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By Nick Parsons

Aussie Dollar goes from bottom to top spot as US stocks rally. GBP weaker, but CAD weaker still. Volatility seems here to stay for a while.


AUD / NZD

Expected Range

The NZD/USD has been on a US 73 cents ‘big figure’ for every minute of the past 24 hours, despite a 450-point drop and subsequent 300-point rally in the main US stock market index. The pair has bounced three times off the 0.7310 level and reached a high during the European afternoon just above 0.7360; an unusually tight high-low range given the big swings in global equities. The AUD/NZD cross, meantime, remains below last week’s 6-month low of 1.0705, having been down to 1.0655; the lowest since August 4th last year. <br><br> Data from the Reserve Bank of New Zealand show total credit card spending in New Zealand decreased for the first time in five months in January. Credit card spending dropped 0.6% month-over-month in January, fully reversing a 0.6% rise in December. The numbers also showed that credit card balances increased at a slower pace of 0.2% in January, following a 0.4% rise in the preceding month. The good news is that credit card users are making much more of an effort to pay balances more promptly. As at December 2017, 60.4% of all balances incurred interest. That is the lowest level ever recorded since this data started in July 2000. Just one year ago it was 62.2%, and five years ago it was 64.8%. It peaked at 76.1% in January 2001. <br><br> Separate data from Stats NZ show labour productivity rose 0.9 percent in the year ended March 2017. Setting aside for a moment the irony of publishing productivity figures 10 months after the quarter-end, the statisticians’ Press release was punchily titled, “More New Zealanders working, and working smarter” and the details showed that New Zealand workers could produce 133 units of goods or services each hour in 2017, compared with 100 an hour 20 years ago. In the long run, productivity is regarded as key to increasing standards of living – as workers share the fruits of their labour. By producing more for each hour worked, Stats NZ helpfully explains, their incomes may rise and the country becomes wealthier. The New Zealand Dollar opens in Asia this morning at USD0.7345 and AUD/NZD1.0685.

GBP / AUD

Expected Range

Mornings have not been kind to the British Pound this week and by lunchtime in London on Thursday, it was down against all the major currencies and for the third time this week looked set to take bottom spot on our one-day performance table. It had very briefly regained USD1.40 for a few minutes after the FOMC Minutes were released but then began to fall sharply and couldn’t subsequently hold on to a USD 1.39 ‘big figure’, reaching an intra-day low yesterday of USD1.3860. The sharp rally in the US stock market helped lift GBP/USD up almost a cent from its low and the GBP finished the day up against USD and CAD but down against EUR, AUD and NZD. <br><br> In economic news, UK growth in the fourth quarter of last year has been revised down to 0.4%, from an initial estimate of 0.5% whilst annual growth for 2017 as a whole has also been revised down a little, from 1.8% to 1.7%. details showed that business investment was flat in Q4 and household spending rose by just 0.3% during the quarter, which means it only grew by 1.8% last year. A tenth or so off the GDP numbers doesn’t sound much but in terms of presentation it is very important. It means the UK is at the bottom of the G7 pack with average growth in 2017 back below Japan and Italy (Canada doesn’t report Q4 figures until March 2nd). <br><br> UK Government Ministers headed away on Thursday for a Cabinet ‘offsite’ meeting on Brexit, to discuss the ‘position paper’ which we wrote about here yesterday. In what is understood to be the Prime Minsiter’s preferred model, the UK would be in regulatory alignment with the EU in some areas while finding different ways to achieve the same outcomes in other sectors. In the so-called ‘third basket of sectors’, the UK would in time diverge from the EU and go its own way under the model. If that sounds an elaborate fudge, that’s because it is! The EU have spotted it too and a European Commission document timed to coincide with the meeting says, “The UK views on regulatory issues in the future relationship including ‘three basket approach’ are not compatible with the principles in the [European council] guidelines.” Oh well, maybe the government enjoyed the tea and sandwiches at Chequers. The pound opens in Asia this morning at USD1.3955, GBP/AUD1.7790 and GBP/NZD1.8900.

