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By Nick Parsons

AUD/USD moving closely with stock markets but quite resilient


AUD / EUR

Expected Range

The euro was very much out of the spotlight for most of Tuesday though a late rally as the US Dollar struggled took EUR/USD back on to a 1.24 handle for the first time since last Thursday’s ECB Council meeting. For the 12 hours of trading in Asia and the European morning, just 25 pips separated the high and low for EUR/USD and it settled around the mid-point of its range, lacking both direction and momentum until the announcement of the sacking of the US Secretary of State. By the close in New York, however, the EUR was challenging the GBP for second place on our one-day performance table. <br><br> The leader of Italy’s far-right League, which emerged the largest conservative party in national elections on March 4, said on Tuesday that he did not see the country suddenly leaving the euro. “The euro is and remains a flawed currency,” League leader Matteo Salvini told reporters in Strasbourg, repeating his common line but, “There is no unilateral and improvised exit on the horizon,” he added. Salvini campaigned on rewriting European Union budget rules in order to make drastic tax cuts, and on mass deportations of irregular migrants but has not yet been invited by Italian President, Sergio Mattarella, to try to form the next Government. <br><br> The main events economic in the Eurozone come today with the final German CPI numbers ahead of those for the wider Eurozone on Friday. There are plenty of Central Bank speakers on Wednesday too, with President Draghi, Vice President Constancio and Chief Economist Peter Praet all scheduled to talk. The euro opens in Asia today at USD1.2390, AUD/EUR0.6340 and NZD/EUR0.5915.

AUD / NZD

Expected Range

Volatility has resumed in the New Zealand Dollar which once again topped the table at the end of the global trading day on Tuesday. NZD/USD is back on a 73 cents handle and the high in the European afternoon around 0.7350 was the best level in almost three weeks. AUD/NZD is down more than half a cent to 1.0720 whilst NZD/CAD is up more than a full point from Monday’s close at 0.9500. <br><br> The Reserve Bank of New Zealand’s (RBNZ) outgoing governor said on Tuesday that the bank’s use of macroprudential tools had successfully insulated the financial sector from the risks of a hot housing market and that its policy toolkit should be expanded. Governor Grant Spencer said that a planned review of the bank’s use of macroprudential policy in 2018, five years after it was first adopted, should consider the ways in which the success of the tools could be built on. “While we stated at the outset in 2013 that LVRs (loan to value restrictions) would be temporary, I believe there is a case to consider maintaining a policy infrastructure of this sort, with policies being adjusted through time between binding and non-binding settings.” Mr. Spencer also recommended the introduction of a new committee to make decisions around macroprudential policy, which would sit alongside the bank’s monetary policy committee, with some overlap in members. <br><br> The RBNZ slightly eased back some of its LVR restrictions in January after a sharp slow-down in house price inflation towards the end of 2017. House prices have since recovered, growing at an annual rate of around 6.5 percent for the past three months. The timing of Mr. Spencer’s speech is very interesting, coming on the day before the always-fascinating REINZ house price report is released and should keep the topic very much a live one for debate. The New Zealand Dollar opens in Asia this morning at USD0.7325 and AUD/NZD1.0720.

AUD

Expected Range

On a day of high political drama in the United States, the opening of the cash equity market in the United States on Tuesday coincided with the peak in the AUD/USD exchange rate just under 0.7895. The DJIA had rallied almost 650 points from last Thursday’s intra-day low; at which point AUD/USD stood around 0.7775. As the stock market yesterday suffered a 250 point drop in the space of just a few hours on news that Secretary of State Rex Tillerson had been fired, so the AUD/USD slipped back; albeit demonstrating some resilience given the scale of the stock market reversal. <br><br> The highlight in Australian economic news was the well-respected NAB monthly business survey. The business conditions index moved 3 points higher to +21. This is a record high since the monthly survey commenced in March 1997, although the same measure in NAB’s quarterly survey reached this level in 1994. In contrast, the business confidence index declined by 2 points to +9. According to NAB, “The fall in confidence may reflect the turbulence seen in international financial markets in early February, but confidence remains above average suggesting that the impact was relatively limited”. The strength in business conditions was broad-based with all major industry groups reporting above-average conditions. NAB noted, “The gap between the best and the softest performing industries is at a relatively low level with even the underperforming retail sector recording its highest reading in eight months. That said, the trend down in personal & recreational services over the past four months needs to be watched closely as it could indicate that softness in consumer spending is broadening beyond retail.” <br><br> It is striking that even a record high for NAB’s business conditions sees the bank hedging its bets on the interest rate outlook. It recently removed one of the two hikes in its 2018 forecast profile and now says, “We expect by late 2018 the RBA will feel relaxed enough about the domestic fundamentals to cautiously start withdrawing the stimulatory policy stance it is currently running. However, it will depend heavily on the data flow and the risk is that the RBA will delay rate rises until early 2019.” The Australian Dollar opens in Asia this morning at USD0.7855, with AUD/NZD at 1.0720 and GBP/AUD1.7775.

