framework that is widely admired by many of our peers and was cited as one of the factors that earned us the Central Bank of the Year Award we received recently”. <br><br> Your author is a particular fan of the BoC and its Governor Stephen Poloz who always has fascinating insights delivered in an interesting and very engaging manner. His deputy’s conclusion that, “We continue to believe that the best contribution the Bank can make to improving the performance of the economy is to ensure that inflation remains low, stable and predictable” could, in all honesty, have been written by any of his peers in G-10 but the speech was thoughtful and interesting. There are no economic statistics released Friday and the Canadian Dollar opens in Asia this morning at USD/CAD1.2500, AUD/CAD0.9910 and NZD/CAD0.9250.

GBP / AUD

Expected Range

After the dramas of US CPI on Wednesday, the pound was the quickest of all the major currencies to reverse its losses and went on to a day’s high just below 1.4000; more than a full cent above where it had been prior to the US data release. On Thursday it built on these gains, reaching an intra-day high around 1.4090 and finishing top of our one-day currency performance chart. <br><br> In its annual review of the UK economy, the IMF noted, “Economic growth has moderated since the beginning of 2017, reflecting weakening domestic demand. The sharp depreciation of sterling following the referendum has raised consumer price inflation, squeezing household real income and consumption. Business investment has been constrained. In the medium term, growth is projected to remain at around 1.5 percent under the baseline assumption of continued progress in Brexit negotiations that lead to an understanding on a broad free trade agreement and on the transition process.” Executive Directors noted that “output growth remains positive and labor market performance strong, notwithstanding the moderation in economic activity that reflects the impact of the exchange rate depreciation on consumption and the heightened uncertainty following the decision to leave the European Union (EU). This uncertainty will continue to weigh on growth, and the outlook depends crucially on the outcome of the negotiations with the EU”. <br><br> Friday brings UK retail sales figures. It always used to be the case that December and January were best viewed together to see the impact of discounting in the annual sales. In the internet age, with the advent of Black Friday promotions in November, it is probably wiser to judge the three months as a whole. Thus, we saw a 1.1% monthly increase in November followed by a -1.5% m/m drop in January which left the annual rate of growth for 2017 at just 1.9%; the weakest since 2013. We’ll see today how the new year 2018 began for UK retailers. The pound opens in Asia this morning at USD1.4080, GBP/AUD1.7755 and GBP/NZD1.9025.

AUD / USD

Expected Range

Thursday was another frustrating day of sharp reversals for the US stock market and its currency; albeit within narrower trading ranges than seen recently. Ahead of the opening bell, futures markets were signaling the DJIA 200 points higher around 25,150. After the cash market had been open for just an hour, these gains had evaporated and the index then fell to 24,870; a drop of 280 points from the high. Two hours after that, it had regained 200 points of the drop and was back over 25,000 even as 10-year bond yields hit a fresh 4-year high of 2.90%. For the Dollar, its index against a basket of major currencies hit a low of 88.30 in the European morning, rose to a high of 88.65 and then finished back at the day’s low. <br><br> In economic news, US factory output was flat for the second straight month in January, raising questions about the manufacturing outlook. Manufacturing output was held back by monthly declines of -0.2% at aerospace factories, -0.5% for those producing plastics and -0.4% in food industries. Output rose modestly overall for primary metals, computers and motor vehicles. What’s more, the statisticians had previously estimated a small increase in output for December but revised the data to show no gain in that month. Separate Fed surveys of manufacturing from New York and Philadelphia showed big increases in Prices Paid. The New York prices index surged from 36.2, to 48.6, the highest in six years, while according to the Philly Fed, their prices paid index increased 12 points to 45.0, its highest reading since May 2011 or in nearly 7 years. <br><br> There are no further US economic statistics scheduled this week though whether that is a good thing or not for markets remains to be seen! The USD index opens in Asia this morning around 88.30.

