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By Nick Parsons

USD rallies after Powell testimony. Bond yields rise and equities fall. AUD falls on to a US 77 cents ‘big figure’.


AUD / NZD

Expected Range

Having been the worst performing currency on Friday, the New Zealand Dollar was back at the top of the pile on Monday, even as there was no fresh incoming news or economic data. Instead, it continued to be driven by flows in the AUD/NZD cross rate which then fed through across the majors in what can sometimes be a relatively illiquid currency. On Tuesday, after a worse than expected set of merchandise trade figures, NZD/USD was back on a US 72 cents ‘big figure’ and as it broke down through technical support in the 0.7275-80 area, the Kiwi Dollar again finished as the weakest currency of the day. <br><br> Just as New Zealand’s dollar is volatile, so too are some of its economic statistics. In January 2018, New Zealand recorded its largest deficit for a January month since 2007. This deficit contrasts with last month’s surplus, which was the largest ever for a December month. The January 2018 trade balance was a deficit of $566 million. This was larger than January 2017 deficit as imports rose more than exports. Stats NZ noted that, “Both imports and exports reached new highs for January months. Import growth remains strong while export growth didn’t carry on at the same rate as the record-setting December 2017 month.” The official statisticians always provide plenty of fascinating detail and this month’s report was no exception. They report the $373 million (9.5%) rise in exports was led by milk powder, butter, and cheese – up $101 million. The countries with the largest rises in exports in the milk powder, butter, and cheese group were Algeria (milk powder), Peru (milk powder), and Iran (butter). Values were down $21 million to China, due to lower exports of milk powder. This fall is the first for the milk powder, butter, and cheese group to China since November 2016. <br><br> Today we have the ANZ Business survey and on Friday the international travel and migration figures. These will be a stark reminder of the importance of tourism to the NZ economy, which is now New Zealand's largest export earner, overtaking dairy in 2015/16. International tourism expenditure reached $14.5 billion in the year-ended March 2017 and it is estimated that international visitors are delivering $40 million in foreign exchange to the New Zealand economy each day of the year – one in five export dollars. The New Zealand Dollar opens in Asia this morning at USD0.7235 and AUD/NZD1.0770.

AUD

Expected Range

From Monday’s high of USD0.7885 – its highest since last Tuesday – the Aussie Dollar has spent the last 36 hours moving lower, with the move accelerating in North America on Tuesday on a combination of stronger USD, much lower gold prices and a pick-up in volatility which has seen the VIX index more than a point higher at 17.4. The AUD/USD pair held on to a 78 cents big figure until lunchtime in New York though for the moment has held above technical support from Thursday’s low around 0.7790. <br><br> There’s a very hard-hitting report out from Credit Suisse on Australia. The bank says, “The RBA has become renowned over the years for delivering hawkish and arguably credible narratives, supported by consistent upward inflection points in its growth and inflation forecasts, virtually dismissing near-term undershoots, resulting in consistent over-prediction of real GDP growth and core CPI inflation.” They go on to argue that, “If sluggish wage inflation is a problem for highly leveraged consumers, and RBA forecasting errors are contributing to low wage inflation by allowing growth and inflation expectations to become unhinged, then it stands to reason that officials bear some responsibility for anemic consumption growth.” The report concludes that, “If the RBA continues on its merry way, lost credibility may become a more significant factor weighing on inflation expectations and bond yields, notwithstanding how global factors evolve… This means that either the Bank materially revises down its forecasts — and adjusts rates accordingly — to win more credibility, or fiscal policy makers need to take on more responsibility to help keep inflation within the target band.” <br><br> The GDP figures for Q4 are released next week and the task for analysts until then is to keep one eye on incoming information which shows the progress of the economy in Q1, and the other on the so-called ‘partial data’ for the end of last year which feed directly into the GDP number. So, today and Thursday, we get the official and private sector PMI survey numbers which will be watched closely for any signs of slowdown; albeit against a backdrop of continued global strength whilst Thursday brings the two Australian manufacturing PMI surveys and the Q4 Private Capital Expenditure numbers. The Australian Dollar opens in Asia this morning at USD0.7795, with AUD/NZD at 1.0770 and GBP/AUD1.7850.