GBP / AUD

Expected Range

The British Pound couldn’t quite make two consecutive days at the top of the table, knocked into second place on Tuesday by the ever-volatile New Zealand Dollar. GBP/USD actually spent most of the Asian session and European morning in a fairly tight range, unchanged from the previous New York close at 1.3900 at the moment UK Chancellor Phillip Hammond stood up to present the inaugural Spring Statement to the House of Commons. By the time he had finished, ‘cable’ stood at 1.3965 and went on to a day’s best of 1.3985. <br><br> We wrote here yesterday that, “There is the chance of a rare upgrade to UK economic forecasts after the incoming data over the past few months have shown the Office for Budget Responsibility was too pessimistic in its assumptions on UK productivity.” That is exactly what happened, albeit the upward revisions were only very small and from an exceptionally weak starting point. What really grabbed the attention was how upbeat the Chancellor was; as if he had been practicing really hard for quite some time. Often accused of being an Eeyore (the pessimistic, gloomy, depressed, old grey donkey who is the friend of Winnie-the-Pooh in the children’s books by A.A. Milne), Mr. Hammond began by insisting, “I am at my positively Tigger-like best” (As this character says, bouncing is what Tigger does best). He proceeded to read a series of five-year economic growth forecasts which should reduce any adult to tears of sadness, not joy: 1.5%, 1.3%, 1.3%, 1.4% and 1.5%. This will be the first time in 70 years of five consecutive years of growth below 2%, but the Chancellor made it sound like the winning lottery numbers; hailing a 0.1% upward revision to the 2018 number. <br><br> The Chancellor promised Britain that, “our best days lie ahead of us” and said he would use the budget this autumn to set out his expenditure expectations for 2020 and beyond, with a full spending review next year, after Brexit. If the public finances continued to reflect the improvements outlined in his Statement, he said the government would “have capacity to enable further increases in public spending and investment in the years ahead.” Rarely has such poor news been so well received; both by backbench MP’s and a usually more skeptical foreign exchange market. The GBP opens in Asia this morning at USD1.3965, GBP/AUD1.7775 and GBP/NZD1.9060.

AUD / CAD

Expected Range

The GBP could quite make two consecutive days at the top of our performance table but the Canadian Dollar has made back-to-back appearances at the bottom. USD edged gradually higher in Asia and the European morning then jumped from 1.2840 to 1.2925 as headlines from Bank of Canada Governor Stephen Poloz’s speech began to hit the newswires. By the end of the day, AUD/CAD was nudging 1.02 and NZD/CAD was almost at 95 cents. <br><br> In a speech which focused on labour market slack, the Governor said Canada is at the “sweet spot” of the business cycle where growing demand is actually generating new capacity as companies invest to meet sales, a process he said the Bank of Canada has an “obligation” to nurture. The increased investment, meanwhile, will help bring more people into the work force - such as women, youth and the long-term unemployed. “Put it all together, and it is not much of a stretch to imagine that Canada’s labour force could expand by another half a million workers. To put this thought experiment into perspective, this could increase Canada’s potential output by as much as 1.5 per cent, or about $30 billion per year. That’s equal to a permanent increase in output of almost $1,000 per Canadian every year, even before you factor in the possible investment and productivity gains that would come with such an increase in labour supply. Clearly, that is a prize worth pursuing.” <br><br> On monetary policy, Poloz said, “It should be clear that there are likely to be significant economic benefits associated with allowing the economy to find its way to a higher, more productive economic equilibrium, if this can happen within our inflation-targeting regime… “We cannot know in advance how far the capacity-building process can go, but we have an obligation to allow it to occur.” This doesn’t sound like a man in any hurry to raise interest rates, hence the slump in the Canadian Dollar which opens in Asia this morning at USD/CAD1.2970, AUD/CAD1.0190 and NZD/CAD0.9495.