AUD / USD

Expected Range

We warned earlier in the week that whilst we couldn’t be sure of the direction of causality between stocks and the US Dollar, the correlation was very strong. 700 points off the DJIA from last Friday’s high added a little over 2 points to the dollar’s index against a basket of major currencies, which yesterday morning traded up to 89.85; its highest in almost 10 days. As the Dow Jones then added 350 points by the time London traders left for home, so the USD index gave back around half a point of its recent gains. All that currency traders have to do is to figure out where stock markets are going! <br><br> St. Louis Federal Reserve President James Bullard cautioned that investors may be "getting ahead of themselves" in anticipating four rate hikes from the central bank this year. Speaking with CNBC Television, Bullard said he doesn't see the case for a 1.2% increase in the Fed Funds rate this year, adding that "one hundred basis points in 2018 seems a lot to me." He also said there was a "ways to go" with respect to sustainable upward move on inflation and reiterated the view that US GDP will likely grow between 2.4% and 2.5% this year. Fed Governor Randal Quarles, meantime, gave a speech in Tokyo saying, “The U.S. economy appears to be performing very well and, certainly, is in the best shape that it has been in since the crisis and, by many metrics, since well before the crisis… With a strong labor market and likely only temporary softness in inflation, I view it as appropriate that monetary policy should continue to be gradually normalized." <br><br> The US economic calendar is empty on Friday which might not be a bad thing given the volatility seen already in this holiday-shortened week. The USD index opens this morning in Asia around 89.30; down almost half a point from Thursday’s high but still 1 ½ points up on where it was this time last week.

AUD / CAD

Expected Range

The Canadian Dollar has weakened steadily over the past week, not just against a rebounding US Dollar. On Thursday morning, USD/CAD moved on to 1.27 ‘big figure’; a fresh high for 2018 and the best level since December 26th last year. After the latest retail sales numbers were released, the CAD fell further. USD/CAD hit a high of 1.2740 whilst AUD/CAD is now less than a quarter of a cent from trading at parity. <br><br> Stats Canada reported that after three consecutive monthly increases, retail sales decreased 0.8% in December. Sales fell in 6 of 11 subsectors, representing 42% of retail trade. Lower sales at general merchandise; health and personal care; and electronics and appliance stores more than offset gains at motor vehicle and parts dealers and food and beverage stores. Excluding motor vehicle and parts dealers, retail sales fell an even bigger -1.8%m/m. There’s no doubting that these numbers were considerably worse than the +0.2% m/m consensus, but retail sales were up 1.5% in the fourth quarter and up 6.7% for the year. <br><br> Local analysts said the disappointing reading put the economy on track for growth of about 2 percent in the fourth quarter, below the Bank of Canada’s 2.5 percent forecast. Statistics Canada will release fourth-quarter growth figures next week. The market-derived probability that the BoC will remain on hold at its March 7th meeting rose to 96% , though another rate hike is still fully priced in by July. The Canadian Dollar opens in Asia this morning at USD/CAD1.2710, AUD/CAD0.9970 and NZD/CAD0.9340.

AUD / EUR

Expected Range

The euro has had a pretty lively 24 hours. It jumped to 1.2355 on the Fed Minutes before plunging to a low early in Thursday’s European morning of 1.2260. As stock markets recovered and the USD gave back some of its recent gains, so the EUR first stabilised then jumped around three-quarters of a cent as the daily gains for the DJIA exceeded 300 points. <br><br> Investors have grown used to a steady stream of good and better than expected economic data in the Eurozone. There were the first cracks in this narrative with Wednesday’s ZEW Survey and yesterday morning’s ifo survey was a genuine disappointment. The institute noted, “Germany’s very favourable business climate cooled down considerably this month. The ifo Business Climate Index fell to 115.4 points in February from 117.6 points in January. Companies were less satisfied with their current business situation, but the indicator was at its second highest level since 1991. This signals economic growth of 0.7 percent in the first quarter. After the euphoria of recent months, companies’ assessments of the business outlook for the months ahead were also far less optimistic. In manufacturing the index fell considerably from last month’s record high. Assessments of the current business situation were slightly less favourable, although they remained at a high level. Manufacturers also downwardly revised their business expectations. They reported a marginal slow-down in demand and slightly lower order levels.” <br><br> The Minutes of the ECB Council Meeting said, “Some members expressed a preference for dropping the easing bias regarding the APP from the Governing Council’s communication as a tangible reflection of reinforced confidence in a sustained adjustment of the path of inflation… However, it was concluded that such an adjustment was premature and not yet justified.” Mr Draghi’s views on FX at the Press Conference were widely shared among Council members. “Concerns were expressed about recent statements in the international arena about exchange rate developments and, more broadly, the overall state of international relations…The importance of adhering to agreed statements on the exchange rate was emphasised.” An unusually extensive discussion of FX said, “It was also pointed out that the bilateral exchange rate of the euro against the US dollar had changed more than the euro's nominal effective exchange rate... However, explaining the US dollar weakness was not straightforward, given the strength of recent data releases and the fiscal and monetary policy outlook in the United States”. Friday’s Eurozone CPI numbers might show s the extent to which a stronger euro is still weighing on prices. The EUR opens in Asia this morning at USD1.2335, AUD/EUR0.6365 and NZD/EUR0.5960.