AUD / EUR

Expected Range

The euro yesterday initially retraced much, but not all of Monday’s losses and couldn’t get back to the USD1.2350 high, failing around 10 pips below this level in the European morning. By the end of the day, however, it had fallen more than a full cent to a low of 1.2230 as the contrast between ECB and Fed monetary policy paths in 2017 was made clear. We said here yesterday that, “Mr. Draghi has often shown himself to be a master of market expectations… and he might well be actively trying to push the EUR lower ahead of the ECB meeting.” If he was, he’d certainly be happy with yesterday’s price action! <br><br> The main contender for Mr Draghi’s job once his term of office ends is Bundesbank President Jens Weidmann. Speaking in Frankfurt yesterday morning, he said that, “I believe it is important to gradually and dependably reduce the degree of monetary policy accommodation when the outlook for price developments in the euro area permits us to do so. If the upswing continues and prices rise accordingly, in my view, there is no reason why the Governing Council should not end the net purchases of securities this year… One thing seems clear to me: monetary normalisation in the euro area will take a long time. Monetary policy will remain very expansive even after the end of net bond purchases.” <br><br> Ahead of today’s Eurozone CPI figures, German inflation slowed more than expected to hit a 15-month low in February. Harmonised CPI rose by just 1.2% year-on-year after an increase of 1.4% in the previous month, the data showed. That was weaker than the 1.3 percent consensus estimate, the lowest reading since November 2016 and marked the third consecutive fall in the headline figure. The consensus on Eurozone inflation is for the annual rate to edge down to 1.2% in February from 1.3% in January. The EUR opens in Asia this morning at USD1.2235, AUD/EUR0.6375 and NZD/EUR0.5915.

AUD / CAD

Expected Range

Ahead of the Federal Budget, the Canadian Dollar had another poor day on Tuesday, kept off bottom spot in our one-day performance table only by the weakness of the NZD. As the US Dollar caught a bid on rising money market rates and higher bond yields, USD/CAD moved up through Monday’s 1.2705 high and on to a best level of 1.2755; a fresh high for 2018 and the highest since December 22nd. <br><br> As we pointed out here yesterday, if all goes as planned, Canada’s fiscal picture in about five years’ time will be pretty much the same as Harper’s last Conservative budget; a situation which analysts at Bloomberg said “could be a problem if Trudeau has any intentions of seeking re-election on an ambitious second-term agenda”. With this in mind, gender equality – a key priority for Prime Minister Justin Trudeau’s Liberal government – and a national pharmacare plan are expected to be the two main highlights of the Budget, rather than any expensive new economic measures. <br><br> A day after the latest round of NAFTA negotiations began in in Mexico City, US President Donald Trump told a meeting of governors at the White House that when it comes to trade, Canada is "very smooth…. We lose a lot with Canada. People don't know it. They have you believe that it's wonderful, and it is – for them. Not wonderful for us, it's wonderful for them." An eighth round of talks is already planned in Washington next month but any statement the President makes at the moment serves only to increase nervousness for the Canadian Dollar which opens in Asia this morning at USD/CAD1.2755, AUD/CAD0.9945 and GBP/CAD1.7750.