AUD / USD

Expected Range

The US Dollar fell even as stocks turned sharply lower on Tuesday, on news that President Trump had fired his Secretary of State, Rex Tillerson. The Dollar’s index against a basket of major currencies had risen a couple of tenths in Asia to 89.65 and held that level until lunchtime in Europe. By noon in New York, however, it had fallen almost half a point to a 6-day low of 89.65 and the DJIA had tumbled 250 points from earlier levels. <br><br> It wasn’t just the fact of Mr Tillerson’s departure, but the way it had been announced with the Secretary of State on learning of his fate from the POTUS Twitter feed. President Trump subsequently told reporters that he and Tillerson disagreed on Iran, that he made the North Korea decision himself and thinks Tillerson will be "much happier now." Trump said "I wish Rex Tillerson well… I very much appreciate his commitment and his service and I wish him well. He’s a good man… We got along actually quite well but we disagreed on things.” The Trump White House has seen 24 departures in its first 417 days - a rate of around one senior position every 17 days (and more first-year departures than any other president in at least 40 years). A chief of staff, press secretary, three communications directors, a chief strategist, a health secretary, and now a Secretary of State and Personal Assistant are among those who have left the Trump administration. <br><br> Amidst all the political dramas, the economic numbers seem like something of an after-thought. The Labor Department said its Consumer Price Index rose 0.2% last month after jumping 0.5% in January, taking the annual rate to 2.2%, up from 2.1% as the weak reading from last year dropped from the calculation. Excluding the volatile food and energy components, the CPI rose 0.2% after increasing 0.3% last month to leave the annual rate unchanged at 1.8%. After the inflation numbers, on Wednesday we have retail sales and then towards the end of the week it’s housing and industrial production data. The USD index opens in Asia around 89.30.

By Nick Parsons

AUD just beaten into top spot on Monday by GBP. NAB business survey is Tuesday highlight


AUD / CAD

Expected Range

After the sharp rally seen on Thursday and Friday, the Canadian Dollar was back at the bottom of the table on Monday, though we’d repeat our warning not to read too much into currency movements on what was actually a fairly quiet day in the Northern Hemisphere. USD/CAD hit a low of 1.2805 in Asia yesterday and only moved around a quarter of a cent higher over the next 12-15 hours, having hit a high just under 1.2840. <br><br> Finance Minister Bill Morneau said during a visit to London on Monday that there are parallels between the way companies in North America and Britain are holding back on investment as they respectively wait for clarity on the re-negotiation of NAFTA and the outcome of talks on a Brexit deal. “There are some businesses that are being cautious in investments because there is an expectation that NAFTA could be slightly different tomorrow than it was yesterday… What’s been clear from the American standpoint is they are anxious to have a conclusion to Nafta as near term as possible - we’re trying to work constructively towards that goal.” On Canada’s future trading partnership with the UK -which is currently under the Comprehensive Economic and Trade Agreement - Morneau said any post-Brexit arrangement would have at least as much trade as the two countries enjoy currently. “To the extent that we can get a better arrangement with the U.K. in the future, that’s positive.” <br><br> BoC Governor Stephen Poloz is due to make a speech on Tuesday which will be closely analysed for further clues on monetary policy. Deputy Governor Tim Lane last week said, “We’ve been balancing the risk of undermining the economic expansion by moving too quickly with the risk of delaying too long and needing to raise rates sharply later to rein in inflation.” The market isn’t fully pricing in the next rate increase - which would be the fourth in the cycle - until July, according to calculations on overnight index swaps. The market expects two to three more hikes during the course of this year. The Canadian Dollar opens in Asia this morning at USD/CAD1.2830, AUD/CAD1.0105 and GBP/CAD1.7840.

