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By Nick Parsons

Minutes show RBA in no rush to do anything. USD rallies further as stocks fall. EUR was Tuesday’s worst performer.


AUD

Expected Range

The Aussie Dollar continues to be extremely sensitive to moves in global stock markets, as well as to more local influences such as the RBA Minutes. Whilst on Monday it was able to hold onto a US 79 cents handle and thus remain above Friday’s 0.7895 low, yesterday the AUD appeared far more fragile. From a high in the Sydney session of 0.7925, AUD/USD lost almost half a cent as US equities remained in the red; with a headline-grabbing decline of almost 10% for Walmart during the New York morning. The pair did climb briefly back on to 79 cents later in the day but with gold down more than 1% to $1331, the AUD is now beginning to face into some headwinds and closed in the high 78’s. <br><br> After leaving interest rates unchanged for 16 consecutive months, the Minutes of the February RBA Board signaled more of the same ahead. Business conditions remained at a relatively high level and prospects for non-mining investment “were more positive than they had been for some time” but strong retail competition has exerted downward pressure on consumer goods and food for some time and was expected to persist “in the next few years”. Indeed, “members noted that food prices, excluding fruit and vegetables, had been little changed for nearly a decade”. After all the warnings from the Governor and Deputy Governor in recent speeches, the Minutes reiterated that, “There was still a risk that growth in consumption might turn out to be weaker than forecast if household income growth were to increase by less than expected. In an environment of high household indebtedness, consumption might be particularly sensitive to adverse developments in household income or wealth”. <br><br> We’ve mentioned here previously the split of views on rates this year between CBA and NAB. The standout call on Australian interest rates, though, is still the one from Westpac which notes, “Given our long-held view that rates would remain on hold in 2018, we were encouraged to note that the minutes point out financial market pricing suggested that market participants expected the cash rate to remain unchanged during 2018 but had priced in a 25bps increase by early 2019. Neither the Bank nor the markets are onside with our call for steady policy in 2019 as well, but a continuation of this benign inflation environment, weak consumer and softening housing markets could easily convince the Bank of our case.” Today’s quarterly wage prices are now hugely important. The last set of numbers in November showed a +0.5% q/q increase to leave the annual rate at 2.0%; well-below its long-run average around 3¼%. Consensus looks for a similar pace of growth in the Q1 data. The Australian Dollar opens in Asia this morning at USD0.7890, with AUD/NZD at 1.0730 and GBP/AUD1.7735.

GBP / AUD

Expected Range

The GBP began the day as the weakest of all the currencies we follow here but ended up as the strongest on what the US financial news channels might call ’Turnaround Tuesday’. On a day of no official economic statistics (though we did get the CBI monthly survey) GBP/USD initially fell to 1.3940 as nervous investors braced for a speech in Vienna from UK Minister for Exiting the EU, David Davis. By the afternoon, a magazine story claiming the EU Parliament favoured a special deal for a post-Brexit Britain helped push ‘cable’ back up to a high around 1.4020 with gains between half and three quarters of a cent against the AUD and NZD. <br><br> Speaking to Austrian business leaders, Mr. Davis said, “We will continue our track record of meeting high standards after we leave the European Union. Now, I know that for one reason or another there are some people who have sought to question that our intentions. They fear that Brexit could lead to an Anglo-Saxon race to the bottom, with Britain plunged into a Mad Max-style world borrowed from dystopian fiction. … these fears about a race to the bottom are based on nothing – not history, not intention nor interest.” In a totally separate event, after a speech to manufacturers’ organisation the EEF, Opposition Labour party leader Jeremy Corbyn said: “We have to have access to European markets, we have to have a customs union that makes sure we can continue that trade, particularly between Northern Ireland and the Republic of Ireland. That is key to it.” <br><br> According to an ‘exclusive’ report in Business Insider magazine, the European Parliament is putting together a 60-paragraph document outlining its desire for an "association agreement" with post-Brexit Britain, in a break from the position of the chief EU negotiator Michel Barnier. The European Parliament is pushing for a future relationship with the United Kingdom which could allow for Britain to retain "privileged" access to the single market. This marks a break from the direction previously taken by the EU's negotiating team, which has instead suggested that Theresa May's negotiating red lines mean Britain may only have access to a Canada-style free trade deal. It is claimed the EU Parliament currently plans to put the resolution to its Brexit Steering Group around March 8, before it is adopted at a meeting of all MEPs, also known as a plenary, in mid-March. This report lifted the GBP almost three-quarters of a cent from its morning, though we might not have to wait long until it is completely disowned or contradicted by official EU sources. The pound opens in Asia this morning at USD1.3995, GBP/AUD1.7735 and GBP/NZD1.9040.