AUD / USD

Expected Range

As well as a raft of economic statistics the big highlight of the day on Thursday was new Fed Chair Jerome Powell’s first Congressional monetary policy testimony. Ahead of this, both stock index futures and the US Dollar has traded pretty flat with the DJIA around 26,700 and the USD index at 89.60. The testimony is a two-stage process with the text released around 08.30 Washington time but the hearing not beginning until 10.00am. In many ways, the market reaction was similarly two-staged: stocks and bonds initially decided there was nothing fresh at all in the prepared remarks but by the end of the testimony, markets had decided Mr Powell’s comments were a bit more hawkish. The USD index hit 90 for the first time in 2-weeks whilst 10-year bond yields backed up to 2.92%. <br><br> Mr Powell said that, “While many factors shape the economic outlook, some of the headwinds the US economy faced in previous years have turned into tailwinds: In particular, fiscal policy has become more stimulative and foreign demand for US exports is on a firmer trajectory. Despite the recent volatility, financial conditions remain accommodative. At the same time inflation remains below our 2 per cent longer-run objective [although] some of the shortfall in inflation last year likely reflects transitory influences that we do not expect will be repeated. Consistent with this view, some of the monthly readings were a little higher toward the end of the year than in earlier months… The FOMC will continue to strike a balance between avoiding an overheated economy and bringing PCE price inflation to 2 per cent on a sustained basis.” <br><br> Though rising long-term interest rates and recent equity market volatility have tightened financial conditions, Powell said, “we do not see these developments as weighing heavily on the outlook for economic activity, the labor market and inflation.” Rather, “the robust job market should continue to support growth in household incomes and consumer spending, solid economic growth among our trading partners should lead to further gains in U.S. exports, and upbeat business sentiment and strong sales growth will likely continue to boost business investment.” By the end of his Congressional appearance, 2-year yields had risen 5bp to 2.27% whilst the number of implied rate hikes this year had risen from 2.8 to 2.9. The USD index opens this morning in Asia at 89.90; up almost half a point from Monday’s opening level.

GBP / AUD

Expected Range

The GBP had another lurch lower on Tuesday morning as the implications of Opposition leader Jeremy Corbyn’s Brexit speech – which we discussed here yesterday – began to be more widely recognised. However, by the end of the European day, even though the GBP/USD rate was still down more than half a cent, the pound had recovered against most of the other currencies where long positions versus the US Dollar were being liquidated. EUR/USD fell to its lowest level in 2½ weeks, for example, whilst AUD/USD threatened to break below 78 cents. <br><br> The Brexit negotiations are the gift that keeps on giving for political sketch-writers but for businesses and investors the constant twists and turns in the plot are nothing but a major headache. UK International Trade Secretary Liam Fox was yesterday forced to launch a defence of the government’s Brexit trade policy after a former top official in his department dismissed it as the tactics of “a fairy godmother”. In a day of mixed metaphors, Sir Martin Donnelly – who was Dr Fox’s permanent secretary until last year – told the Today programme on BBC Radio 4: “You’re giving up a three-course meal, which is the depth and intensity of our trade relationships across the European Union and partners now, for the promise of a packet of crisps in the future if we manage to do trade deals outside the European Union which aren’t going to compensate for what we’re giving up.” <br><br> On Wednesday, the European Commission is set to publish a detailed draft withdrawal and transition agreement which is said to have more than 120 pages made up of 168 treaty articles and two protocols setting out the EU’s terms for Brexit to be negotiated over the next seven months. Well-sourced leaks suggest it will trigger a new row by designating “the European Court of Justice (ECJ) as the authority for the interpretation and enforcement of the withdrawal agreement”. The pound opens in Asia after another very choppy day at USD1.3915, GBP/AUD1.7845 and GBP/NZD1.9220.

By Nick Parsons

AUD/USD sticks on 78 cents despite volatility in GBP and EUR ahead of Fed Chair Powell’s monetary policy testimony.


AUD / EUR

Expected Range

From an opening level in Asia around USD1.2295, the EUR climbed all the way up to 1.2350 by late morning in Europe as US equity index futures registered strong early gains. Most of the gains were reversed in the afternoon session, however, as ECB President Draghi’s testimony to the Committee on Economic and Monetary Affairs of the European Parliament was viewed as being on the dovish side of expectations. <br><br> Mr. Draghi’s prepared remarks said, “Looking ahead, we anticipate that headline inflation will resume its gradual upward adjustment, supported by our monetary policy measures. At the same time, uncertainties continue to prevail. In particular, the recent volatility in financial markets, notably also in the exchange rate, deserves close monitoring with regard to its possible implications for the medium-term outlook for price stability… Therefore, while the strong momentum of the euro area economy has clearly strengthened our confidence in the inflation outlook, patience and persistence with regard to monetary policy is still needed for inflation to sustainably return to levels of below, but close to, 2%. In fact, the evolution of inflation remains crucially conditional on an ample degree of monetary stimulus provided by the full set of our monetary policy measures: our net asset purchases, the sizeable stock of acquired assets and the forthcoming reinvestments, and our forward guidance on policy interest rates.” <br><br> Mr. Draghi has often shown himself to be a master of market expectations. His comments come a little more than a week before the Governing Council meets in Frankfurt, and with some officials pushing for a change in their policy language to take the central bank closer to ending bond-buying, he might well be actively trying to push the EUR lower ahead of that meeting. The EUR opens in Asia this morning at USD1.2305, AUD/EUR0.6375 and NZD/EUR0.5935.