AUD

Expected Range

Intra-day movements across asset classes are becoming more volatile, less predictable, and often occurring with little obvious catalysts. Did yesterday’s FOMC Minutes really warrant a 400 point drop in the Dow Jones Industrial Average? And if the answer is ‘yes’, then why did the same index rally 300 points the very next day on absolutely no fresh news or information? We may have to live with such swings for some time to come, and factor them into our decisions on when and how to execute our currency transactions; whether they be for hedging, investment or simply recreational cross-border expenditure such as vacations. As a good example of this volatility, after Wednesday when the AUD was the worst performer of all the major currencies we follow here, Thursday saw it back at the top of the table. Higher stocks and lower market-based measures of risk such as the VIX index help explain the AUD rally, but anyone who claims to know the precise reason that equities fell then rallied is guilty of merely fitting a story to the price action. <br><br> With that rant off your author’s chest, we note that Prime Minister Turnbull is scheduled to meet with US President Trump in Washington. This will be his fourth meeting with Mr Trump and he will be accompanied on this trip by four of Australia's six state premiers, other local leaders and 20 CEOs of the nation's largest companies. Briefing journalists ahead of the trip, an unnamed Australian official said, “The prime minister is travelling with a large delegation of business leaders and he is very keen to talk trade opportunities, while China will obviously be an important element of the talks". Mr. Turnbull is still keen to promote the Trans-Pacific Partnership, the official said, even though it is likely to receive a lukewarm reception from Trump who last year withdrew the United States to concentrate on protecting US jobs. <br><br> According to the Sydney Morning Herald, “Prime Minister Malcolm Turnbull will propose using a chunk of Australia's $2.53 trillion superannuation pool to help unlock funding for Trump's infrastructure push. "There's a very bold ambition to drive US infrastructure and Australia should be front and centre in terms of project design, build, financing and management," Trade Minister Steven Ciobo said in an interview ahead of the visit. It is certainly an area in which Australia has proven expertise but if it raises concerns about capital outflows to finance overseas projects, it could end up being another short-term marginal negative for the currency. The Australian Dollar opens in Asia this morning at USD0.7845, with AUD/NZD at 1.0685 and GBP/AUD1.7790.

By Nick Parsons

AUD was Wednesday’s worst performing currency as RBA rate hike forecasts continue to be pared back. US stocks liked the FOMC Minutes so USD gave back some of its gains.


AUD / NZD

Expected Range

The NZD/USD pair continues to edge slightly lower and has now extended its decline from Friday’s 0.7434 high to more than a full cent. However, the Kiwi’s drop against a very strong US dollar is not the main story. Instead, the big event is the continued decline in the AUD/NZD cross which has fallen below Friday’s 6-month low of 1.0705, and has been down to 1.0665; the lowest since August 4th last year. <br><br> The New Zealand Government yesterday published a weighty report on the economic impact of the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP). The 243-page National Interest Analysis (NIA) estimates the economy would grow between 0.3% and 1% more than if TPP had not existed, with exporters enjoying better access to new markets such as Japan, Canada and Mexico. The NIA estimates tariff savings of $222.4 million in savings annually once fully implemented, with $95.1 million of those savings starting as soon as the deal enters into force. The agreement would also help reduce non-tariff barriers, though the potential benefits are harder to quantify. The report estimates they could range between $363 million to $1.2 billion. Trade Minister David Parker said it supported New Zealanders' jobs and income and protected national sovereignty although the National Party said it has yet to formally decide whether to support the newly renegotiated TPP trade deal. <br><br> According to the Ministry of Foreign Affairs and Trade's estimates, the less than snappily-named CPTPP is expected to produce between a $1.2b and $4b boost to New Zealand's real GDP. The dairy industry alone is expected to save nearly $86 million in tariffs and the country's exporters would save about $200m in reduced tariffs to just Japan once the reductions are fully implemented. Coming after the latest Global Dairy Trade auction showed the first fall in prices this year, the government report is a reminder of the huge economic importance of that sector. The New Zealand Dollar opens in Asia this morning at USD0.7355 and AUD/NZD1.0670.

