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By Nick Parsons

AUD jumps back to 78 US cents as US Dollar falls across the board


AUD / CAD

Expected Range

We can’t deny the Canadian Dollar has few friends at the moment. But, we warned in our North American commentary on Tuesday that whilst, “there are plenty of opportunities for USD/CAD to move on to a new 1.30 ‘big figure’… one word of caution is the large number of investors who are now expecting it; suggesting that the market is already heavily positioned that way.” More than eight hours since we wrote that, USD/CAD has not only failed to break on to 1.30 but is now back on 1.28. AUD/CAD is only a few pips above where it opened yesterday morning in Sydney whilst even NZD/CAD is barely a quarter of a cent higher. Sometimes it pays to keep an eye on market positioning… <br><br> Ahead of Wednesday’s BoC meeting, a really excellent article in the Financial Post says that Governor Stephen Poloz’s narrative boils down to something like this: “There is more uncertainty in the world today. This heightened uncertainty is the sort you can’t measure or estimate. Geopolitics is an important factor, but so is growing uncertainty about the reliability of models to prescribe policy. Because of this, policy makers are injecting more “realism” and judgment into the narrative and nudging the decision-making process toward something that looks less like a mechanical exercise akin to engineering and more like risk management. More art, less science, in Poloz’s words.” The BoC Governor travelled to London last week to accept an award as ‘Central Banker of the Year’; something with which your author fully concurs. His acceptance speech said, “we have learned that it is far better to be open and honest about the uncertainty we face, as well as how we deal with it, rather than to just assume the uncertainty away and project a false sense of confidence.” <br><br> Before the Bank of Canada policy meeting – where a poll of 30 analysts by Reuters unanimously forecasts the central bank will hold its benchmark rate at 1.25 percent - we have the housing starts and labour productivity data. The Canadian Dollar opens in Asia this morning at USD/CAD1.2895, AUD/CAD1.0080 and GBP/CAD1.7915.

AUD / EUR

Expected Range

On Monday, the euro was unsure whether to focus on the diminution of political risk in Germany or the uncertainties of the Italian general election. On Tuesday, the Single European Currency put the Italian concerns firmly behind it; breaking above Monday’s high to reach a best level around 1.2410; the first time it had been back a 1.24 big figure in two weeks. <br><br> After Sunday’s Italian election, the two populist parties which emerged triumphant both claimed the right to form the next government. According to The Times, “Matteo Salvini, head of the anti-migrant League party, said that he had “the right and the duty” to lead a government after he took 17 per cent of the vote on Sunday, making him the senior partner in his right-wing coalition with Silvio Berlusconi’s Forza Italia. With a combined 37 per cent of the vote, their bloc is the largest in the new parliament. Minutes after Mr Salvini’s victorious press conference, however, Luigi Di Maio, head of the anti-establishment Five Star Movement, declared that his party, which came first with 32.6 per cent of the vote, was “the absolute winner” and should dictate the pace. “We feel we have the responsibility to create a government… We are sure the president [of Italy] will give us this opportunity.” <br><br> The combined electoral share of the two rival parties doesn’t quite form a mathematical majority but by gaining 49% of the total votes cast, it was a result which surprised all the political experts in the country. The Five Star Movement did best in the south where unemployment is highest and it had promised to pay a minimum €780 minimum wage to the jobless. The Northern League did best in the North (the clue is in the name!) where it received more votes than its presumed coalition party Forza Italia led by Silvio Berlusconi. The League and 5SM have both ruled out any power-sharing agreement so it now falls to the President to choose which one he will call to see if they can form a formal Coalition government. Failing that, new elections will have to be called. The euro open in Asia this morning at USD1.2400, AUD/EUR0.6305 and NZD/EUR0.5880.