GBP / AUD

Expected Range

The GBP had a classic day of two halves on Monday: the strongest of all the majors in the local morning and almost the weakest of all in the afternoon (apart from the CAD) which left the pound in second from bottom place on our one-day performance table. The focus in the early part of the day had been on former MPC ‘dove’ Dave Ramsden’s apparent conversion to the hawkish side of the interest rate debate, whilst Brexit concerns returned to undermine the currency after a speech from Opposition Labour Party leader Jeremy Corbyn. <br><br> We discussed the interest rate issue here yesterday so don’t need to revisit that now. The weekend Press had widely trailed an important Brexit policy speech from Labour leader Corbyn which would, it was said, support UK membership of a Customs Union with the EU and thereby offer a new way forward in the Brexit negotiations. It didn’t quite work out that way. His speech said, “Labour would negotiate a new and strong relationship with the single market that includes full tariff-free access and a floor under existing rights, standards and protections… In our transport networks, our energy markets and our digital infrastructure, too often Britain lags behind. So we would also seek to negotiate protections, clarifications or exemptions where necessary in relation to privatisation and public service competition directives state aid and procurement rules and the posted workers directive.” <br><br> It is hard to see how this speech is anything other than the cherry-picking approach which European Council President Donald Tusk has already warned would be “totally unacceptable”. Thus, we have a situation whereby the Opposition leader is outlining a policy which many people might prefer (thus raising the prospect of a Labour Government) but which would not be compatible with existing EU rules. In other words, it could end up for the GBP being the worst of all worlds – continued confusion around Brexit but more talk of a general election which could well result in defeat for the incumbent Conservatives and their coalition partners the DUP. The pound opens in Asia after a very turbulent day at USD1.3960, GBP/AUD1.7795 and GBP/NZD1.9110.

AUD / NZD

Expected Range

Last Friday, a sharp reversal higher in the AUD/USD cross rate took the pair back to the mid-1.07’s and left the NZD as the worst performer on the day even as the locals had gone home and were already starting the weekend. On Monday, it reversed a little of Friday’s cross action and held generally firm against a strengthening USD to take NZD/USD back on to a 73 cents ‘big figure’. This pushed the Kiwi in to top spot on our one-day FX leader board; a move which neatly sums up the frustrations of foreign exchange markets recently – from bottom to top in two consecutive trading days with a total absence of fresh incoming information to drive the price. <br><br> As local news media are consumed both with the widely-reported Australian TV interview with Prime Minister Jacinda Ardern and suggestions for what former US President Barack Obama should do on his forthcoming trip to New Zealand, the week’s economic calendar barely registers any interest at all. On Wednesday we have the ANZ Business survey, either side of which we have the international travel and migration statistics and the visitor arrivals figures. These will be a stark reminder of the importance of tourism to the NZ economy, which is now New Zealand's largest export earner, overtaking dairy in 2015/16. International tourism expenditure reached $14.5 billion in the year-ended March 2017 and it is estimated that international visitors are delivering $40 million in foreign exchange to the New Zealand economy each day of the year – one in five export dollars. <br><br> Before all the tourism and visitor numbers, Tuesday brings January’s trade balance data. After a -$640mn deficit in December, consensus looks for a modest improvement on the month with a deficit between $100-200m. Local specialists BNZ are looking for strong growth in both imports and exports (up 12% and 13% respectively y/y) but a bigger overall deficit of $214mn. The New Zealand Dollar opens in Asia this morning at USD0.7310 and AUD/NZD1.0735.