AUD / NZD

Expected Range

The New Zealand Dollar followed its Aussie cousin higher in Monday’s Asian session, reaching a best level just over USD0.7320 but was unable to hold on to its early gains. By the London afternoon it had slipped back on to a US 72 cents ‘big figure’ and finished the day pretty much unchanged from Friday’s closing levels. <br><br> As well as the ‘risk-on’ mood for currencies which have often been positively correlated with rising asset markets, the news on trade was generally viewed in a favourable light. A spokesman for Trade and Export Growth Minister David Parker said that New Zealand has formally sought an exemption from the tariffs announced by President Trump, and while the details are still to be clarified, New Zealand may fall within the flexibility offered to close security partners. In an emailed statement to the Press, he said, "I am also concerned about the secondary impacts of these tariffs in terms of the knock-on effects on prices of steel and aluminium products around the world, including in New Zealand… A tit-for-tat escalation benefits no-one and hurts everyone." <br><br> Though the main economic news this week will be the Q4 GDP estimate on Thursday, it is far from the only set of figures to be released. On Wednesday we’ll get the always-fascinating REINZ house price report and before then this morning come the monthly food price numbers where consensus looks for a +0.3% monthly increase. The RBNZ has also announced that Governor Grant Spencer will deliver a speech titled "Getting the best out of macro-prudential policy". The speech text and a news release will be published at 12.45pm local time Tuesday afternoon. The New Zealand Dollar opens in Asia this morning at USD0.7295 and AUD/NZD1.0790.

AUD / EUR

Expected Range

EUR/USD spent most – but not all – of Monday on a 1.23 ‘big figure’ with its best level just under 1.2340 coming early in the European morning. Having dipped to a low just above 1.2290 by lunchtime, the EUR then clawed its way back on to 1.23 to finish mid-table on our one-day performance chart in what was in truth a pretty lacklustre session for most of the major currencies. <br><br> US President Trump tweeted on Monday that, “Secretary of Commerce Wilbur Ross will be speaking with representatives of the European Union about eliminating the large Tariffs and Barriers they use against the U.S.A. Not fair to our farmers and manufacturers.” According to Bloomberg, a meeting in Brussels between EU Trade Commissioner Cecilia Malmstrom and her U.S. counterpart Robert Lighthizer on Saturday ended without a breakthrough, as the EU didn’t receive assurances that it will be exempted from the metal tariffs. “If anyone starts throwing stones, it’s better first to make sure he’s not living in a glass house,” European Commission spokesman Enrico Brivio said. Asked to respond to Trump’s accusations that the EU is imposing barriers to U.S. automakers, Malmstrom said that “it’s hard to argue on Twitter over these issues, but the European Union is a very open market.” <br><br> Tuesday looks a pretty quiet day in terms of scheduled economic data in the Eurozone, as does much of the rest of the week. The highlight will be the final German CPI numbers on Wednesday and those for the wider Eurozone on Friday. There are plenty of Central Bank speakers, too, with President Draghi, Vice President Constancio and Chief Economist Peter Praet all on Wednesday. Often, the week after an ECB Council meeting is one where monetary officials try to recalibrate any unwelcome market movements or policy expectations but this time around there’s no need at all for that. The EUR opens in North America today at USD1.2315 and EUR/CAD1.5790. The euro opens in Asia today at USD1.2335, AUD/EUR0.6380 and NZD/EUR0.5915.

GBP / AUD

Expected Range

The British Pound finished on Monday as the top performer of the day, just edging the Australian Dollar into second place on our one-day table. GBP/USD had traded sideways in a very narrow range during the Asian session and was initially knocked lower by a pretty downbeat set of UK credit card numbers from Visa which warned that the first quarter of 2018 was on track to be the “worst on record” and that spending by consumers had fallen in nine out the past 10 months. From a low just above USD 1.3840, however, the GBP was then boosted by talk of an agreement on a post-Brexit transition deal and GBP/USD hit 1.39 at the end of the London afternoon. <br><br> Speaking at the Institute of Directors in London, junior Brexit minister Robin Walker said, “We recognise how important it is to secure the deal on the implementation period as soon as possible. I want to stress that we are very close to a deal at this time.” Britain has said it will adhere to EU regulations for a time-limited period after it leaves the European Union in March 2019, and hopes the details of this transition, or implementation, period, will be finalised at a summit with the EU on March 22-24. Britain has said it expects the transition period to last around two years after its departure date, although the European Union has said it should end earlier, on December 31st 2020. <br><br> Thoughts turn today to the Chancellor of the Exchequer’s Spring Statement. There is the chance of a rare upgrade to UK economic forecasts after the incoming data over the past few months have shown the Office for Budget Responsibility was too pessimistic in its assumptions on UK productivity. There are no longer any changes to taxes announced in March as the UK tax year begins on April 6th and the Chancellor has said he prefers to make these announcements in the Autumn to give time for consultation on detailed implementation. The OBR’s numbers, then, will likely take centre-stage in this new set-piece event. The GBP opens in Asia this morning at USD1.3900, GBP/AUD1.7655 and GBP/NZD1.9060.