AUD / USD

Expected Range

Up until the end of last week, the USD had a fairly close inverse relationship with the stock market: Equities up, dollar down and vice-versa. This broke down on Friday when both the stock market and the USD fell as a result of threatened retaliation to President Trump’s proposed steel tariffs. A huge rally in the stock market on Monday saw the USD trade essentially sideways but for much of Tuesday, stocks and the USD both headed south again as the DJIA fell 300 points in the New York morning. <br><br> It is not immediately obvious why a reported North Korean offer to ‘de-nuclearise’ should have been seen as negative for risk assets. The headlines came from South Korean National Security Office special envoy Chung Eui-yong, who was speaking to reporters in Seoul after returning from Pyongyang. He also said that "North Korea and South Korea agree to hold summit in April and Pyongyang vowed not to test any ballistic missiles or make further provocations during talks”. Instead, it seems more likely that the culprit for the simultaneous drop in stocks and the dollar was a report that former Goldman Sachs COO Gary Cohn will leave his White House job if Trump decides to go forward with tariffs on imported steel and aluminum. This itself might not be enough to cause the President to change his mind, although Bloomberg subsequently reported that Georgia Senator David Purdue (a well-known Trump ally) has made comments that President Trump is "open to changes on tariffs." <br><br> Keeping up with all the twists and turns of global foreign exchange markets is an exhausting business at the moment, though our clients around the world can’t say they weren’t warned about this extreme volatility. We wrote here 24 hours ago that, “All eyes elsewhere will be on the POTUS’ Twitter feed; a single tweet from Mr. Trump could easily move stocks and the US Dollar by one per cent in a matter of moments.” As we’ve said many times before, having orders already in place to profit from or mitigate the impacts of this volatility is a key component of a corporate risk management strategy.

GBP / AUD

Expected Range

After Monday’s table-topping performance, Tuesday was a much poorer day for the GBP which fell against four of the five other currencies we follow closely here. The biggest fall (-0.7%) came against the NZD but losses elsewhere came against the EUR, CAD, AUD and NZD. The low point for GBP/USD was early in the London morning at 1.3820 and the pair rallied exactly one cent when the USD came under pressure after the North Korean news. By the end of the day, however, the GBP had fallen more than a quarter of a cent from its high, leaving it back on a 1.38 big figure. <br><br> On Brexit, we said yesterday that, “the reaction of the EU will be more important than the routine criticisms from Opposition parties in Westminster.” The Guardian newspaper carried the story that Stefaan de Rynck, the main adviser to the EU’s chief Brexit negotiator, Michel Barnier, stressed that the rules of the single market required far more than her chief proposal – a mutual recognition of standards. In his speech, at a special LSE lecture in London last night, de Rynck said, “The EU has moved away in the wake of the financial crisis from mutual recognition of national standards to a centralised approach with a single EU rule book and common enforcement structures and single supervisory structures.” He also claimed EU businesses, faced by a choice, “are more concerned with maintaining the integrity of the EU single market than any loss of access to British markets.” <br><br> It had been expected that the EU’s guidelines for the EU-UK post-Brexit trade talks would be released on Tuesday, but publication of that document, which will constitute the EU’s fullest response yet to Theresa May’s Lancaster House speech on Friday, has been postponed. This might remove one of the near-term negatives for the GBP, though Arlene Foster (the head of the DUP Coalition partner) has tweeted, “Just concluded a constructive meeting with Michel Barnier. There are sensible solutions to the border question. Greater flexibility needs to be shown by Brussels. Unacceptable for Northern Ireland to be treated separately from rest of UK as set out in the draft EU legal text.” The pound opens in Asia this morning at USD1.3880, GBP/AUD1.7750 and GBP/NZD1.9025.

AUD / NZD

Expected Range

If a coherent narrative around the AUD on Tuesday is difficult, the New Zealand Dollar once again defies explanation. It was way out on top of the one-day leader board with NZD/USD printing on a 73 US cents ‘big figure’ for the first time in eight days. To some extent, this price action is similar to the AUD/USD pair but the Kiwi’s moves were amplified; as evidenced by a fall in the AUD/NZD cross from 1.0740 to 1.0705. NZD/USD ended the day 0.9% higher with GBP/NZD down 0.7%. <br><br> New Zealand’s statisticians have issued a reminder that today, March 6th, is census day in New Zealand. Already 1.2 million people have completed the census online and timing for online forms is averaging four minutes for the dwelling form and eight minutes for the individual form. Stats NZ has a target of 70 percent of all census forms completed online, but anyone can ask for a paper form instead. The Statistics Act 1975 requires everyone in New Zealand on census day to take part. People who choose not to fill out their census forms can be fined between $50 and $500. In 2013, Stats NZ announced about 100 people were being prosecuted for not completing their census forms whilst in 2006, the Government department prosecuted 72 people for not completing the census, resulting in 41 convictions. <br><br> Three of the ‘partial data’ which feed in to the calculation of the GDP numbers are out this week. Today it is Building Work Put in Place and Wholesale Trade whilst Thursday is the quarterly Survey of Manufacturing. For the moment, early estimates of the GDP number are for growth around 0.4-0.6% in the December quarter. The New Zealand Dollar opens in Asia this morning at USD0.7300 and AUD/NZD1.0710.