AUD

Expected Range

Given the volatility elsewhere in the FX majors on Monday – most notably the GBP and EUR – the Australian Dollar had a relatively quiet day. From an opening level in Sydney around USD0.7840 and as the USD sold-off after the rally in stock index futures, the AUD moved up to a best level during the European morning of 0.7885; its highest since last Tuesday. It then spent the rest of the day giving back these gains, even as equity markets stayed well-bid and the VIX index eased back around half a point to a 3-week low of just 16.2. <br><br> There is still no general consensus on Australian interest rates from the ‘Big Four’ banks locally. Westpac see no change in RBA rates until at least the end of 2019, CBA look for unchanged rates until the end of this year, whilst NAB are still calling for two hikes in H2 2018. The GDP figures for Q4 are released next week and the task for analysts until then is to keep one eye on incoming information which shows the progress of the economy in Q1, and the other on the so-called ‘partial data’ for the end of last year which feed directly into the GDP number. Thus, on Wednesday and Thursday, we get the official and private sector PMI survey numbers which will be watched closely for any signs of slowdown; albeit against a backdrop of continued global strength whilst Thursday brings the two Australian manufacturing PMI surveys and the Q4 Private Capital Expenditure numbers. <br><br> After the resignation of Barnaby Joyce as the leader of the rural-based National Party, Michael McCormack was chosen in a party-room ballot to replace him. Under the terms of the coalition deal with Australian Prime Minister Malcolm Turnbull’s centre-right Liberal Party, the leader of the Nationals automatically becomes deputy prime minister. “Our enduring and successful political partnership will continue under Michael’s leadership of the National Party,” Turnbull said in an emailed statement. The Australian Dollar opens in Asia this morning at USD0.7845, with AUD/NZD at 1.0735 and GBP/AUD1.7795.

AUD / CAD

Expected Range

Ahead of today’s Federal Budget, the Canadian Dollar had a poor day on Monday, the worst performer of all the major currencies we follow closely here. USD/CAD had fallen to a low around 1.2620 during the Asian session but then turned higher and rose almost a full cent to a day’s high of 1.2705 before settling in the high 1.26’s. <br><br> As Bloomberg points out, since defeating former Prime Minister Stephen Harper in 2015, Prime Minister Justin Trudeau has taken what was a structural balance under the Conservatives to a small structural deficit. A federal budget operating surplus of about 1 percent of GDP has been brought to a level just above zero. Which means revenues right now just about match expenses, and Canada’s deficit essentially represents borrowing to pay interest on its debt. There’s not much wrong with these metrics but it is not exactly the foundation of something ambitious. In fact, if all goes as planned, Canada’s fiscal picture in about five years’ time will be pretty much the same as Harper’s last Conservative budget; a situation Bloomberg say “could be a problem if Trudeau has any intentions of seeking re-election on an ambitious second-term agenda”. <br><br> With the seventh round of talks on NAFTA renegotiation underway in Mexico City, optimists note that an eighth round is already planned in Washington next month. But, with a general election in Mexico on July 1st and the US midterm elections in November, there is a growing sense of urgency for Canada to achieve some progress now. The Canadian Dollar opens in Asia this morning at USD/CAD1.2685, AUD/CAD0.9955 and GBP/CAD1.7710.

AUD / USD

Expected Range

Just as the inverse relationship between stock markets and the US Dollar seemed to be re-established during the Asian and European time zones on Monday, so it fell apart again during North American hours as the EUR and CAD came under separate local pressures. Thus, the USD index against a basket of major currencies fell from 89.60 to a low of 89.15 as stock index futures rallied almost 200 points but then regained all its losses as the stock marked added a further 100 points. <br><br> A very busy week for US economic data got off to a mixed start. After a 9.3% plunge in December, it had been expected that new home sales would rebound around 3.5% in January. Instead, they tumbled a further 7.8% m/m for the biggest two-month drop since August 2013 whilst the median price dropped from $336,700 to $323,000 - the lowest since October last year. Elsewhere, however, the Dallas Fed business survey surged to 37.2; its highest level since 2005, probably on the back of higher oil prices which are so important for the regional economy in Texas. The indices of future general business activity and future company outlook slipped to 40.6 and 34.5, respectively, but both stayed well above their average readings. Most other indexes for future manufacturing activity also fell but remained highly positive. <br><br> As well as Jerome Powell’s semi-annual monetary policy testimony, Tuesday brings wholesale inventories, the advanced goods trade balance, durable goods, and consumer confidence; the first three of which will all feed directly into the Atlanta Fed’s GDPNow model. There’s scope for plenty of volatility around each of the data prints, though the tone and content of Mr Powell’s remarks will be key ahead of the March 22nd FOMC meeting. The USD index opens this morning in Asia having closed at 89.55.