AUD / EUR

Expected Range

The euro made a recently-rare appearance at the bottom of our one-day performance table on Tuesday as investors began to note the German political concerns we first highlighted here yesterday. EUR/USD opened in Sydney around 1.2410 but it was a one-way street all the way down to a low around lunchtime in Europe of 1.2325; the lowest since Wednesday last week. <br><br> In economic news, the ZEW survey of the current economic situation in the eurozone’s largest economy slipped more than expected this month to 92.3, although the latest assessment of Germany’s performance is still the second-highest reading on record. The ZEW indicator is compiled from a survey of banks, insurance companies and in-house finance teams who are asked about their assessments and forecasts for interest rates, stock markets and exchange rates across a clutch of major global economies. It is obviously more prone to influence from short-term market developments and the fall in stock prices during the survey period may well explain much of this month’s decline. <br><br> In a very hard-hitting article for Handelsblatt, former ECB Executive Board Member Jurgen Stark writes that, “the ECB’s policy interest rate has lost its steering and signaling functions. Another is that risks are no longer appropriately priced, leading to the misallocation of resources and zombification of banks and companies, which has delayed deleveraging. Yet another is that bond markets are completely distorted, and fiscal consolidation in highly indebted countries has been postponed. So, the benefits of the ECB’s policy are questionable, and its costs indisputable. The current ECB policy is thus simply irresponsible, as is the utter lack of any plan for changing it”. For Wednesday, the so-called ‘flash PMI’s’ for services and manufacturing are published for France, Germany and the Eurozone. The EUR opens in Asia this morning at USD1.2340, AUD/EUR0.6395 and NZD/EUR0.5955.

AUD / CAD

Expected Range

Having spent the whole European morning on a 1.25 ‘big figure’, USD/CAD then spent the whole of the North American day on 1.26 after a disappointing set of wholesale trade numbers and as nerves begin to grow ahead of next Tuesday’s Federal Budget. By the end of the day, it was a close-run thing at the bottom of the one-day table, and only a few pips on the CAD/EUR exchange rate kept the Canadian Dollar off bottom spot. <br><br> Statistics Canada reported the value of Canadian wholesale trade dipped 0.5% in December, compared to consensus expectations in a Reuters poll for a monthly increase of 0.4%. Lower sales were recorded in five of the seven subsectors, representing 65 percent of wholesale trade in December, while volumes declined 0.9%. The personal and household goods subsector dropped 3.3% to its lowest level since April 2017 while sales in the miscellaneous subsector fell 2.4% on weakness in the agricultural supplies industry. Taking the calendar year as a whole, wholesale trade in 2017 rose for the eighth year in a row, jumping 9.4%to a new record. The year-over-year increase was the biggest advance since the 13.7% jump in 1997. <br><br> For the rest of this week, we have official data on retail sales on Thursday then on Friday it’s earnings, hours worked and the CPI numbers. The Canadian Dollar opens in Asia this morning at USD/CAD1.2635, AUD/CAD0.9970 and NZD/CAD0.9280.

AUD / USD

Expected Range

The US Dollar had another pretty good day on Tuesday, its movements largely mirroring those of the main US equity indices. At times when stock markets are rallying, the USD has had an observable tendency to sell-off, whilst any sign of stress in equities has had the opposite effect, leading to something of a safe-haven bid. It would be both a huge exaggeration and a mistake to suggest that yesterday’s stock market moves were on the scale of those seen a couple of weeks ago, but that is what currency traders were largely focused on. The USD index against a basket of major currencies rose half a point from 88.90 to an intra-day best level of 89.40, before giving back some of these gains as Wall Street clawed back earlier losses in the NY afternoon. <br><br> The main attention in US markets was in rates and fixed-income as the US has to sell a record amount of debt with three days of auctions of T-bills and notes totaling $258 billion. The 3 and 6-month bill auctions, came at record amounts of $51bn and $45bn respectively but the market had no problems absorbing the massive supply: the 3-month yielded 1.63%, below the 1.64% when-issued price and the 6-month yielded 1.82%, also 1bp below the when-issued price. The 2-year auction, meantime, priced at 2.255%; the highest yield since August 2008, one month before the Lehman bankruptcy. Fed funds futures are fully pricing three 25bp rate hikes and put the probability of the Fed raising rates four times this year at 25 percent versus just 17 percent immediately before last week’s US CPI release. <br><br> The highlight for Wednesday will be the release of the Minutes of the January 31st FOMC; just two days before the 666-point drop for the Dow Jones Industrial Average and the subsequent surge in volatility. Of course, the further 2,000-point drop and similar-scale rally seen over the last two weeks should make any conclusions from the Minutes even more conditional and unreliable as policy signals than they usually are. The USD index opens this morning around 89.35; well above its recent 3-year low of 87.95.

