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By Nick Parsons

US President Trump makes surprise announcement on import tariffs. US stocks plunge but USD falls from highs also. AUD holds 77 cents.


AUD / EUR

Expected Range

After a very poor week, the euro finally found a bit of support on Thursday. EUR/USD reached a low just above 1.2160 in the European afternoon; the lowest since mid-January but then rallied around half a cent back on to a 1.22 handle and was the best performer of all the FX majors in the immediate aftermath of the US trade tariffs announcement. <br><br> In economic data, the final Eurozone Manufacturing PMI eased to a four-month low of 58.6 in February, down from 59.6 in January; better than the earlier flash estimate of 58.5 and well above its long-run average of 51.8. The PMI has remained above the 50.0 no-change mark for the past 56 months. The Press Release for the survey was resolutely upbeat. “The eurozone manufacturing sector continued to expand at a robust pace in February. Although rates of increase in output and new orders eased further from the highs reached before the turn of the year, the sector is still enjoying one of its best growth spells over the past 18 years… National PMI data also highlighted the broad-base of the upturn, with expansions seen in all of the countries covered. Growth was led by the Netherlands (survey record expansion), Germany and Austria. Although rates of increase eased in the latter two, and also in France, Italy and Ireland, growth was robust across the board. Spain and Greece both saw faster expansions, with Greece registering its best pace of improvement for 18 years.” <br><br> Markit’s one note of caution from the PMI survey was that, “There are signs, however, that growth could cool further in coming months. A slowdown in growth of new export order inflows to an 11-month low suggests that the appreciation of the euro may be starting to curb export sales. Job creation, while still among the highest seen in the twenty-year survey history, has meanwhile moderated as a result of the slower inflows of orders, adding to suspicions that the manufacturing growth peak is behind us.” The EUR opens in Asia this morning at USD1.2235, AUD/EUR0.6330 and NZD/EUR0.5920.

AUD

Expected Range

The Aussie Dollar has spent most of this week moving lower against the USD, although from Monday’s opening levels in Sydney it is up against the GBP. The combination of lower stock markets, much lower gold prices and a pick-up in volatility is rarely good for the AUD and once it fell through technical support in the 0.7780-90 area, it tumbled to a low of 0.7715 in the European morning; a fresh low for 2018 and the weakest since December 27th. By the New York afternoon, the AUD managed to rally around half a cent to 0.7760 but it was soon reversed as stock markets headed lower once more on the announcement of US trade tariffs on imported steel. <br><br> The fall in the Australian Dollar came despite a very upbeat survey on manufacturing. The Commonwealth Bank PMI index – a composite indicator designed to measure the performance of the manufacturing economy – edged slightly higher to 55.6 in February, from 55.4 in January, signaling a strong rate of improvement in the health of the manufacturing sector. The headline PMI has recorded above the 50.0 no-change mark in each month since the survey began in May 2016. According to CBA, “Australia’s manufacturing sector continued to improve strongly in February, supported by robust output growth and increased new business inflows. Buoyed by these trends, both business confidence and the rate of job creation reached fresh survey highs. As a result of higher staff levels, backlogs of work increased to a weaker extent. Meanwhile, strong demand led to intense pressures on supply chains, with delivery times rising”. <br><br> Also released yesterday were the Q4 Capital Expenditure numbers. According to the Australian Bureau of Statistics, CAPEX fell by 0.2% to $29.57 billion in the final quarter of last year, missing forecasts for an increase of 1%. CAPEX in the September quarter of 2017 was revised up from +1.0% to show a gain of 1.9%. Despite the lower than expected headline number, total CAPEX grew by 4% over the year, the strongest increase in five years. Spending on buildings fell by 2.1% to $16.2 billion, partially offset by a 2.2% increase in investment on plant, machinery and equipment which rose to $13.4 billion. It is this last number which feeds directly into Australia’s Q4 GDP report released next week, and will therefore contribute to real GDP growth. The Australian Dollar opens in Asia this morning at USD0.7730, with AUD/NZD at 1.0695 and GBP/AUD1.7765.