AUD / USD

Expected Range

The US Dollar fell modestly on Monday; a day which brought no fresh incoming economic news and little further developments in the trade tariff saga. Its index against a basket of major currencies had ended last week around 89.70 and by close of business in New York it had slipped just a couple of tenths to 89.50. The USD was down against the GBP and EUR, as well as the Antipodeans, but finished up against the CAD. In stock markets, meantime, the DJIA managed to turn a 150-point gain into a 100-point loss by late afternoon in New York. <br><br> Even after Friday’s employment report, Chicago Federal Reserve Bank President Charles Evans said he wanted the US central bank to keep interest-rate increases on hold until after March to allow inflation a chance to rise and even exceed the Fed’s 2-percent target. “My own preference would be to wait a little bit longer,” Evans said in a CNBC interview. “We could go midyear and all of a sudden see, ‘wow, inflation continues to move up towards 2 percent, I’m much more confident’ and we continue an upward gradual adjustment of the funds rate.” Evans told both CNBC and Bloomberg that the February jobs report was good news in that it showed more people entering the labor force, with the participation rate rising to a five-month high of 63 percent. But, with strong hiring and an unemployment rate of 4.1 percent, he had hoped that wage growth would be stronger. He also said he would rather wait at least until inflation data for March had been released before raising rates. <br><br> For today, the main economic focus will be the CPI data. The headline inflation rate is expected to tick up to 2.2% y/y from 2.1% although the core rate excluding food & energy costs is expected to remain unchanged at 1.8%. Bear in mind that unlike the RBA, RBNZ or BoE, the Federal Reserve doesn’t have a CPI target. Instead, it looks at the core PCE deflator which is still some way below its preferred 2.0% level. After the inflation numbers, on Wednesday we have retail sales and then towards the end of the week it’s housing and industrial production data. The USD index opens in Asia around 89.50.

AUD

Expected Range

The global ‘risk-on’ mood definitely helped the Australian Dollar in the Asian session on Monday and AUD/USD marginally extended last week’s rally to reach a best level just under 0.7880. After an early mark-up, however, stocks found little fresh buying interest and as US index futures began to give back their gains, so too the AUD slipped back a little. Overall, the trading ranges were not wide and it would be unwise to read too much into the price action but it does seem that the near-term fortunes of the Aussie Dollar are closely aligned to those of the equity market. <br><br> Westpac’s analysts have arguably been the most accurate forecasters of the Australian economy recently. They were the first of the ’Big Four’ banks to call for RBA rates to be unchanged until the end of 2019 and though others are becoming less aggressive (and therefore less confident) in their rate hike calls, it does seem like a process of catch-up to the thought leader. Their latest research note reiterates, “a number of key themes that we believe will dominate economic and market developments. Our advice to customers throughout 2017 has been to expect Australia’s growth rate to likely be anchored below trend in both 2018 (2.7%) and slowing to 2.5% in 2019. That has contrasted with official forecasts (Reserve Bank and Treasury) which anticipate growth picking up to 3.25% in both 2018 and 2019. We have recognised a solid ongoing boost to growth from non– residential construction; government investment (especially at the state level) and exports. However, we are much more cautious than official forecasts on the consumer; residential construction and equipment investment.” <br><br> On a day when the NAB will grab most of the headlines with their very well-respected monthly business survey, Westpac note that back in August 2017, they had been forecasting that AUD cash rates would fall below the US Federal Funds Rate by around 40 basis points by end 2018. That, in turn, would drive the 10-year bond spread to zero, from around 60 basis points. At that time markets were priced for the US rate to be around 35 basis points below Australia. They now expect RBA rates to be even lower than Federal Funds at minus 63 basis points by end 2018 and minus 112 basis points by mid-2019. The likely result, their view, is that AUD 10-year bonds will trade around 30 basis points below US bond rates by mid-2019; something which they see will push AUD/USD to 74 cents by end-2018. The Australian Dollar opens in Asia this morning at USD0.7870, with AUD/NZD at 1.0790 and GBP/AUD1.7655.