AUD / USD

Expected Range

The US Dollar continues to trade pretty much inversely to stock markets, with its 3-day winning streak since Friday coming as the DJIA moved from a high of 25,370 down to a low on Wednesday morning of 24,910. Over this period, the USD index against a basket of major currencies rose from 88.00 to a high yesterday just over 89.60. After the release of the Minutes of the January 31st FOMC meeting, the DJIA jumped 250 points and it was thus no great surprise to see the USD give back some of its gains with the index down around half a point from its earlier highs. <br><br> There had been some talk that the Minutes might be used to steer the market towards expecting four rate hikes this year, rather than the median of three which had been signaled in the December ‘dot-points’ and the 2.82 hikes which were reflected in interest rate pricing. This didn’t really happen. For sure, “A majority of participants noted that a stronger outlook for economic growth raised the likelihood that further gradual policy firming would be appropriate" and FOMC voters agreed to add word "further'' in front of gradual increases because of the stronger economic outlook. A number of FOMC participants indicated that they had raised their forecasts for economic growth in the near-term vs their December estimates and the impact of recent tax cuts "might be somewhat larger in the near term than previously thought''. Nevertheless, "Participants generally noted few signs of a broad-based pickup in wage growth in available data" and some participants saw “an appreciable risk that inflation would continue to fall short of the committee's objective'' and judged the FOMC "could afford to be patient". <br><br> As ever, there’s something for everyone in the Minutes and you can nearly always find what you’re looking for to support any particular view. On the whole, however, there’s nothing too scary for asset markets and nothing to suggest that either the pace or scale of future rate hikes is to be accelerated. As equity markets took on board this message from the Minutes, the USD index opens this morning around 89.35; down almost half a point from its high but back only to where it was at this time on Wednesday.

AUD / EUR

Expected Range

Having been bottom of our one-day performance table on Tuesday, the EUR edged further lower on Wednesday with EUR/USD falling to a one-week low just a few pips above 1.2300 ahead of the release of the FOMC Minutes. The EUR was unchanged against the CAD and GBP, fell against the USD and NZD but rose against the AUD. <br><br> In economic data, Eurozone business activity continued to rise at a decent pace in February, albeit with the rate of expansion cooling from the near 12-year high recorded in January. Price pressures and employment growth also remained elevated, though likewise saw rates of increase ease slightly. Business optimism about the coming year meanwhile ticked higher. The headline Markit Eurozone PMI fell from 58.8 in January to 57.5 in February, according to the flash estimate, which is based on approximately 85% of usual final replies. Markit noted that, “By country, growth in Germany came in at a three-month low, while in France the composite PMI moderated to the weakest for four months. However, in both cases the PMI readings remained at levels indicative of strong growth, close to recent seven-year highs. Business activity growth meanwhile also slowed across the rest of the eurozone, though still registered the second-largest expansion in nearly 12 years… At the eurozone level, the goods-producing sector continued to record a faster pace of expansion than the service sector, though growth of output and new orders slowed in both cases. However, both sectors continued to enjoy the best periods of expansion seen for seven years.” <br><br> Currency markets have historically 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. Today’s Minutes of the January24-25th meeting will be very closely watched this time around ahead of Friday’s Eurozone CPI numbers. The EUR opens in Asia this morning at USD1.2325, AUD/EUR0.6360 and NZD/EUR0.5970.

AUD / CAD

Expected Range

The Canadian Dollar has spent the whole of the last 24 hours on a USD/CAD1.26 ‘big figure’ on the combination of Tuesday’s disappointing wholesale trade numbers and a generally stronger US Dollar. Indeed, yesterday morning in North America, USD/CAD traded as high as 1.2680; a fresh high for 2018 and the best level since December 27th last year. <br><br> Away from the regular round of incoming economic statistics, some of which sometimes seem to generate more noise than genuine insight, Statistics Canada have released the preliminary year-end tourism figures for 2017. The results show last year was the best-ever year on record for international visitors to Canada. During the year of Canada 150 celebrations, international tourists made 20.8 million trips of one or more nights to Canada, up 4.4% from 2016 and a new annual record, surpassing the previous record of 20.1 million set in 2002. The number of US tourists rose 3.1% in 2017 to reach 14.3 million, the highest figure since 2005. There were also a record 6.5 million tourists from overseas countries, up 7.2% from 2016. Compared with the previous 2002 record, a greater share of tourists to Canada in 2017 were from countries other than the United States, the result both of declines in tourism from the United States and an increase in the number of tourists from overseas. <br><br> According to an official Press release, “The Government of Canada is committed to growing Canadian tourism. This includes making key investments through Budget 2017 and launching Canada's New Tourism Vision. The Vision aims to increase the number of international tourists to Canada by 30 percent by 2021, double the number of Chinese visitors by the same year, and position Canada to compete for a top 10 destination ranking by 2025. It also includes actions to grow culinary tourism and support Indigenous tourism.” Back to the regular round of economic data, we have official data on retail sales today then on Friday it’s earnings, hours worked and the CPI numbers. The Canadian Dollar opens in Asia this morning at USD/CAD1.2655, AUD/CAD0.9930 and NZD/CAD0.9310.