AUD

Expected Range

After Monday’s fairly quiet start to the week for the Aussie Dollar, Tuesday was quite a bit livelier – albeit some of the explanations for its movement look a little contradictory. Despite the efforts of some analysts to talk up the RBA’s view on wages, AUD/USD finished the Asia session lower than where it began. The pair was then very steady until lunchtime in Europe when an apparent offer from North Korea to talk about nuclear disarmament sent the USD sharply lower and boosted AUD/USD to a best level around 0.7835; the highest in exactly a week. Quite why this was a negative for stocks has yet to be fully explained but the DJIA then lost 250 points which, in turn, knocked a quarter of a cent off AUD/USD even as gold jumped by $15 per ounce. Fitting a coherent narrative to this price action across asset classes is tricky indeed! <br><br> To no-one’s great surprise, the RBA decided to leave the cash rate unchanged at 1.50 per cent; the 19th consecutive month of unchanged rates. Its Statement said, “The Bank's central forecast is for the Australian economy to grow faster in 2018 than it did in 2017. Business conditions are positive and non-mining business investment is increasing. Higher levels of public infrastructure investment are also supporting the economy. Further growth in exports is expected after temporary weakness at the end of 2017. One continuing source of uncertainty is the outlook for household consumption. Household incomes are growing slowly and debt levels are high.” The one thing that caught the attention of currency markets was the line that, “Notwithstanding the improving labour market, wage growth remains low. This is likely to continue for a while yet, although the stronger economy should see some lift in wage growth over time. Consistent with this, the rate of wage growth appears to have troughed and there are reports that some employers are finding it more difficult to hire workers with the necessary skills.” <br><br> It’s a bit of a stretch to jump from “wage growth appears to have troughed” to a forecast either that wages will go up or an observation that they have indeed already risen. But, foreign exchange markets often get way ahead of themselves and this merest hint of a bit more optimism on wages was the main reason the AUD initially moved higher. In other data yesterday, the Q4 balance of payments data showed exports -1.8% and imports +0.5% which will subtract around 0.5% from today’s GDP data. Forecasts for this indicate a number around 0.6-0.7% q/q for an annual rate of growth around 2.6-2.7%. The AUD opens in Asia at USD0.7810, with AUD/NZD at 1.0710 and GBP/AUD1.7760.

By Nick Parsons

US stocks reverse strongly higher but AUD little moved ahead of RBA. GBP is best performer but EUR held back by Italian election


AUD / CAD

Expected Range

We explained here on Friday that the announcement of US tariffs hits the Canadian Dollar in two ways. First, and directly, Canada is the world’s number one exporter of steel to the United States. Second, it throws into question the delicate renegotiation of the NAFTA agreement. Yesterday all these worries finally hit the CAD hard. USD/CAD rose to just under 1.2995; its highest since early July whilst AUD/CAD hit an 8-month high around 1.0080. <br><br> In a couple of fresh tweets on tariffs, President Trump said, “We have large trade deficits with Mexico and Canada. NAFTA, which is under renegotiation right now, has been a bad deal for U.S.A. Massive relocation of companies & jobs. Tariffs on Steel and Aluminum will only come off if new & fair NAFTA agreement is signed. Also, Canada must.. ...treat our farmers much better. Highly restrictive. Mexico must do much more on stopping drugs from pouring into the U.S. They have not done what needs to be done. Millions of people addicted and dying.” Canada's Finance Minister Bill Morneau said the country is negotiating the North American Free Trade Agreement (NAFTA) with a partner that has "changed the terms of the discussion". Speaking at a women’s entrepreneurship event in Toronto, he stressed the tariffs are not advantageous to either country or national security. <br><br> Tuesday brings the Canadian PMI survey and on Wednesday morning before the Bank of Canada policy meeting, we have the housing starts and labour productivity data. On Friday, the Canadian labour market report will be released at the same time as the US employment numbers; plenty of opportunities for USD/CAD to move on to a new ‘big figure’. The Canadian Dollar opens in Asia this morning at USD/CAD1.2990, AUD/CAD1.0080 and GBP/CAD1.7970.