AUD / NZD

Expected Range

The New Zealand Dollar continued to edge slightly weaker on Tuesday. NZD/USD extended its decline from Friday’s 0.7434 high and at its weakest point during the European afternoon was down almost a full cent from this level. AUD/NZD, meantime, continued to find some buying interest and is now almost 30 pips above Friday’s 6-month low of 1.0705. <br><br> Statistics NZ reported that producer output prices rose 1.0% q/q in the fourth quarter of 2017, in line with expectations and unchanged from the previous three months. Higher output prices were up mainly due to dairy product manufacturing and higher oil prices. Producer input prices were up 0.9% q/q, shy of expectations for 1.0%, which would have been the same rate as Q3. The statisticians noted "Higher crude oil prices led to increased costs for many industries, including petroleum, forestry and logging, transport, construction, and farming." In the year to December 2017, producer output prices increased 4.7% and producer input prices 4.4%. The farm expenses price index increased 2.5%, while the capital goods price index increased 2.6%. <br><br> A separate survey from ASB Bank yesterday showed expectations that house prices will rise are at a six-and-a-half year low. Nationally, expectations that house prices would rise were a net 16% for the three months to December, down from 17% in the three months to October. Details showed expectations that house prices would rise in the South Island had lifted to a net 30% from 29%, led by Canterbury at net 11% up from 8 % previously. Price expectations continued to ease in the North Island to net 20%, down from 23% in the previous survey. The New Zealand Dollar opens in Asia this morning at USD0.7345 and AUD/NZD1.0730.

By Nick Parsons

No surprises seen in RBA Minutes today, but can AUD hold on to US 79 cents?


AUD / NZD

Expected Range

The New Zealand Dollar last week touched a fresh 2018 high of USD0.7434 before slipping back to close more than a cent lower at 0.7390, which is where it spent most of Monday before then losing almost half a cent against a generally well-bid US Dollar. A sell-off during the European afternoon took the pair down to 0.7355 before a recovery to the 0.7355 area. Against its Aussie cousin, the AUD/NZD cross couldn’t break Friday’s 6-month low of 1.0705 and moved around a quarter of a cent higher as the day progressed. <br><br> The Bank of New Zealand-Business NZ’s performance of services index (PSI) was published on Monday. It showed growth in New Zealand’s services sector eased in January and new orders fell to their lowest in 10 months. The headline index edged down to 55.8 from 56 in the previous month whilst the sub-index measuring new orders and business fell to 57.6, the first time it had slipped below 60 since April 2017. The authors of the report noted that, “While the PSI is relatively robust, combined with the Performance of Manufacturing Index it nonetheless signals something of a slowing in GDP growth for the near term.” <br><br> Today is another day of inflation numbers. As well as the quarterly PPI data, there’s RBNZ survey of household inflation expectations. This survey often runs higher than the business numbers, and is calculated to only one rather than two decimal points. In the December quarter, household expectations of inflation in one year’s time rose from 2.5% to 3.0%; well above comparable survey results from businesses and professional forecasters. The New Zealand Dollar opens in Asia this morning at USD0.7370 and AUD/NZD1.0730.