AUD / CAD

Expected Range

The Canadian Dollar continues to struggle. On Wednesday afternoon USD/CAD moved up on to a 1.28 ‘big figure’ for the first time since December 20th and yesterday after President Trump’s tariffs announcement (which was seen as a negative for progress on NAFTA) it extended these gains to 1.2890; a fresh 10-week high (CAD low). <br><br> Canada’s manufacturing PMI eased only slightly to 55.6 from the 6-month high of 55.9 in January and remained well above the 50.0 no-change threshold. Improving business conditions have been recorded in each month since March 2016. February data pointed to a relatively strong improvement in overall business conditions, which continued the positive start to 2018 for the manufacturing sector. Robust rises in output and new orders contributed to the sharpest pace of job creation for six months. Market noted that, “Canadian manufacturers continue to experience robust growth conditions. Of particular note and a key positive development was the pick-up in export order books in February. The latest increase in new work from abroad was the fastest for just over three years, helped by supportive global economic conditions and rising demand from US markets in particular.” <br><br> Friday brings the GDP numbers in Canada and it’s one of the four occasions each year on which we get both a monthly and a quarterly number. Consensus looks for a 0.1% m/m increase which would leave Q4 with an annualized pace of growth of 2.0%, up from 1.7% in Q3. The Canadian Dollar opens in Asia this morning at USD/CAD1.2850, AUD/CAD0.9955 and GBP/CAD1.7690.

GBP / AUD

Expected Range

The pound’s bad week got even worse on Thursday, though the pace of its losses was much slower than over the previous few days. The GBP/USD exchange rate fell through a well-watched level of technical support from the February 9th low around 1.3785 and it traded all the way down to 1.3720 by lunchtime in New York. It finished the day up against both the Aussie and Canadian Dollars to leave it off the bottom of the table. <br><br> The UK manufacturing PMI survey was released yesterday. At 55.2, Purchasing Managers’ Index fell to an eight-month low and lost further ground after hitting a 51-month high last November. Manufacturing production increased at the slowest pace for 11 months in February, with decelerations seen across the consumer, intermediate and investment goods sectors. Brighter news was provided by the trend in new orders, which rose at a faster pace than in January. Companies indicated that domestic demand strengthened, while new export business rose at a solid (albeit slower) pace. Markit commented that, “The February survey provided mixed signals on the health of the UK manufacturing sector. The PMI’s Output Index fell to its second-lowest level since the EU referendum and, based on its past relationship with official ONS data, is consistent with only a subdued 0.4% quarterly pace of growth in production volumes. This would represent a marked downshift from the 1.3% increase signaled for the final quarter of 2017, providing a further brake on the rate of expansion in the wider economy.” <br><br> In the ongoing and never-ending Brexit saga, at a meeting of the European parliament’s Brexit steering group, led by the former Belgian prime minister Guy Verhofstadt, MEPs concluded that the UK had not gone far enough with its proposals on immigration. Verhofstadt said in a statement that the UK’s position was unacceptable to the parliament, which will have a right to veto any withdrawal agreement. Prime Minister Theresa May is scheduled to give a major speech on Friday, in which she is due to outline the government’s plan for a new post-Brexit relationship with the EU. It is certainly keeping currency markets nervous. The pound opens in Asia this morning at USD1.3740, GBP/AUD1.7760 and GBP/NZD1.8995.

AUD / NZD

Expected Range

The NZD continues to be the most volatile of all the six major currencies we follow closely here and after twice this week finishing bottom of our one-day performance table, on Thursday it was back in top spot. The all-important AUD/NZD cross continued its drop from Wednesday’s 1.0825 high and late in the North American afternoon traded back on to a 1.06 handle. This helped push NZD/USD from its low in Sydney around 0.7190 back up to 0.7250 before settling around 0.7230. <br><br> ANZ’s job advertisement data were released earlier today. Job ads fell 1.2% m/m in February giving up some of its strong increase the previous month. Annual growth eased to 5.8%. There was a marked drop in job ads in the construction, utilities, manufacturing and transport sector, which comprises about a third of job ads. The analysts at ANZ said, “We are not surprised to see job ads fall back to their more modest growth trend, with the labour market tight and skilled labour in particular difficult to come by. The labour market is tight, with the unemployment rate at just 4.5%, and both surveys and anecdotes confirming that firms are having difficulty hiring the skills they need. With business confidence improving and firms profitable, workplace relations reforms and minimum wage hikes suggest we will see higher wage growth going forward.” <br><br> Today we’ll get numbers on building permits and consumer confidence but, whatever the data show, it would be difficult to bet against the NZD being either top or bottom of the table by close of business in New York this evening. The New Zealand Dollar opens in Asia this morning at USD0.7230 and AUD/NZD1.0695.