GBP / AUD

Expected Range

The British Pound had a good day on Monday, as an apparent truce between the warring factions of the Conservative party and some decent economic data brought a recently-rare combination of good news. As recently as last Thursday, GBP hit a low point 1.3720; the lowest since January 12th (the day after the ECB first spoke about changing forward guidance). The pair rallied on Friday as the USD came under pressure and the GBP extended its gains on Monday to a five-day high around 1.3870. Approaching the close of business in New York, the GBP was at the top of our one-day performance table with gains of around three-tenths of a percent against most major currencies and more than one per cent against the CAD. <br><br> Monday’s UK economic data were generally better than expected. The service sector PMI registered 54.5 in February, up from 53.0 in January, to signal the strongest rate of output growth for four months. Higher levels of business activity were attributed to the resilient economic backdrop and an associated upturn in new work. Markit noted that, “UK service providers experienced a modest rebound in business activity growth during February, supported by the fastest rise in new work since May 2017. The latest survey also pointed to stronger job creation across the service economy, with payroll numbers rising to the greatest extent for five months as firms sought to boost operating capacity in response to improved order books.” <br><br> As we trailed here yesterday, Theresa May gave a speech in the House of Commons on Brexit: essentially a mini-version of what she had said at the Mansion House last Friday. She then took questions for almost a couple of hours from all sides. There was more heat than light generated in the Q+A session, but expectations recently have been so low that the absence of any controversy was itself taken as reason for hope about future progress. As ever, though, the reaction of the EU will be more important than the routine criticisms from Opposition parties in Westminster. The pound opens in Asia this morning at USD1.3835, GBP/AUD1.7825 and GBP/NZD1.9150.

AUD

Expected Range

It has been a fairly quiet start to the week for the Aussie Dollar, stuck between better than expected incoming economic data and recovering stock markets on the one hand, and some nervousness around the RBA’s messaging and Q4 GDP figures on the other. AUD/USD has spent almost the whole of the past 24 hours in a relatively narrow band from 0.7725 to 0.7765, with both the VIX index of volatility and the gold price down a little from Friday’s closing levels. <br><br> In economic data, building approvals jumped 17.1% m/m in January, returning to growth following a revised 20.6% fall in December, according to the Australian Bureau of Statistics. That was above the 5% growth forecast in a Reuters poll of economists. Approvals for apartments, classed as private sector dwellings excluding houses, jumped 42.2% in January while approvals for private sector houses fell 1.1%. Meantime, CBA published their service sector PMI survey which rose to 54.2 in February from 53.8 in January, indicating a solid and accelerated rate of output growth. CBI noted that, “New order growth accelerated to a seven-month high, with the favourable demand environment encouraging firms to pass on higher cost burdens to their clients through greater output prices. Meanwhile, the rate of job creation remained weak relative to the series trend amid reports of increased labour costs.” <br><br> Even before today’s RBA Board meeting, there is plenty of data scheduled for release. First up at 9.30am is the weekly consumer confidence index, then a couple of hours later there’s the January retail sales report. As with other countries, a shifting pattern of consumption around Black Friday sales promotions in late November has tended to distort retail sales numbers but by the end of January, the y/y rate should see most of these distortions unwound. ANZ forecast a slight acceleration in the annual rate to 2.6%. Also at 11.30am, we get to see the December quarter current account and net export numbers; both of which will feed into Wednesday’s Q4 GDP number. Provisional estimates suggest around 0.6-0.7% q/q for an annual rate of growth around 2.6-2.7% but these are subject to revision after the last ’partial’ data. The AUD opens in Asia at USD0.7765, with AUD/NZD at 1.0740 and GBP/AUD1.7820.