AUD / CAD

Expected Range

There’s been lots to digest in the last few weeks for the Canadian Dollar, not least because the world’s second and fourth largest countries by area are facing huge uncertainty over the future of the Free Trade Agreement which has been in place for almost thirty years. With the USD on a weaker trajectory and a huge increase in stock market volatility, the CAD has not been unscathed. Over the past week it ended on net firmer against the US Dollar around 1.2550 but weaker against all the other FX majors with AUD/CAD, for example, up a full cent to 0.9930 and now just 60 pips away from parity. <br><br> Canadian Finance Minister Bill Morneau met on Friday with private-sector economists in Toronto ahead of his upcoming February 27th budget. According to Bloomberg, he said they discussed the impact of US tax changes, as well as ongoing talks to revamp the North American Free Trade Agreement. He declined to say if corporate tax cuts were on the table on this side of the border in the wake of the Trump administration’s tax overhaul. In a letter to Morneau, the Business Council of Canada – which represents chief executives from dozens of major companies – last week said the country “must move quickly to shore up its business tax competitiveness.” They would say that, wouldn’t they… <br><br> The Bank of Canada has raised rates three times since July 2017 and its next monetary policy meeting is on March 8th; two days after the RBA and the same day as the ECB. Money markets are indicating around a 70% probability of another hike by May, but it is not expected to come before then. This week brings official data on retail sales on Thursday then on Friday it’s earning, hours worked and the CPI numbers. Before then, wholesale trade numbers are released today. The Canadian Dollar opens in Asia this morning at USD/CAD1.2560, AUD/CAD0.9940 and NZD/CAD0.9260.

AUD / USD

Expected Range

The US Dollar had another good day on Monday, albeit closing below its best levels seen during the European afternoon. Its index against a basket of major currencies rose on Friday from a low of 87.95 to close around 88.75. Yesterday, it extended these gains up to 89.10 before slipping back to 88.85 as stock index futures lost 100 points then rallied back to flat at the end of the European day. It’s not clear what is the direction of causality here: whether the currency is driving stocks or vice-versa. If the causality isn’t clear, though, the correlation most definitely is and will be something to watch closely as the US returns today from the Presidents’ Day holiday and Chinese investors come back to the market later in the week. <br><br> Though US stocks and the currency seem well-correlated (negatively) the USD still isn’t getting any support from higher bond yields or the expectation of much higher short-term interest rates over the course of this year. Fed funds futures are fully pricing three 25bp rate hikes and put the probability of the Fed raising rates four times this year at 25 percent versus just 17 percent immediately before last week’s US CPI release. The overwhelming narrative amongst bank strategists is that the US Dollar is headed lower, if for no better reason than that is the prevailing trend. <br><br> The highlight of the week ahead will probably be Wednesday’s release of the Minutes of the January 31st FOMC; just two days before the 666-point drop for the Dow Jones Industrial Average and the subsequent surge in volatility. Of course, the further 2,000-point drop and similar-scale rally seen over the last two weeks should make any conclusions from the Minutes even more conditional and unreliable as policy signals than they usually are. But, as we’ve said before, there’s a whole army of Fed-watchers who have to earn their living trying to sort the wheat from the chaff on every sackful of words from the Eccles Building. The USD index opens this morning around 88.85; almost a full point above its recent 3-year low of 87.95.

AUD

Expected Range

As half of Asia and more than half of North America was out for holidays on Monday, it always threatened to be a fairly quiet day for the Australian Dollar and that’s pretty much how it turned out. That’s not to say it was totally uninteresting, and it was noticeable how sensitive the AUD was to moves in US stock index futures – which were open for trading even as cash equities were closed. The high for the day for AUD/USD around 0.7935 came with the DJIA up around 100 points and when the market turned negative in the European afternoon, so too the AUD fell back to just a few pips above 0.7900. Holding on to that psychological level was a positive, and technically it was good to hold above Friday’s 0.7895 low. Whether this holds or crumbles after today’s RBA Minutes is now the big question for global FX markets. <br><br> The Governor’s statement after the February 6th Board meeting said, “Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual. Taking account of the available information, the Board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time”. The 68-page Quarterly Statement just 3 days later had exactly the same message, whilst Deputy Governor Luci Ellis last week was notably cautious in her assessment of wage pressures and household consumption. The discussions in the Minutes released today are unlikely to deviate much from this path of gradualism, and it would be a source of genuine surprise if future interest rate expectations were to be much changed as a result. <br><br> One thing is certain however: on current published forecasts, both CBA and NAB cannot be simultaneously correct. CBA has erased the two rate hikes it had penciled-in for 2018 whilst the NAB still has them in its forecast profile. We doubt the Minutes will be the peg on which to hang any forecast changes, but Wednesday’s quarterly wage prices will be scrutinised closely for any clues. The last set of numbers in November showed a +0.5% q/q increase to leave the annual rate at 2.0%; well-below its long-run average around 3¼%. Consensus looks for a similar pace of growth in the Q1 data. The Australian Dollar opens in Asia this Tuesday morning at USD0.7910, with AUD/NZD at 1.0730 and GBP/AUD1.7695.