AUD

Expected Range

The continued weakness of the US Dollar helped the Aussie reach a high early in the European morning on Thursday of 0.7965; its best level since the day of the US non-farm payroll figures back on February 2nd. Its early strength was not sustained, however, and the Australian Dollar slid steadily throughout the day to be the equal-worst performer (along with the USD) of all the currencies we closely track here. AUD/USD at one point lost almost three-quarters of a cent in Northern Hemisphere trading and was back on a 78 cents ‘big figure’ before closing in New York around 0.7930. <br><br> Yesterday’s Australian labour force figures did nothing to boost investor appetite for the AUD. Employment increased 16,000 to 12,453,500. Full-time employment decreased 49,800 to 8,460,900 and part-time employment increased 65,900 to 3,992,600. Since January 2017, full-time employment has increased by 293,200 persons, while part-time employment has increased by 110,100 persons. Seasonally adjusted monthly hours worked in all jobs decreased by 24.1 million hours (or 1.4%) between December 2017 and January 2018 to 1,708.2 million hours. This follows a decrease of 8.6 million hours (or 0.5%) from November to December 2017, and four consecutive increases up to November. The average number of hours worked per employee per week fell to a new record low of 31.7. Employees are on average working 2.7% fewer hours than a year ago and that will limit the boost to household incomes from rising employment. <br><br> As some of the Australian banks are either scaling back or abandoning their earlier forecasts for the RBA to be hiking interest rates, they were joined by offshore consultancy Capital Economics who yesterday said, “while the continued strength of the labour market will provide at least some support to income and consumption growth this year, without much more wage inflation the RBA isn’t going to raise interest rates. We expect the RBA will keep interest rates at 1.5% until the second half of 2019.” Amongst the hawks, NAB are sticking with calls for hikes in both August and November though they now add, “we acknowledge the risks are that these hikes could be delayed.” The Australian Dollar opens in Asia at USD0.7930, with AUD/NZD at 1.0715 and GBP/AUD1.7750.

AUD / EUR

Expected Range

After trading on three different ‘big figures’ on Wednesday, the EUR had a much calmer day on Thursday, albeit one in which it managed to gain against most of the major currencies. EUR/USD managed to trade very briefly on a 1.25 handle and spent most of the day in the high 1.24’s. <br><br> In economic news, the trade surplus in the Eurozone rose to €23.8bn in December from a revised €22.0bn in November, above the consensus, €22.3bn and continuing a run which has seen the 3-month average (a better guide to trend than m/m numbers) in surplus for the entire period since 2012. This comes on the back of figures midweek which showed the Eurozone economy expanded 0.6% in Q4 (at an annualized pace of 2.4% to quote it in comparable terms to the US numbers). Healthy growth but a general absence of inflationary pressures leaves 10-year German government bond yields at just 0.77% with the spread between Germany and the US at 216bp; its widest since April last year. <br><br> Whilst US trade deficits are most of spoken in the context of US-China or US-NAFTA, Thursday’s figures from Eurostat show the EU had a trade surplus with the United States of 120.8 billion euros ($150.9 billion) in 2017, up from 113.1bn in 2016. Exports from the EU to the US increased to 375bn in 2017 from 363.5bn euros the year prior, while imports from the US grew to 254.2bn from 250.4bn in 2016. The EUR opens in Asia today at USD1.2500, AUD/EUR0.6345 and NZD/EUR0.5920.

By Nick Parsons

Wednesday was a day of big swings and reversals for all the FX majors after US CPI data. AUD/USD back to 79 cents, more than a full cent off its daily low.