By Nick Parsons

AUD joined the ‘risk-on’ party on Friday but can it last? US CPI on Tuesday may hold the key


AUD / CAD

Expected Range

The Canadian Dollar had quietly been the worst performing major currency of 2018 but it seems the whole world finally noticed the fact early in the week and decided to become very bearish. By the end of the week, many of those investors who sold the currency would have been licking their wounds as it rallied sharply on Thursday and Friday. <br><br> USD/CAD opened last week at 1.2880 and went on to hit a high on Monday of 1.2995; its highest since early July whilst GBP/CAD at 1.78 was the highest since late-June. For the Antipodeans, AUD/CAD extended its gains to a 9-month high of 1.0120 whilst NZD/CAD at 0.9435 was the highest since early July. The Canadian Dollar had a good day on Thursday after the US specifically excluded Canada and Mexico from the initial impact of tariffs on steel and aluminium. USD/CAD fell from the mid-1.29’s back on to a 1.28 big figure and the CAD gained more than a cent against both the GBP and AUD. We warned on Friday that, “it’s not clear that all the ‘short’ positions in the CAD have yet been unwound. Its recent rally may have a little further to go if this afternoon’s jobs data don’t hold any nasty surprises.” That is exactly how things turned out, with USD/CAD ending at the week’s low around 1.2815. <br><br> The Canadian economy added 15,400 jobs in February after a big loss in January but full-time positions shrank and wage growth decelerated. Statistics Canada said on Friday the unemployment rate dipped to 5.8% from 5.9% in January. Analysts in a Reuters poll had forecast employment would increase by 20,000 after Canada shed 88,000 positions in January, the most in nine years. February’s gains were all in the part-time sector, which added 54,700 positions, while the full-time sector shed 39,300 jobs. Average hourly wages for permanent employees rose by 3.1% y/y, down from the 3.3% y/y increase in January. For the week ahead, BoC Governor Stephen Poloz is due to make a speech on Tuesday evening which will be closely analysed for further clues on monetary policy. The Canadian Dollar opens in Asia this morning having closed on Friday at USD/CAD1.2815, AUD/CAD1.0055 and GBP/CAD1.7745.

AUD / USD

Expected Range

The US Dollar fell, rallied, then fell again last week and on a trade-weighted basis finished pretty much where it had begun. Its index against a basket of major currencies opened in Sydney last Monday around 89.60. It hit a low on Wednesday morning in London at 89.05 but immediately prior to the latest US employment report had rallied to a best level just above 89.90. The combination of a 312,000 increase in non-farm payrolls but a softening in average earnings to 2.6% from the 2.9% which had spooked equity markets a month ago, was deemed to be ‘risk-positive’ and pushed up equity markets whilst weighing down on the US currency. <br><br> The softening of President Trump’s initially very hard line on tariffs was seen as a modest positive for the currency, not least because it might reduce the threat of retaliatory action from other countries. An offer of talks from North Korean leader Kim Jong-Un was also interpreted in some quarters as a diplomatic victory for Mr. Trump which also helped boost the US Dollar and by Friday lunchtime the USD index stood at an 8-day high of 89.90. The February labour market report, as noted above, helped allay some of the recent concerns about a sharp increase in wage pressures and inflation as the US economy approaches full employment. The DJIA once again advanced more than 300 points on Friday. <br><br> For the week ahead, the main focus on economic data will be Tuesday’s CPI data. The headline inflation rate is expected to tick up to 2.2% y/y from 2.1% although the core rate excluding food & energy costs is expected to remain unchanged at 1.8%. Bear in mind that unlike the RBA, RBNZ or BoE, the Federal Reserve doesn’t have a CPI target. Instead, it looks at the core PCE deflator which is still some way below its preferred 2.0% level. After the inflation numbers, on Wednesday we have retail sales and then towards the end of the week it’s housing and industrial production data. The USD index ended last week almost exactly where it had begun at 89.65.