AUD / USD

Expected Range

The US Dollar had a very mixed day on Monday: down against a buoyant GBP, unchanged against the EUR but quite a bit higher against the friendless CAD. The day began with equity index futures extending Friday’s losses – something with often lends support to the USD – but in the New York afternoon, stock markets caught a bid and the DJIA moved from being almost 200 points down to 300 points up. The USD index against a basket of major currencies traded in a relatively narrow range from 89.55 to 89.80 and finished pretty much around the mid-point of this at 89.65. <br><br> February’s ISM non-manufacturing index slipped very slightly from 59.9 to a still very strong 59.5; the 97th consecutive month of expansion in the service sector. Business activity rose 3 points to 62.8, whilst new orders rose 2.1 to 64.8 but employment fell 6.6 from an exceptionally high reading of 61.6 in January to 55.0 and prices paid fell 0.9 to 61.0. According to the ISM, 16 non-manufacturing industries reported growth and the majority of respondents’ continue to be positive about business conditions and the economy. <br><br> Although the Atlanta Fed updates its GDP forecast after the ISM manufacturing report, it doesn’t do so after the service sector index is published. Its next update will come on Wednesday after the international trade numbers are released. Currently, its forecast for Q1 growth is an annualized pace of 3.5%. Tuesday brings factory orders and durable goods numbers whilst New York Fed Chief Bill Dudley – who last week said that four rate hikes in 2018 would be ‘gradual’ - is scheduled to make a speech on the economy. All eyes elsewhere will be on the POTUS’ Twitter feed; a single tweet from Mr. Trump could easily move stocks and the US Dollar by one per cent in a matter of moments.

AUD / NZD

Expected Range

For once, the New Zealand Dollar had an average, middle of the pack day on Monday; little changed against its Aussie cousin around 1.0740 and on the same 72 cents ‘big figure’ throughout the day against the US Dollar. For many businesses and traders, this will have been a welcome period of calm after the seemingly random daily movements over the past couple of weeks. Its biggest change came against the GBP which was way out at the top of the leaderboard, with GBP/NZD rising a full cent to a 5-day high of 1.9160. <br><br> In the first economic data of a fairly busy week, the ANZ Commodity Price Index rose 2.8% m/m in February, kicking on from the 0.7% gain in January. The lift was fairly broad-based, although the dairy group provided the major thrust, with a 6% gain and beef prices rose 3.9% m/m. ANZ’s analysts noted that, “New Zealand’s merchandise terms of trade hit a new all-time high in Q4. It represents a key purchasing power benefit for the economy. We are assuming that it stabilises around this level over the next couple of years. And while today’s figures only represent half of the equation, the lifts seen over 2018 to date do suggest there is a possibility of some further near-term upside.” <br><br> Away from the economic stuff, New Zealand’s National Institute of Water and Atmospheric Research (NIWA) reports that the Summer of 2018-18 was the hottest on record. Their cousins across the Tasman Sea may snigger, but the nationwide average temperature was 18.8 degrees Celsius, 0.3C above the previous 1934-35 record of 18.5C, and a significant 2.1C above the 1981-2010 averages. The hot summer was characterised by mean sea level pressures being higher than normal, bringing more northerly and northeasterly winds than normal - consistent with La Niña conditions. For the capital Wellington, there were 17 days when the temperature exceeded 25 degrees, whilst Alexandra reached 38.7°C on 30 January, the country’s hottest January temperature in 39 years. The New Zealand Dollar opens in Asia this morning at USD0.72425 and AUD/NZD1.0740.