GBP / AUD

Expected Range

The British Pound spent most of Wednesday morning steadily falling and by lunchtime in Europe was by some distance the worst-performing of all the major currencies. GBP/USD fell from a best level overnight of 1.3920 to 1.3885 immediately before the US CPI numbers then dropped to a low just a few pips above 1.3800. It was then the quickest of all the major currencies to reverse its losses and went on to a day’s high around 1.4000; more than a full cent above where it had been prior to the US data release. <br><br> UK Foreign Secretary Boris Johnson gave what was billed as a major set-piece speech on Brexit yesterday. He said there are three main branches to the opposition to Brexit: A geo-strategic concern that Britain is a relatively small nation that has made a mistake in choosing to leave such a major international alliance, a spiritual and aesthetic concern – that people feel we have pulled up a drawbridge – and an economic fear that Britain will be worse off outside the EU. The Foreign Secretary said Brexit “need not be nationalist, but can be internationalist” and sought to allay those three concerns, acknowledging that he “runs the risk of causing further irritation” in making such an argument. More practically, Mr Johnson warned against a second referendum, telling his audience, “I say in all candor that if there were to be a second vote I believe that we would simply have another year of wrangling and turmoil and feuding in which the whole country would lose. So let’s not go there.” <br><br> The problem with any UK Ministerial speech is that it simply draws attention to the practical problems of Brexit without showing any detailed roadmap forwards. This problem begins at the very top of government, with Prime Minister May trying so hard to keep her divided Cabinet together, that no concrete proposals are ever advanced, for fear of provoking rebellion. And, to the extent that Brexit itself then becomes the topic for journalists and the media, the GBP often then struggles with the subsequent political fallout. There are no UK economic statistics scheduled for release this Thursday and the pound opens in Asia this morning at USD1.3995, GBP/AUD1.7690 and GBP/NZD1.9000.

AUD / USD

Expected Range

It’s hard to know where to begin with today’s US Dollar commentary so let’s stick initially to the facts and figures. The USD index peaked last Thursday around 90.25; a level it almost, but not quite, regained on Friday afternoon. From then on, as stock markets recovered, its index against a basket of major currencies fell over a full point to a low during Sydney time yesterday around 89.05. When January CPI came in above consensus expectations (see below) the index jumped to a high of 89.60 as 10-year bond yields hit 2.89%, the DJIA fell 460 points and the USD strengthened against all the currencies we follow here. Within 2 hours, however, the stock market was back in positive territory on the day and the USD had a stunning turnaround; losing almost a full point by the time European traders headed for home and hitting the lowest level in 10 days. <br><br> The much-hyped January CPI figures came in higher than consensus expectations which were for a m/m gain of +0.3% which would have taken the annual rate down from 2.1% to 1.9%. Instead, CPI rose 0.5% m/m and the annual rate was unchanged at 2.1%. The so-called ‘core’ rate of inflation which excludes food and energy prices and is seen as a better measure of underling inflation trends, was one-tenth higher than expected at +0.3% m/m (the biggest monthly increase since last January) which lifted the annual rate from 1.7% to 1.8%. Indeed, the actual unrounded figure for core inflation was just 1/1000th of a point from being revised up to 0.4% m/m. For all the angst over CPI, we should remember that – unlike the RBA, RBNZ or BoE – the Fed does not target this measure of inflation. It tracks a different index, the personal consumption expenditures price index excluding food and energy, which has consistently undershot the central bank’s 2 percent target since mid-2012 and tends to run around 0.3% below core CPI. In this sense, the panic over higher than expected CPI looks a little overdone, even if there’s no denying an upward trend. <br><br> As well as inflation numbers, the January retail sales data were also released. These were quite a bit softer than consensus forecasts with the headline number falling -0.3% m/m versus expectations of a +0.2% m/m increase. The ‘core’ number excluding auto sales was unchanged on the month compared to forecasts of a +0.4% increase. This was the first monthly drop in retail sales since last August and was accompanied by downward revisions to some of the back data. Details showed a significant decline in building materials & furniture while online sales and restaurant spending was unchanged. After the data release, analysts rushed to revise down their Q1 GDP estimates. JP Morgan moved from 3.0% to 2.5%, BAML from 2.3% to 2.0% and Morgan Stanley from 3.3% to 2.9%. The Atlanta Fed which just a few weeks ago was up at 5.2% and was 4.0% at the beginning of this week is now down much closer to the pack at 3.2%. The USD index opens in Asia this morning around 88.75.