By Nick Parsons

China PMI Surveys, Q4 capex are important for AUD, but Fed Chair Powell’s testimony on Tuesday could be key to financial markets


AUD / NZD

Expected Range

After a brief period last Monday on US 74 cents, the New Zealand Dollar spent much of last week on a US 73 cents ‘big figure’; until Friday morning when it broke down into the high 72’s. Though the story of NZD/USD was a steady decline (other than the Wednesday night spike higher which all the other FX majors enjoyed against the USD) the main action was on the AUD/NZD cross which fell on Thursday to a fresh 6-month low of 1.0655; the lowest since August 4th last year. By Friday, however, a sharp reversal higher took the pair back to 1.0740 to leave it within a few pips of its starting point on Monday morning and left the NZD the worst performer on the day even as the locals had gone home and were already starting the weekend. <br><br> It was a slow week of mostly second-tier data, though things potentially look a bit more interesting in the week ahead. Monthly trade figures are released on Tuesday and on Wednesday it’s the always-fascinating international travel and migration statistics. Also on Wednesday, the ANZ business survey will show if business confidence has picked up from the year-end slump which took the headline number down to -37.8 in December. They are not a market mover, but your author always enjoys the colour and detail provided by the international visitor arrivals figures which are out on Friday; so important for all those whose livelihoods depend on tourism and discretionary spending from overseas. <br><br> Speaking of overseas visitors, it has been announced that former US president Barack Obama is to visit New Zealand for the first time next month. Obama will speak to about 1000 invited guests at an event run by the NZ-US Council in Auckland on March 22, spending about three days in the country, before going on to Sydney. Prime Minister Jacinda Ardern welcomed confirmation of the trip. "I look forward to welcoming Mr Obama to our country and anticipate meeting him once his full programme is finalised," she said in a statement. The New Zealand Dollar opens in Asia this morning having ended last week at USD0.7290 and AUD/NZD1.0740.

AUD / CAD

Expected Range

The Canadian Dollar didn’t have a great week, though it was rescued to some extent by stronger than expected inflation numbers in the very last trading session of the week on Friday. USD/CAD opened on Monday morning at 1.2560 and after a very brief dip lower in the Asia time zone that day (in line with all the non-USD FX majors) it moved all the way up to a high of 1.2745 in North America on Thursday; a new high for 2018 and the highest level since December 26th last year. On Friday the CAD rallied back onto 1.26 and ended the week around 1.2630, having at one point come within a quarter of a cent of parity against the Aussie Dollar. <br><br> On Friday, the annual inflation rate was reported at 1.7% in January, down from 1.9% in December but above consensus forecasts for 1.4%. The Bank of Canada’s three measures of core inflation were less muted, with CPI common, which the central bank says is the best gauge of inflation, rising to 1.8%, the highest since April 2012. Transportation costs rose 3.2% from a year ago, moderating from the previous month’s pace as price gains for gasoline and autos decelerated. But food prices were up 2.3%, the largest gain since April 2016, as Canadians paid more for food at restaurants as well as fresh fruits and vegetables. Interest rate markets expect the BoC to make no change at its next policymaking meeting in March but another rate hike is fully priced in by July. <br><br> The seventh round of talks on NAFTA renegotiation begins in Mexico City. According to Reuters, talks are running behind schedule although some officials believe the longer they last, the less likely it is that Trump will dump NAFTA, which he has threatened to do if the overhaul of the accord does not benefit the United States. Negotiators had wanted to wrap up talks by March to avoid them being politicised by Mexico’s July presidential election. But officials have already raised the possibility that they will run past Mexico’s vote, and some say they could continue at a technical level for several months if necessary. A US official noted, “there has never been a hard deadline”, and among Mexicans following the process, belief is growing that lobbying efforts by US business leaders and politicians to preserve NAFTA has been gaining traction. Back home in Canada on Tuesday afternoon, Finance Minister Bill Morneau will table his government’s third federal budget in the House of Commons. The Canadian Dollar opens in Asia this morning, having closed in North America on Friday at USD/CAD1.2630, AUD/CAD0.9905 and GBP/CAD1.7650.