GBP / AUD

Expected Range

The GBP had a bit of a wobble on Monday and ended up sharing bottom spot in our one-day performance table with the NZD, having at one point been on its own way below the rest of the pack, before a rally during the North American morning. GBP/USD stood around 1.4030 at lunchtime in Europe but then took a dive to the low 1.3960’s as the initial 100-point gain for DJIA futures turned into a near 100-point loss. As stocks recovered, so too did the ‘cable’ rate, even though it struggled to hold on to a USD 1.40 handle. <br><br> On Sunday, in an interview for the BBC's Andrew Marr Show, Guy Verhofstadt, the EU Parliament's Brexit chief, said that Britain cannot cherry pick the areas where it wants to make bespoke deals, and that any deal should ensure there "should be no competitive advantage for either the UK or EU. What will be in that part of the agreement, we will see. Passporting will not be there, you have to be part of the Single Market," he said. UK Ministers David Davis and Liam Fox are said to be preparing speeches for delivery this week but no amount of internet searches actually throws up any details of where and when these might be. <br><br> A fascinating analysis by The Guardian newspaper claims that Britain will move beyond “peak cash” this year, with debit cards set to overtake cash as the most frequently used payment method in the UK later this year. In 2006, 62% of all payments in the UK were made using cash; in 2016 the proportion had fallen to 40%. By 2026, it is predicted cash will be used for just 21%, according to figures from UK Finance. ATM data show that in 2016, there were 2.7bn withdrawals from the country’s 70,000 cash machines; the lowest number of transactions since 2010. The total amount of money withdrawn at ATMs has fallen steeply in the last few years; in 2016, people withdrew more than £6bn less than they did in 2015. Bank of England figures meanwhile show that while the volume of cash in the economy typically increases every year, it is now doing so at the slowest rate since 1972. It is not just the world of cross-border currency transactions which is being transformed by new technology and smarter companies! The pound opens in Asia this morning at USD1.4005, GBP/AUD1.7700 and GBP/NZD1.9000.

AUD / EUR

Expected Range

The euro had a pretty quiet Monday in Asia but EUR/USD then fell more than half a point either side of lunchtime in Europe, moving from 1.2425 to 1.2370 before rebounding back on to a 1.24 ‘big figure’ as US stock index futures recovered their losses. <br><br> We mentioned last week that German politics were becoming less of a tail-risk for the euro, but there are some signs that it is again growing as a source of concern. Two developments are worth noting. The first is that the 463,723 Social Democratic party members still have to decide whether to enter another grand coalition under Chancellor Angela Merkel. They have until March 2 to submit their votes, and the result is expected to be announced the following day. At a special SPD conference in January, only 60 percent of delegates voted to authorise their leaders to hold coalition talks with the conservatives. “I am convinced we will get a majority,” Andrea Nahles, who senior SPD officials this week endorsed as the party’s future leader, told Der Spiegel magazine in comments published on Saturday. “I don’t have a Plan B.” The second concern is that even if a coalition is approved, a poll published on Monday by the newspaper Bild put the Alternative for Germany (AfD) on 16 percent, showing that they are currently more popular than the Social Democrats (SPD). They entered the Bundestag for the first time in September after winning 12.6 percent of the vote. The party was set up in 2013 and fought the election of that year on an anti-Euro platform. Don’t be surprised to hear much more from AfD over the coming months. <br><br> Tuesday brings Germany’s ZEW Survey of professional forecasters and the so-called ‘flash PMI’s’ are published on Wednesday. The EUR opens in Asia this morning at USD1.2410, AUD/EUR0.6375 and NZD/EUR0.5940.

By Nick Parsons

USD rallied on Friday but sentiment remains very negative. Wages data on Wednesday are key for RBA and AUD.