GBP / AUD

Expected Range

Tuesday was the day when the GBP fell to the bottom and rose to the top of our table but Wednesday it went from bottom to top then almost all the way back down again, ending the day up only against the friendless Aussie Dollar. GBP/USD hit a low around lunchtime in Europe of just 1.3910 as investors focused on Brexit uncertainties and soft-ish set of UK unemployment figures. As BoE Governor Carney and three MPC colleagues then gave evidence to Parliament on the quarterly Inflation Report, so the GBP recovered to almost 1.3990 as rate-hike headlines hit the newswires. But, on the realisation that none of this was actually fresh news, and reports emerged of further splits between the UK and Brussels, the GBP then shed half a cent into the London close. <br><br> In economic news, the UK unemployment rate ticked up to 4.4% in the three months to December, up from 4.3% (a four-decade low) and the number of people out of work rose by 46,000 to 1.47 million. But, the number of people in work also rose, by 88,000 during the quarter, to 32.147 million. The one-tenth rise in the unemployment rate was the first increase in two years but there was a 109,000 fall in the number of people classed as economically inactive, which helped lift the jobless rate. Only a couple of weeks ago, the Bank of England expectation was for an unemployment rate of 4.3%, a slight drop to “around 4.25%” up until Q3 and a further drop to 4.1% by the first quarter of 2021. <br><br> Later in the day, newspapers began to publish leaked details of a so-called ‘position paper’ which the UK Government has shared with EU member states. The document appeared to leave open the possibility of an open-ended transition. “The UK believes the period’s duration should be determined simply by how long it will take to prepare and implement the new processes and new systems that will underpin the future relationship,” the draft paper said. “The UK agrees this points to a period of around two years, but wishes to discuss with the EU the assessment that supports its proposed end date”. According to the Financial Times, “The paper contradicts some key EU negotiating principles and raises the risk of failing to reach a transition deal before a March summit of EU leaders… As the fortunes of the GBP are just as closely linked to Brexit as to incoming economic data, the intra-day swings in the British Pound look set to continue for some time. It opens in Asia this morning at USD1.3965, GBP/AUD1.7795 and GBP/NZD1.8990.

AUD

Expected Range

Lower stocks, a lower gold price and higher volatility made for a difficult background for the Aussie Dollar even before we factor in the RBA’s pretty dovish set of Minutes earlier in the week. AUD/USD has remained below 0.7900 ever since lunchtime in New York on Tuesday. Yesterday in Asia it broke through Friday’s low, which turned the technical picture much more negative and dragged the AUD/USD pair down to a one-week low of 0.7830. Indeed, by the close of business in the Northern Hemisphere on Wednesday, the AUD was the worst performer of all the major currencies we follow here, even as a surge in equity markets after the FOMC Minutes helped lift AUD/USD almost a quarter of a cent off its lows. <br><br> The Australian Bureau of Statistics reported yesterday that its wage price index grew by 0.55% over the December quarter in seasonally adjusted terms, leaving the change on a year earlier at 2.08%. Markets had been expecting a quarterly gain of 0.5%, seeing the year-on-year rate hold steady at 2.0%, so the data was marginally better than consensus. Most of the increase was due to increases in pay for government employees - mainly in the health industry and education - while private sector pay, which accounts for the majority of workers, remained weak at just over 1.9%. Rises through the year in the public sector ranged from 1.9% for Professional, scientific and technical services to 2.9% for Health care and social assistance and public sector pay has now outpaced that in the private sector for the past four years. <br><br> We’ve focused here over the past week on the split of view on interest rates amongst the ‘Big Four’ Aussie banks. From an offshore perspective, albeit a local author, Capital Economics say, “We suspect that wage growth will creep ever so gradually higher as the unemployment rate edges lower and spare capacity is used up, but it may still just be around 2.2 to 2.3% by the end of this year and perhaps only 2.5% by the end of next year… Wage growth is unlikely to significantly boost household income growth or underlying inflation this year at least, [and] until that changes, the RBA isn’t going to raise interest rates.” The Australian Dollar opens in Asia this morning at USD0.7850, with AUD/NZD at 1.0670 and GBP/AUD1.7795.

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 / 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

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 / 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 / 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.

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.

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.

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