AUD / EUR

Expected Range

The calm which had engulfed the euro is now decisively over. EUR/USD traded on three different ‘big figures’ on Wednesday, tracing out a very similar pattern to that described above for the GBP. The pair edged lower throughout the Asian day and European morning, falling from a high of 1.2390 to 1.2345 immediately prior to the US CPI and retail sales numbers. The EUR then plunged to a low around 1.2285 but within ninety minutes had completely unwound its losses and went on to a best level of 1.2435. <br><br> Figures released by Eurostat confirmed the January 30th preliminary estimate that GDP in the Eurozone rose 0.6% in Q4 last year. Growth slowed a little in Germany and Italy, while the pace of expansion accelerated in the Netherlands and Portugal. Germany’s upswing – despite a slowdown in quarterly output – continues to be a key ingredient for growth in the euro area. Momentum at the end of last year was driven by a strong increase in exports, according to a national report. Government consumption and equipment investment increased, while private spending remained largely unchanged and construction slipped. The Dutch economy also benefited from buoyant global trade. GDP increased 0.8% in the fourth quarter, exceeding consensus estimates. Italian growth slowed to 0.3%, leaving it lagging behind France and Germany and providing a note of caution ahead of general elections next month. GDP increased 0.7% in Portugal. <br><br> A fascinating Bundesbank study published yesterday shows that cash no longer makes up most of the money spent in Germany. Cash accounted for 47.6% of German transactions by volume last year, down from 53.2% three years earlier and below the 50% mark for the first time since polling started in 2008. Cards grabbed a 39.4% market share last year compared to 33.4% in 2014, mirroring a global trend that has long taken hold in many other countries including Sweden and Britain. Internet payments also grew but still accounted for a modest 3.7% of total volume. Germans and Austrians are the biggest users of cash among countries in the euro zone’s richer “core”, according to a recent study by the European Central Bank (ECB) and the Bundesbank survey found most Germans thought that cash was useful to teach children about the use of money and to ensure a better control of one’s personal finances. The vast majority also believed the abolition of notes and coins would cause problems to parts of the population, such as the elderly, while only just over a third saw it as a way to fight tax evasion and money laundering. The EUR opens in Asia today at USD1.2435, AUD/EUR0.6360 and NZD/EUR0.5920.

AUD

Expected Range

After the much-hyped US CPI figures, Wednesday was a day of some stunning reversals in global equity and foreign exchange markets. Immediately prior to the CPI release, the Dow Jones Industrial Average was up 150 points at 24,810. Less than 10 minutes later, it had fallen almost 500 points to 24,350. Barely ninety minutes after that, the index had rallied 370 points off its low and added a further 100 points before the close. It was a similar tale of extreme swings in FX. AUD/USD stood at 0.7860 just before the inflation numbers and, as stocks tumbled, it fell almost a full cent to the 0.7775 area. Two hours later, the pair had regained all its losses and more to a best level of 0.7885 and by the close of business in New York it was back on a 79 cents big figure for the first time since February 5th. <br><br> After the NAB business survey earlier in the week, yesterday we saw the Westpac survey on consumer confidence fell by 2.3% to 102.7 in February from 105.1 in January. The bank notes, “The survey was conducted over the week of February 5 – February 11. That week was marked by a wave of volatility in global share markets. The Australian market, which was more stable than most, still experienced some significant swings, being down a net 4.6% for the week while the US market (S&P 500) was down by a net 7.2%... Extensive media coverage of these developments would have unnerved respondents on two fronts – the impact on their own financial position and concerns for general global stability. These concerns appear to have been acutely felt by retirees whose confidence fell by 13.5%”. Looking at the details, Westpac point out, ““Developments in the components of the Index are consistent with the likely impact from last week’s market volatility. In particular respondents’ assessments of their own finances suffered, the ‘finances vs a year ago’ sub-index fell by 4.5%; and the ‘finances, next 12 months’ sub-index fell by 3.1%. We assume that these components have suffered temporary set- backs associated with market volatility. On face value the ‘year ago’ component is sending a very weak signal about likely spending prospects.” <br><br> We noted earlier in the week that Commonwealth Bank of Australia have changed their interest rate forecasts to remove the two hikes they previously had penciled-in for 2018. Westpac haven’t yet done this but note, “While we are less optimistic about the unemployment rate and the growth outlook, the Bank’s forecasts are not entirely out of line with our own view and, arguably, consistent with steady rates over the next few years.” NAB, meantime, still has two 25bp hikes in its forecast profile for H2 2018. Let’s see what today’s labour market report does to all those forecasts. The Australian Dollar opens in Asia at USD0.7910, with AUD/NZD at 1.0745 and GBP/AUD1.7690.