AUD / CAD

Expected Range

There’s been lots to digest in the last few weeks for the Canadian Dollar. Investors are grappling with the implications of higher US inflation and interest rates at the same time as US government debt is soaring and the current account deficit is widening. Throw in uncertainty around NAFTA and an oil price which has fallen more than 10% over the past couple of weeks and it’s easy to see why the USD/CAD has been so choppy. Over the past week it ended on net firmer against the US Dollar but weaker against all the other FX majors with AUD/CAD, for example, up a full cent to 0.9930 and now just 70 pips away from parity. <br><br> We covered here on Friday the 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. In response to audience questions afterwards, he went on to say that Bank of Canada’s cautious approach to further rate hikes does not mean rates will stay low forever, as policymakers also have to weigh inflationary pressures. “There’s a balance between the two - being cautious and recognizing that there’s important uncertainties facing the Canadian economy, but at the same time recognizing and monitoring inflationary pressures and how they develop.” <br><br> The Bank of Canada has raised rates three times since July 2017 and has said less monetary policy stimulus is likely going to be required over time, but maintains it will be cautious and watch incoming data as it considers more hikes. The next BoC monetary policy meeting is on March 8th; two days after the RBA and the same day as the ECB and though money markets are indicating around a 70% probability of another hike by May, it is not expected to come before then. This week brings official data on retail sales on Thursday then on Friday it’s earning, hours worked and the CPI numbers. Before then, wholesale trade numbers are out Tuesday but its otherwise a very quiet start to the week. The Canadian Dollar opens in Asia this morning having finished on Friday at USD/CAD1.2555, AUD/CAD0.9930 and NZD/CAD0.9280.

AUD / NZD

Expected Range

The New Zealand Dollar began last week around USD0.7250 and moved steadily higher, interrupted only by a sharp drop and equally sharp reversal higher on Wednesday after the release of the US CPI figures. By Friday morning, the pair touched a fresh 2018 high of 0.7434 before slipping back to close more than a cent higher at 0.7390. Against its Aussie cousin, the NZD reached a 6-month high with the AUD/NZD cross falling to 1.0705; its weakest since August 5th. <br><br> In economic news, last week’s highlight was arguably the RBNZ's March quarter survey which 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%. New figures on house sales from the Real Estate Institute of New Zealand, meantime, showed sales volumes nationally rose when compared to the same time last year for the first time in 19 months. <br><br> The week ahead has another RBNZ survey on Wednesday; this time of households rather than businesses. This survey often runs higher than the business numbers, and is calculated to only one rather than two decimal points. In the December quarter, household expectations of inflation in one year’s time rose from 2.5% to 3.0%; well above comparable survey results from businesses and professional forecasters. Before then, today brings the performance of services index which – like the manufacturing PMI survey – is published out of synch with all the other global PMI numbers. As at Friday’s New York close, the NZD stood at USD0.7390 and AUD/NZD1.0705.

AUD / EUR

Expected Range

The euro had a good week, ending with EUR/USD almost 2 cents above Monday’s opening level. With German politics fading as a concern for investors and sentiment towards the USD uniformly negative, incoming economic data in the Eurozone continued to support the Single Currency, albeit there was no standout positive surprise. <br><br> Figures released from Eurostat confirmed 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. 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 while GDP increased 0.7% in Portugal. <br><br> After a slow start today, Tuesday brings Germany’s ZEW Survey of professional forecasters and the so-called ‘flash PMI’s’ are published on Wednesday. Markets have hitherto never been bothered with Minutes of the ECB Council Meetings but it was the last set of Minutes published on January 11th which dropped the bombshell about the need to change the language around monetary policy. EUR/USD was trading down at 1.1950 at the time and it was this – rather than anything Mr. Mnuchin said at Davos – which really sent the euro soaring. The Minutes will be very closely watched this time around on Thursday ahead of Friday’s Eurozone CPI numbers. The EUR opens in Asia this morning having closed in New York on Friday evening at USD1.2415, AUD/EUR0.6370 and NZD/EUR0.5950.