AUD / EUR

Expected Range

By last Thursday morning, EUR/USD had fallen to 1.2160; its lowest since mid-January. It began to rally as soon as President Trump announced his trade tariffs and having gained a full cent by the close of business in New York, it extended gains on Friday to a high of 1.2330. Yesterday, the EUR initially rallied on news that Angela Merkel could form a coalition government but subsequently gave back some of its gains as investors attempted to digest the results of the Italian general election. <br><br> With almost all the votes now counted in Italy, it seems that none of the three main factions will be able to govern alone. A majority of Italian voters have supported Eurosceptic candidates in the national election and projections suggest the two parties with the most gains, the eurosceptic Five Star Movement and the anti-migrant League, could reach a majority in at least one of the houses of parliament should they join forces. Observers say such a coalition would likely challenge EU budget restrictions and be little interested in further European integration. According to Reuters, “with the centre-right coalition on course for 37 percent of the vote and 5-Star for 31 percent, swift new elections to try to break the deadlock are another plausible scenario.” <br><br> In economic news, the final Eurozone PMI Composite Output Index posted 57.1 in February, down from January’s near 12-year high of 58.8. The headline index has signaled expansion in each of the past 56 months, although the latest reading was slightly below the flash estimate of 57.5. The manufacturing sector again registered stronger output growth than services. Both sectors also continued to enjoy the best periods of expansion for seven years, despite seeing rates of increase in output and new orders easing across the board in February. By country, Markit reported that rates of output growth were solid despite mostly slowing since January. Germany (three-month low) topped the rankings, followed by France (five-month low) and then Spain (eight month high). Rates of expansion in Ireland and Italy slipped to four- and three-month lows respectively. The euro open in Asia this morning at USD1.2325, AUD/EUR0.6300 and NZD/EUR0.5860.

By Nick Parsons

US trade tariffs to dominate investor sentiment. RBA will leave rates unchanged on Tuesday but will GDP figures offer any more clues for the AUD?


AUD / EUR

Expected Range

EUR/USD ended last week almost exactly unchanged but it was far from dull. Having opened in Sydney on Monday around 1.2310, by Thursday morning it had fallen 1½ cents to 1.2160; its lowest since mid-January. The euro began to rally as soon as President Trump announced his trade tariffs and having gained a full cent by the close of business in New York, it extended gains on Friday to a high of 1.2330 to end the week up against the AUD, NZD, CAD and GBP. <br><br> In a speech on Friday night at Harvard University, European Commissioner for Competition, Margrethe Vestager, said the EU will respond to the tariffs, “to defend European industry, and the world trading system”. She called the Trump action, “one-sided protectionist measures, which hurt, not just jobs, but the whole system of rules that makes our global economy work.” According to Reuters, the United States had a $22.3 billion automotive vehicle and parts trade deficit with Germany in 2017 and a $7 billion deficit with the United Kingdom. The United States accounts for about 15 percent of worldwide Mercedes-Benz and BMW brand sales, while it accounts for 5 percent of VW brand sales and 12 percent of Audi sales. <br><br> Whilst trade threats will likely dominate the agenda in the early part of this week, we’ve also had the results of the German SPD’s membership vote on whether to enter a so-called “Grand Coalition” - or “Groko” as it’s known locally - with Angela Merkel. A majority of 66.02% of 463,723 eligible SPD members voted in favour of renewing the coalition that has governed Germany for the last four years. As we write this commentary, the results of the Italian General Election are not yet in, though political experts suggest the result appears likely be a hung parliament. The worst outcome for the currency would be a highly unlikely 5SM victory, though if it polls very well and enters a formal coalition, then the EUR will still be pressured. It closed on Friday evening in New York at USD1.2320, AUD/EUR0.6300 and NZD/EUR0.5880.