AUD / USD

Expected Range

For most of last week, the US Dollar’s fortunes largely mirrored those of the main US equity indices. At times when stock markets were rallying, the USD had an observable tendency to sell-off, whilst any sign of stress in equities had the opposite effect, leading to something of a safe-haven bid. The 2018 low point for the USD index came back on Friday February 16th at 87.95. As the stock market sold-off on Monday, Tuesday and Wednesday last week – culminating in a sharp dive lower after the FOMC Minutes – so the USD index rose to a best level for the week of 89.85; a 10-day high. On Thursday, stocks recovered and the USD fell (no surprise there) but on Friday the inverse relationship seemed to break down somewhat. Equity index futures were up almost the whole day but the USD was little moved, ending the week only a down three or four-tenths from Thursday’s best level. <br><br> There had been some talk that the Minutes of the January 31st FOMC meeting 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 market interest rate pricing. That didn’t really happen, even though stock markets at that point back in January hadn’t yet started the dramatic decline which began after the labour market and average earnings numbers on Friday February 2nd. Of course, we now have a new Fed Chairman and this week will be his first semi-annual monetary policy testimony to Congress. Most of the published calendars for this week will show this being on Wednesday but it has in fact been moved forwards 24 hours to 10am Tuesday, apparently because the casket of preacher Billy Graham will be lying in state in the Capitol Rotunda for two days from February 28th; only the fourth ever private citizen to do so. <br><br> As well as Jerome Powell’s testimony, there is a raft of US economic data scheduled for release this week, although the first Friday of the month of March won’t bring the payroll numbers due to the Presidents Day holiday late in the already-short month of February. Tuesday brings wholesale inventories, the advanced goods trade balance, durable goods, and consumer confidence; the first three of which will all feed directly into the Atlanta Fed’s GDPNow model. Wednesday is the Chicago NAPM and existing home sales, whilst Thursday brings the personal income, expenditure and deflators as well as the ISM manufacturing survey. There’s scope for plenty of volatility around each of the data prints, though the tone and content of Mr Powell’s remarks will be key ahead of the March 22nd FOMC meeting. The USD index opens this morning in Asia having closed at 89.50; more than 1½ points up from its 2018 low.

AUD

Expected Range

The Australian Dollar moved lower last week, in part due to early weakness in global stock markets, in part due to higher volatility across asset classes and in part also to incoming news on the RBA and wage costs. Overall, the AUD began the week at USD0.7910 and moved lower almost without interruption to 0.7790 on Thursday morning in Sydney. A subsequent rally as stock markets jumped took the pair up to 0.7855 but it then slipped steadily through the Northern Hemisphere on Friday to end the week around 0.7840. <br><br> The wide split of views on the Australian Dollar is well-illustrated by a Google search. The top four articles on the news function are headed ‘Australian Dollar is a sell but a risky one’, ‘Australian Dollar is on the ropes but can still triumph in 2018’, ‘Buying Australian Dollars an attractive way to bet against US Dollar’ and ‘Australian Dollar likely to be pulled one way by China, another by US’. That selection of headlines pretty much covers all bases; the AUD is either going up, or down, or both at the same time! <br><br> For the week ahead, and away from the obvious influence of ever-volatile stock markets, the two main drivers for the AUD are likely to be domestic economic news flow and China’s PMI figures. There have been some signs of hardening in China’s attitude to credit creation and its currency has been allowed to appreciate against the US Dollar. On Wednesday and Thursday, we get the official and private sector PMI survey numbers which will be watched closely for any signs of slowdown; albeit against a backdrop of continued global strength. At home, Thursday brings the two Australian manufacturing PMI surveys and the Q4 Private Capital Expenditure numbers which will feed directly into the following week’s GDP estimate. The Australian Dollar opens in Asia this morning having closed on Friday evening in New York at USD0.7840, with AUD/NZD at 1.0740 and GBP/AUD1.7820.