AUD / USD

Expected Range

The US Dollar had a very poor week with its index against a basket of currencies falling below 88 for the first time in a little over 3-years. Its fall came as equity markets enjoyed their biggest one-week gain since December 2011 and despite the yield on US 10-year Treasury bonds hitting a 4-year high of 2.91%. Analysts have been falling over themselves to advance new reasons for the USD decline, in some cases citing the very factors which caused them to be bullish in early 2017. Thus, the strength of the US economy we are now told is a bad thing because it will suck in imports whilst the rise in bond yields is due to deficit-financing which will leave the US at the mercy of foreign investors. Never underestimate the ability of analysts to fit a narrative around the prevailing price action! <br><br> With stock markets recovering, a 25bp rate hike at the March FOMC meeting is now priced with greater certainty than at any point this year. Three weeks ago, with the stock market at a record high, the market-derived probability of a hike was 76%. Today, it is at 83%. Indeed, Fed funds futures put the probability of the Fed raising rates four times this year at 25 percent versus just 17 percent immediately before the US CPI release. None of this helped the US Dollar last week, however, and though Friday saw a half-point gain for the USD index, sentiment and price action remain very negative. <br><br> Today is the third Monday in February so US markets are closed for the President’s Day holiday. Originally established in 1885 in recognition of President George Washington and celebrated on February 22, the holiday was moved in the 1971 Uniform Monday Holiday Act; an attempt to create more three-day weekends for workers. The highlight of the working week will probably be Wednesday’s release of the Minutes of the February 1st FOMC; just one day before the 666-point drop for the Dow Jones Industrial Average and the subsequent surge in volatility. It is otherwise a pretty quiet week for economic statistics. Existing home sales and Markit’s version of the PMI survey are out on Wednesday and there are a few Fed speakers scheduled but no top-tier data. The USD index closed on Friday at 88.30 having earlier in the day hit a fresh 3-year low of 87.95.

AUD

Expected Range

With stock markets enjoying their biggest weekly gain since December 2011, volatility lower and gold up more than $30 from its recent low, many of the conditions were in place for a rally in the AUD last week. With the US Dollar hitting a fresh 3-year low against a basket of major currencies, AUD/USD ended the week more than a cent higher at 0.7910, having at one point on Friday morning reached a 2-week best of 0.7985. <br><br> Last week’s Australian labour force figures did nothing to boost investor appetite for the AUD. Employment increased 16,000 on the month but 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. 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. RBA Assistant Governor Luci Ellis last week noted, “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.” <br><br> As the RBA has made very clear that it is watching wages and aggregate household incomes, then investors around the world are going to be doing exactly the same thing. On Wednesday this week the Australian Bureau of Statistics releases its quarterly wage price index, as it has done every three months since September 1997. The last set of numbers in November showed a +0.5% q/q increase to leave the annual rate at 2.0%; well-below its long-run average around 3¼%. Consensus looks for a similar pace of growth in these Q1 numbers and the read-across to the currency from the data should be pretty straightforward: stronger numbers = stronger AUD and, of course, vice-versa. The Australian Dollar opens in Asia this Monday having closed in New York at USD0.7910, with AUD/NZD at 1.0705 and GBP/AUD1.7750. Within the Asian time zone, Chinese markets remain closed until Wednesday for the Lunar New Year holidays.

GBP / AUD

Expected Range

The GBP had a very good week despite the softness of economic activity data. It began on Monday around USD1.3820 and moved higher on Tuesday after CPI figures showed the UK inflation rate stuck at 3.0% rather than falling to 2.9% in line with consensus expectations. From a high on Wednesday morning of USD1.3920, the pound tumbled to 1.3830 after stronger than expected US CPI figures. Within ninety minutes, however, it had more than reversed all its losses to close just under 1.40. On Thursday and Friday, it extended these gains to a 2-week high just below 1.4140. Then came news that UK retail sales grew just 0.1% m/m in January, well below consensus expectations of a +0.6% m/m increase and by the close of business the GBP had lost more than a cent to USD1.4045. <br><br> With the balance of incoming economic data generally soft – especially in those areas linked to the housing market, consumer confidence and expenditure – the GBP continues to be buffeted by alternating hopes and fears around Brexit negotiations. There are only a little over 4 weeks to a key European Council Summit on March 22-23, and UK Cabinet members are currently embarked on a series of speeches which are designed to put a little more flesh on the bare bones of its negotiating position. Last Wednesday it was the turn of Foreign Secretary Boris Johnson and on Saturday the Prime Minister gave a speech in Munich about Britain and European security policy. <br><br> For the week ahead in markets, the focus will be on the major UK banks which all report annual profit numbers. In economics, Wednesday brings the latest unemployment and average earnings figures and, just as in Australia, currency investors will be watching closely for any sign of pick-up in wage growth. Futures markets are currently reflecting a 70% probability of a 25bp hike at the May MPC meeting. 32 of 57 analysts polled by Reuters last week said the BoE would raise its Bank Rate to 0.75 percent in May, up from only 13 of 71 economists in a similar survey in January. The pound opens in Asia this morning having closed on Friday at USD1.4035, GBP/AUD1.7750 and GBP/NZD1.8990.

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 / 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.

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.

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

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 / 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 / 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 / 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 / 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 / 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.

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.

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