GBP / AUD

Expected Range

Brexit manages to be simultaneously a very fascinating and extremely tedious subject! Unfortunately, it is also the key driver of the GBP which ebbs and flows according to whether any final deal is seen to be good for the UK trade (soft Brexit) or something which leaves the country more isolated from the Continent of Europe but free to strike global trade deals (hard Brexit). Sentiment can shift strongly from day-to-day and even intra-day and last week was a very good example of how sensitive the GBP can be. From an opening level around USD1.3980 in Sydney last Monday, the GBP hit a best level around 1.4060 in the London morning but it was then downhill pretty much all the way to a low point on Thursday of 1.3720; the lowest since January 12th (the day after the ECB first spoke about changing forward guidance) A bounce was seen late Friday evening but the pound couldn’t hold on to a 1.38 ‘big figure’; closing around 1.3795. <br><br> The Prime Minister’s major speech on Friday – moved from Newcastle because of the extreme winter weather which gripped the UK last week - was high on aspiration but low on detail, even if it did acknowledge for the first time that totally frictionless trade with the EU will be a future impossibility. The good news in terms of domestic politics is that both wings of the Conservative Party have welcomed Theresa May’s new approach. The threat of losing a vote of confidence in the House of Commons appears much less likely than it did just a few days ago. However, what we haven’t yet seen is any reaction from Brussels which on Friday was busy crafting a response to President Trump’s trade tariffs. The GBP will now be driven by the extent to which the EU will seek to harden its own negotiating position ahead of the EU Summit in just over two weeks’ time. <br><br> For the week ahead, the main economic statistics come at the beginning and the end. Today we have the service sector PMI survey and on Friday it’s manufacturing and industrial production and the overseas trade balance numbers. In politics, as the BBC pithily notes, “There will be a flare-up in the Brexit phoney war on Monday when Theresa May takes questions from MPs about the policies in her big Brexit speech but after that things quieten down, with sporadic guerrilla activity in various select committees.” The pound opens in Asia this morning having closed on Friday at USD1.3795, GBP/AUD1.7770 and GBP/NZD1.9060.

AUD / NZD

Expected Range

The New Zealand Dollar continues to defy analysis or even explanation. On Friday ten days ago, it was bottom of our one-day performance table without any incoming news. Last week, it was top on Monday; again with no fresh incoming data or news catalyst. Both Tuesday and Wednesday it was bottom of the pile and on Thursday it was back in top spot. NZD/USD hit a low in Sydney on Thursday of 0.7190 but ended the day at 0.7250 and went on to a best level on Friday of 0.7275 before closing around 0.7240. Seemingly random swings from top to bottom place are frustrating for everyone but show the importance of placing orders in advance to benefit from volatility in offshore centres. <br><br> Just as New Zealand’s dollar is volatile, so too are some of its economic statistics. Last week, we saw that 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. In separate data, ANZ’s monthly business survey turned less pessimistic, their jobs advertisement numbers turned down from recent highs yet consumer confidence rose. We also saw that 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. <br><br> It’s not just across the Tasman Sea where analysts are firming up their estimates of G4 GDP. Locally in New Zealand, the GDP numbers are not out until March 15th but this week there are three of the ‘partial data’ which feed in to the calculation. On Wednesday it is Building Work Put in Place and Wholesale Trade whilst Thursday is the quarterly Survey of Manufacturing. For the moment, early estimates of the GDP number are for growth around 0.4-0.6% in the December quarter. The New Zealand Dollar opens in Asia this morning having closed in New York on Friday at USD0.7240 and AUD/NZD1.0715.

AUD / CAD

Expected Range

The Canadian Dollar had another poor week. USD/CAD opened on Monday morning at 1.2645 and moved relentlessly higher to a best level on Friday around 1.2910; its first time on a 1.29 ‘big figure’ since November 30th and the highest level since mid-July. AUD/CAD, meantime, on Friday hit parity for the first time since August 18th and is up 3½ cents since its early-December low. <br><br> The announcement of US tariffs hits the Canadian Dollar in two ways. First, and directly, Canada is the world’s number one exporter of steel to the United States, followed by Brazil, South Korea, Mexico and Russia. Canada’s Foreign Minister Chrystia Freeland said it’s “entirely inappropriate” for the US to consider the country a threat to national security. “We will always stand up for Canadian workers and Canadian businesses... Should restrictions be imposed on Canadian steel and aluminum products, Canada will take responsive measures to defend its trade interests and workers.” Second, as a seventh round of NAFTA talks is underway in Mexico City, an escalation of a trade and tariffs war makes for a very difficult backdrop, throwing doubt on the whole process. <br><br> The week ahead could be quite busy for the Canadian Dollar, not just in terms of economic data and trade news, but also on Wednesday the Bank of Canada policy meeting. The BoC is unanimously expected to leave official rates unchanged at 1.25% after the 25bp hike in January and the accompanying statement will be closely read for what the Central Bank has to say about trade and the economy. Ahead of that on Tuesday is the PMI survey and on Wednesday morning the housing starts and labour productivity data. On Friday, the Canadian labour market report will be released at the same time as the US employment numbers. The Canadian Dollar opens in Asia this morning having ended the week at USD/CAD1.2880, AUD/CAD1.000 and GBP/CAD1.7770.