AUD / EUR

Expected Range

The euro had a poor week. Its 2018 high of USD1.2550 came back on Thursday February 15th. The EUR opened last Monday morning already almost 1½ cents down from this level at 1.2410 and by Thursday morning it had fallen all the way down to 1.2265; the lowest in almost 10-days. In part, this was driven by a weaker US stock market which boosted the US Dollar, but it was also the first week of the year in which Eurozone economic data were by quite a margin softer than consensus expectations. <br><br> The ZEW survey of the current economic situation in the eurozone’s largest economy slipped more than expected in February to 92.3. The headline Markit Eurozone PMI fell from 58.8 in January to 57.5, 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. Completing a trifecta of disappointing numbers, the ifo reported, “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. 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”. <br><br> It’s only a few days since we had the final Eurozone CPI numbers for January and after the shortest month of the year it’s already time for the ‘flash estimate’ for February which will be published on Wednesday. The final PMI numbers are out on Thursday, when we’ll also see all the Eurozone countries which are not covered in the mid-month flash. Before then, Bundesbank President Jens Wiedmann will be presenting the institution’s annual report. A fascinating account of a wide-ranging lunch with Mr Weidmann and the FT’s Frankfurt bureau chief was published in this weekend’s Financial Times. Its author, Claire Jones, reported, “Weidmann contents himself with offering lukewarm praise for Draghi, while echoing a view I have heard on countless occasions in Germany that the ECB has done too much to bail out weaker members of the eurozone. “The ECB [is] certainly an institution that functions well,” he says. “But this cannot be an argument for us to take over the role . . . of governments.” The EUR opens in Asia this morning having ended the week at USD1.2295, AUD/EUR0.6375 and NZD/EUR0.5930.

GBP / AUD

Expected Range

The GBP ended the week lower against the USD and twice finished at the bottom of our one-day performance tables. The low point came on Thursday morning London time around 1.3875 and though it recovered on Friday, GBP/USD could not get back on to a 1.40 ‘big figure’. 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 are something that businesses and investors are unfortunately going to have to live with for some time to come. <br><br> In economic news, UK growth in the fourth quarter of last year was last week revised down to 0.4%, from an initial estimate of 0.5% whilst annual growth for 2017 as a whole is down from 1.8% to 1.7%. 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). Despite the softness of incoming data, policymakers are still talking up the prospect of further rate hikes. An interview in the Sunday Times reveals that the newest MPC member, Terry Ramsden, who was one of the two doves to vote against a rate hike in November, has now changed his mind. “There does seem to me more impetus on wages. We all will keep a close eye on what happens through the early part of this year to see if that forecast [in a Bank survey] of wage growth picking up to 3% is realised. But certainly relative to where I was, I see the case for rates rising somewhat sooner rather than somewhat later… “The economy has a lower speed limit than it did. We already had a productivity growth puzzle, but Brexit has reinforced things.” <br><br> On the never-ending Brexit saga, Prime Minister Theresa May issued a weekend statement saying, “Delivering the best Brexit is about our national future, part of the way we improve the lives of people all over the country. The decisions we make now will shape this country for a generation. If we get them right, Brexit will be the beginning of a bright new chapter in our national story.” She will hold a special cabinet meeting on Thursday to get sign off on the plans discussed at last week’s ‘offsite’ before a speech publicly setting out her position on Friday, expected to be in Newcastle. For all the brave and upbeat talk, it is clear to everyone that the real decisions on Brexit are going to be made in Brussels. European Council President Donald Tusk spoke about 'Brexit' in talks with media on Saturday. He warned the British government that Brussels would not accept what he views as cherry picking. "If the media reports are correct, I am afraid the UK position today is based on pure illusion." The pound opens in Asia this morning after ending last week at USD1.3970, GBP/AUD1.7815 and GBP/NZD1.9155.

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.

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.

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 / 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.

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.

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.

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