AUD / USD

Expected Range

The USD index hit 90 for the first time in 2-weeks in New York on Tuesday evening, a high of 90.30 on Wednesday and then 90.50 by Thursday lunchtime in North America as stock markets continued to trade lower and the VIX index of volatility hit a 2-week high of 19.5. Early in the NY afternoon, President Trump announced tariffs of 25% on imported steel and 10% on aluminium products. This surprise move sent stocks plunging once more, with the DJIA down more than 500 points and the VIX index above 20. This time, the USD index gave back around three-tenths of a point to 90.20. <br><br> There were plenty of US economic statistics released on Thursday. Personal income rose 04% in line with consensus expectations but spending was weaker at -0.1% m/m. The core PCE deflator which is the Fed’s preferred measure of inflation rose 0.3% m/m to leave the annual rate unchanged at 1.5% whilst the headline rate was also steady at 1.7%. Weekly jobless claims, meantime, fell 10k to just 210k; the lowest since 1969. As for the ISM manufacturing survey, the headline jumped from 59.1 to 60.8; the highest reading since May 2004. Details might not have been quite so spectacular though the stand-out was a 5-point jump in employment to a 4-month high. After all the data, the Atlanta Fed revised up its forecast of Q1 GDP from 2.6% to 3.5%. <br><br> Fed Chair Jerome Powell gave the second part of his semi-annual monetary policy testimony amidst suggestions that he might try to rein-in expectations of a more aggressive pace of interest rate increases. Instead, he said that four rate hikes this year comes under the definition of "gradual". Powell said risks are “more two-sided” now than early in the recovery from the financial crisis, adding that “the thing we don’t want to have happen is to get behind the curve.” But he said at this point the Fed could continue “to gradually raise interest rates ... That is the path we have been on and my expectation is that will continue to be the appropriate path.” Reinforcing Powell’s message, New York Fed President William Dudley said at a conference in Sao Paolo that, “If you were to go to four 25-basis-point rate hikes, I think it would still be gradual.” The USD index opens this morning in Asia at 90.20; down three-tenths of a point from Thursday’s high but still up almost three-quarters of a point from Monday’s opening level.

By Nick Parsons

USD extends rally after Powell testimony and stock market drop. AUD can’t hold US 78 cents


AUD / CAD

Expected Range

After 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 a weaker stock market and liquidation of long positions in EUR and GBP, so USD/CAD moved up on to a 1.28 ‘big figure’ for the first time since December 20th. The pair reached a high just above 1.2830 and closed in New York within a few pips of the high of the day. <br><br> The 2018-19 budget, presented in Ottawa on Tuesday evening, had a fiscal track largely in line with what Canadian Finance Minister Bill Morneau forecast in his last fiscal update in October. One major change is C$7.2 billion less infrastructure spending through 2019, an amount that has been allocated to other departmental spending, largely for veterans, indigenous Canadians, women and research. The economy is forecast to average growth of 2 percent between 2017 and 2022, including a 3 percent expansion in 2017 whilst forecasts for debt and the deficit are overall little changed from October’s fiscal update with deficits over the six years including 2017-18 projected to total C$98 billion. The ratio of debt to gross domestic product will drop to 28.4 percent by 2022 from 30.4 percent in 2017-18. <br><br> It’s fair to say that local reaction to the Budget has been at best mixed. The Financial Post says, “Bill Morneau may have passed up his last chance to balance Canada’s budget. Prime Minister Justin Trudeau’s finance chief released his third fiscal plan on Tuesday in circumstances that have hardly been better. Canada’s economy is near full capacity, led the Group of Seven in growth last year and unemployment recently hit a four-decade low - all of which Morneau boasts about. He couldn’t have asked for better conditions to move toward what was once his goal: balance. And yet Morneau’s budget Tuesday plots no such course.” Mr Morneau responded to criticism in a Bloomberg interview, saying, ““We’ve got a really low level of debt to our economy, we can deal with all eventualities and we’re being fiscally responsible along the way.” For the moment, currency markets have given him the thumbs-down and the Canadian Dollar opens in Asia this morning at USD/CAD1.2825, AUD/CAD0.9980 and GBP/CAD1.7700.