AUD / USD

Expected Range

The US Dollar had very much a week of two unequal halves: up for the first three and a half days and down for the remainder. Its index against a basket of major currencies opened on Monday morning at 89.50 and as stock markets fell, volatility rose, and Fed Chair Jerome Powell hinted at the possibility of four 25bp hikes this year, so the USD index hit a high on Thursday of 90.50; back to where it was before US Treasury Secretary Mnuchin’s remarks in Davos in late January. On Thursday 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, however, the USD did not respond positively. Amidst fears of retaliatory action from other countries, the index gave back around half a point to 90.00 and fell further on Friday to 89.60. <br><br> President Trump tweeted on Friday that, “When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win. Example, when we are down $100 billion with a certain country and they get cute, don’t trade anymore-we win big. It’s easy!”. In response, most countries - including Canada, China and much of Europe - have issued statements condemning Trump's decision and threatened retaliatory action. The European Union vowed to “react firmly” with World Trade Organization-compliant countermeasures in the next few days. An EU Commission spokesman said that the EU already has counter-measures ready against US tariffs and stands ready to respond, whilst Canada, which is the biggest foreign supplier of steel to the US was furious: Ottawa said the US measures were “unacceptable.” <br><br> Far from retreating, President Trump instead doubled down on his threats. After hearing that the EU was considering specifically target measures on Harley Davidson motorbikes and Levi Strauss jeans, he tweeted that, “If the E.U. wants to further increase their already massive tariffs and barriers on U.S. companies doing business there, we will simply apply a Tax on their Cars which freely pour into the U.S. They make it impossible for our cars (and more) to sell there. Big trade imbalance!” He went to say, “The United States has an $800 Billion Dollar Yearly Trade Deficit because of our “very stupid” trade deals and policies. Our jobs and wealth are being given to other countries that have taken advantage of us for years. They laugh at what fools our leaders have been. No more!”. We’d note that the last time the US started a trade war over steel in 2002, the S+P 500 fell almost 30% and the USD fell 20% over the next 18 months until the WTO ruled the tariffs were illegal…

AUD

Expected Range

The most well-known US stock market index, the Dow Jones Industrial Average, fell over 1,500 points in just a few days last week. When new Fed Chair Jerome Powell delivered his maiden semi-annual monetary policy testimony, the DJIA stood at 25,800. By Friday afternoon it was down at 24,260. Lower asset markets and higher volatility are usually bad for the Aussie Dollar. Add in a $20 drop for the gold price and it was no surprise to see the AUD weaken. From an opening level in Sydney last Monday morning around 0.7830, AUD/USD fell to a low on Thursday around 0.7715 before a recovery late on Friday to 0.7770. <br><br> In terms of economic data, the last week of February was something of a mixed bag. According to the Australian Bureau of Statistics, Capital Expenditures fell by 0.2% to $29.57 billion in the final quarter of last year, missing forecasts for an increase of 1%. Despite the lower than expected headline number, total CAPEX grew by 4% over the year, the strongest increase in five years. In more timely data, 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. Separately, the value of credit extended to Australia’s private sector grew by just 0.3% in January and over the year, total credit grew by 4.9%, the equal-lowest increase since May 2014. <br><br> The two main events for the Aussie Dollar this week will be Tuesday’s RBA Board meeting and then Wednesday’s Q4 GDP report. It would be one of the biggest surprises ever if the RBA changed interest rates and there’s no great need for any change of signaling from the Central Bank on future policy intentions. Ahead of this, we’ve been highlighting the lack of consensus on Australian interest rates from the ‘Big Four’ banks locally. The divergence narrowed somewhat last week as NAB 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”. The AUD opens in Asia having closed on Friday evening at USD0.7770, with AUD/NZD at 1.0715 and GBP/AUD1.7770.

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

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 / 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.

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.

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.

By Nick Parsons

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


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.

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 / 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.

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