AUD / NZD

Expected Range

The New Zealand Dollar traced out pretty much the same pattern as its Australian cousin in the wild period either side of the US CPI figures. The NZD/USD pair stood at 0.7325 just before the numbers then plunged to a low around 0.7245. Two hours later it was more than a cent off the low at a more than one-week high of 0.7350 and finished the day as the top performer of all the major currencies we track here with NZD/USD at 0.7360 and the all-important AUD/NZD cross down near a 6-month low of 1.0745. <br><br> The RBNZ's March quarter survey showed firms lifted their two-year inflation expectations to 2.11% from 2.02 % in the prior period, while one-year inflation expectations remained steady at 1.86%. Elsewhere in the survey, unemployment rate expectations are the lowest since September 2008. The unemployment rate in one year is expected to be 4.55% but then increase to 4.68% two years ahead. The official unemployment rate reported by Statistics New Zealand for the December 2017 quarter was 4.5% (this was released after the survey was completed). Official unemployment is now at a nine-year low. One year ahead expectations for annual growth in wages, meantime, have increased to 2.48% from 2.25% and two-year ahead expectations increases to 2.68% from 2.57%. <br><br> Today we’ll get to see data on home sales in New Zealand and on Friday its the manufacturing PMI survey. The New Zealand Dollar opens in Asia this morning at USD0.7365 and AUD/NZD1.0745.

AUD / CAD

Expected Range

The Canadian Dollar had pretty much exactly the same price action as all the other major currencies on Thursday (though of course we have to invert it for comparison) but having reversed all its losses in the immediate aftermath of the US economic data, it didn’t then go on to make the same degree of gains as the GBP, EUR and others. USD/CAD jumped from 1.2575 to a high around 1.2645 and after coming back to its starting point within a couple of hours, could then only move another 50 pips lower even as WTI recovered more than a dollar from a 2018 low of $58.30 to $59.30. <br><br> In economic data, January’s Teranet National Composite House Price Index rose 0.3% from the previous month, a touch higher than the historical average for January and a second consecutive monthly increase. The composite index was up 8.7% from a year earlier, the smallest 12-month rise since May 2016 and a seventh consecutive deceleration from the record 12-month gains of 14.2% last June. Moreover, only four of the 11 metropolitan markets surveyed showed gains – the first time since January 2016 that a rise in the Composite Index has had so little breadth. The rise was due mainly to a second straight monthly jump of the index for the important Vancouver market (1.2% in January on the heels of 1.3% in December). The Toronto index rose 0.2%, the Victoria index 1.0% and the Montreal index edged up 0.1%. For Vancouver, January was a ninth consecutive month without a decline. The cumulative rise over that period was 14.5%; comprised of 18.2% for condo units and 11.4% for all other housing. Vancouver and Montreal were the only markets surveyed whose index reached an all-time high in January <br><br> Today we’ll get to see the ADP payrolls report but coming almost a week after the official labour market data, it’s unlikely to have a great deal of market impact. At lunchtime local time there’s a speech from Bank of Canada Deputy Governor Lawrence Schembri. The Canadian Dollar opens in Asia this morning at USD/CAD1.2525, AUD/CAD0.9910 and NZD/CAD0.9225.

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

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.

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 / 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.

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 / 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

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 / 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.

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.

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.

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