GBP / AUD

Expected Range

The GBP had a very bad day on Wednesday, bottom of our one-day performance table by quite a margin, with losses ranging from -0.6% to -0.9% against the major currencies we follow closely here. GBP/USD lost one and a quarter cents to 1.3785, matching its low back on February 9th and a move below this technical support level could conceivably see all its 2018 gains being wiped out. <br><br> Yesterday morning, the European Commission published a detailed draft withdrawal and transition agreement: 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. The document is politically incendiary in the UK, whose Government is a Coalition between the Conservatives and the Democratic Unionist Party in Northern Ireland. According to the draft, the territory of Northern Ireland would be considered part of the EU’s customs territory after Brexit, with checks required on goods coming in from the rest of the UK, under the text produced by the European commission. “A common regulatory area comprising the Union and the United Kingdom in respect of Northern Ireland is hereby established… The common regulatory area shall constitute an area without internal borders in which the free movement of goods is ensured and North-South cooperation protect.” <br><br> Theresa May told the House of Commons that, “No UK prime minister could ever agree to it… I will be making it crystal clear to President Juncker and others that we will never do so.” The European Union’s chief negotiator, Michel Barnier, denied that he was challenging the territorial or constitutional integrity of Britain. “This backstop will not call into question the constitutional or institutional order of the UK. We will respect that. I am not trying to provoke anyone here. I am not being arrogant in any way.” He may well be sincere in his claims, but ahead of a keynote speech from UK Prime Minister May on Friday, worries are growing that British businesses could find themselves without a transition deal to cushion their adjustment to life after Brexit. Moreover, it is by no means clear that all the PM’s own Conservative MP’s will back her vision if it comes to a vote in Westminster. No wonder the GBP is so weak, opening in Asia this morning at USD1.3785, GBP/AUD1.7695 and GBP/NZD1.9100.

AUD

Expected Range

The Aussie Dollar has spent most of the last three days moving lower against the USD, although from Monday’s opening levels in Sydney it is up against both the EUR and GBP. The combination of a stronger USD, much lower gold prices and a pick-up in volatility is rarely good for the AUD and though it has bounced a couple of times off technical support in the 0.7780-90 area, it might not take much of a further wobble in asset markets to see the pair make a fresh low for 2018. <br><br> According to data released by the Australian Bureau of Statistics yesterday, the value of credit extended to Australia’s private sector grew by just 0.3% in January. Over the year, total credit grew by 4.9%, the equal-lowest increase since May 2014. The details of the report showed it was yet again housing credit that drove the increase. It rose by 0.5% in seasonally adjusted terms, up from 0.4% in December, leaving the increase on a year earlier at 6.2%. Despite the small pick-up, the annual rate was still the weakest since May 2014. Credit extended to business fell by 0.1%, the first decline since February last year whilst personal credit rose just 0.1% with an annual rate of -0.9%. <br><br> We’ve been highlighting the lack of consensus on Australian interest rates from the ‘Big Four’ banks locally. The divergence has narrowed somewhat overnight as NAB have revised their outlook. They wrote that, “Weak wages growth and slow progress reducing unemployment means it is now less likely that the RBA will raise rates twice in 2018. We now see the RBA raising rates only once in late 2018 – with November 2018 as the most likely start date for a gradual RBA rate hiking cycle… By late 2018, growth should be near 3% and the unemployment rate approaching 5%. That, together with increasing tightness in employers’ ability to find suitable labour, may finally see private sector wages start to moderately edge up.” Over at Westpac, meantime, the team has re-iterated its view of a considerable widening in the US / Australia interest rate differential as the RBA remains on hold. Markets are currently pricing in a yield differential between US and Australian overnight rates of negative 45 basis points by end 2018 whereas Westpac expects minus 63 basis points. Markets are expecting a differential of minus 42 basis points compared to Westpac’s forecast of minus 112 basis points by end 2019. The Australian Dollar opens in Asia this morning at USD0.7785, with AUD/NZD at 1.0785 and GBP/AUD1.7700.

AUD / NZD

Expected Range

The extreme weakness of the GBP yesterday was the only thing preventing the NZD from marking a third straight day at the bottom of our one-day performance table. Indeed, it was such a gap from second-bottom to bottom that GBP/NZD actually fell almost one and a quarter cents. At one point in the day, the AUD/NZD cross was up on to a 1.08 ‘big figure’ for the first time in a little over two weeks whilst NZD/USD only just managed to hold on to US 72 cents. <br><br> ANZ’s monthly business outlook showed a net 19% of businesses are pessimistic about the year ahead, versus 38% in December. All five sectors improved this month with retail firms the closest to a positive outlook at -4%. Firms’ views of their own activity (which has the stronger correlation with GDP growth), lifted from +16 to +20. The analysts note, “A slower housing market, a small dip in net migration, difficulty finding credit and already stretched construction and tourism sectors are making acceleration hard work from here. But strong terms of trade and a positive outlook for wage growth are providing a push… Our composite growth indicator, which combines business and consumer confidence, suggests growth around 2-3%. Although we are constructive on the medium-term outlook (with incomes supported by the strong terms of trade and higher wage growth), we are conservative in our productivity growth assumptions and believe households need to rebuild their saving. We accordingly see downside risk to both the Reserve Bank’s and Treasury’s growth forecasts”. <br><br> Separate figures show New Zealand's visitor arrivals dropped for the first time in five years in January as fewer Chinese tourists visited the country, although though statistics officials said that was largely due to the timing of Chinese New Year, which this year fell in February. The country's annual net migration also eased off recent highs as government regulations introduced in the middle of last year came into force. On an annual basis net migration was 70,100, down from a record high of 72,400 in July. However, on a monthly basis, the country posed a net gain of 6,210 permanent and long-term migrants in January compared to 5,780 the previous month. Statistics New Zealand said there had been a dip in migrant arrivals on student visas from India and China, New Zealand's two largest education markets, down around 8 per cent to 11,100. The overall number of migrants arriving on student visas was 24,100 in the year to January 31, 2018, down just 150 from the preceding 12 months. The New Zealand Dollar opens in Asia this morning at USD0.7210 and AUD/NZD1.0785.

AUD / EUR

Expected Range

After the data disappointments of last week in the Eurozone, it seems investors finally exited long EUR currency positions on Tuesday and by the end of the day, EUR/USD had fallen more than a full cent to a low of 1.2230. Yesterday it extended those declines, falling to a low during the European afternoon around 1.2190; it slowest since way back on January 18th. We had suggested earlier this week 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 the price action over the last couple of days! <br><br> 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. Although the German numbers raised fears of a weaker than consensus outturn for the Eurozone CPI yesterday morning, they were no softer than expected. The rate of price growth slowed to 1.2% this month from 1.3%, dropping to its weakest since 2016. A fall in energy inflation and a big fall in fresh food inflation were the main drivers of the headline dip this month. The core measure was unchanged at 1.0%. <br><br> The softness of inflation both in Germany and the Eurozone overall help take some of the pressure off ECB President ahead of next Thursday’s Council Meeting. He said to the European Parliament this week that an expansionary policy is still warranted even as the economic situation is “improving constantly” and there’s no sense of urgency around communicating a withdrawal of monetary stimulus. Bundesbank president Jens Weidmann said in a Bloomberg Television interview that guidance on interest rates is “rather vague” and should be strengthened. “This could probably be one part of our discussion - whether to complement any decision on the asset-purchase program and on communication regarding the asset-purchase program with a bit more specificity with respect to the interest-rate guidance. ‘Well past’ is a rather vague time dimension.” The EUR opens in Asia this morning at USD1.2205, AUD/EUR0.6375 and NZD/EUR0.5910.

AUD / USD

Expected Range

The USD index hit 90 for the first time in 2-weeks in New York on Tuesday evening and yesterday it extended these gains, more due to independent concerns about the GBP and EUR than to any fresh fall in US equity markets which has tended recently to offer the USD some support. The index high around 90.25 takes it back to where it was before US Treasury Secretary Mnuchin’s remarks in Davis in late January and means it has rallied more than two full points from its recent low of 87.95. <br><br> Wednesday’s US economic data generally came in shy of consensus expectations. Against a median estimate of a small drop to 64.1, Chicago PMI in February dropped from 65.7 to 61.9; lower than any of the 30 economists in a Bloomberg poll had been looking for. None of the seven sub-indices (prices paid, new orders, employment etc) rose on the month and the headline was the lowest since August 2017. Elsewhere, pending home sales fell by 4.7% m/m in January and though this might be simply weather-related, there’s some talk, too, that sharply rising mortgage rates on the back of higher US bond yields might be feeding through more quickly than usual into lower housing market activity. <br><br> Whatever the case, there’s no doubt that the US economic data have been running somewhat slower than expected over the past few weeks. Citibank produce a very well-regarded “economic surprise index” (scaled from -100 to +100) and this is down from a high over 80 in late-December to just 33.5 today. The Atlanta Fed’s GDPNow model which back in late January was suggesting 5.4% for Q1 GDP has been revised notably lower and after Tuesday’s durable goods numbers, the latest estimate is just 2.6%. This will be updated later today after the release of Personal income and expenditure, the ISM Manufacturing Index, and construction spending. The USD index opens this morning in Asia at 90.25; up almost three-quarters of a point from Monday’s opening level.

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.

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.

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.

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.

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.

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 / 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 / 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 / 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 / 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.

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