GBP / AUD

Expected Range

The British Pound began the week at USD1.3800 and though by Friday lunchtime in London it was exactly unchanged from this level, a late US Dollar sell-off after the February employment report left it almost half a cent higher; albeit down on the week against the Australian and Kiwi Dollars at 1.7650 and 1.9015 respectively. The week was dominated more by Brexit news than incoming economic data, with the EU’s much-anticipated reaction to the Prime Minister’s speech in London on the Friday of the previous week being the key event. <br><br> The EU’s updated draft guidelines on the UK’s exit from the EU were presented by European Council President Donald Tusk who said, "The UK will be our closest neighbour, and we want to remain friends and partners after Brexit - partners that are as close as possible, just like we have said from the very first day after the referendum." While the guidelines make clear that the EU wants "as close as possible a partnership" after Brexit, "being outside the customs union and the single market will inevitably lead to frictions… Divergence in external tariffs and internal rules as well as absence of common institutions and a shared legal system, necessitates checks and controls to uphold the integrity of the EU single market as well as of the UK market… This unfortunately will have negative economic consequences." <br><br> Away from the daily dose of Brexit, investors’ thoughts now turn to Tuesday’s Spring Statement from the Chancellor of the Exchequer (the traditional Budget has now been moved to Autumn). There is the chance of a rare upgrade to UK economic forecasts after the incoming data over the past few months have shown the Office for Budget Responsibility was too pessimistic in its assumptions on UK productivity. Speaking on TV on Sunday, the Chancellor said Britain's debt mountain was still too high and had to be brought down. "There is light at the end of the tunnel because what we are about to see is debt starting to fall after it has been growing for 17 continuous years. That is a very important moment for us but we are still in the tunnel at the moment… We have a debt of £1.8 trillion - 86.5% of our GDP. All the international organisations recognise that is higher than the safe level." The pound ended last week at USD1.3850, GBP/AUD1.7655 and GBP/NZD1.9020.

AUD / NZD

Expected Range

The New Zealand Dollar had by its recent standards a pretty quiet week, with NZD/USD spending all but a few minutes on the same ‘big figure’ of 72 US cents. It opened on Monday morning around 0.7235 and in Tuesday’s US Dollar sell-off reached a best level around 0.7310. The pair then drifted steadily back to a low around 0.7340 on Thursday afternoon in Europe before a ‘risk-friendly’ US labour market report on Friday helped lift the NZD back up to a close around 0.7285. <br><br> In economic data, three of the ‘partial data’ which feed in to the calculation of the GDP numbers which are out this coming week have already been released. The total sales value for wholesale trade rose 3.0% in the December 2017 quarter. Building Work Put in Place, total building activity volume was up 1.4% in the quarter whist the total volume of manufacturing sales rose 1.0% in Q4. Analysts have now firmed up their forecasts for the Q4 GDP estimate due on Thursday. ANZ, BNZ and Westpac all pick +0.7% q/q and 3.1% y/y whilst ASB Bank go for +0.8% and 3.2%. <br><br> The North Island of New Zealand has spent the weekend worrying about a potential hit from Cyclone Hola on Monday and Tuesday. This caused severe damage in parts of Vanuatu and New Caledonia and is now set to make landfall with a very wet and windy start to a week which – as well as GDP – will bring monthly data on food prices, house prices and manufacturing output. The New Zealand Dollar opens in Asia this morning having closed in New York on Friday at USD0.7290 and AUD/NZD1.0750.

AUD / EUR

Expected Range

The EUR had a week which can best be described as “buy the rumour, sell the fact” or, as your author more rhythmically prefers it, “buy the mystery, sell the history”. The mystery, of course, was the second ECB Council Meeting of 2018 on Thursday, and whether President Draghi would be changing the language around QE and the withdrawal of some degree of monetary stimulus. The EUR had a two-stage reaction to the ECB Council meeting. Initially, EUR/USD spiked almost half a cent higher but by the end of Thursday afternoon it had fallen more than a full cent from the high to just 1.2320 and by Friday morning it was back down on a 1.22 big figure before more general USD weakness helped it climb back on to 1.23. <br><br> In its opening Statement, the ECB removed its previous pledge to increase its asset purchase programme (APP) in size or duration should the economic outlook becomes less favourable, taking away what had been its most explicit ‘easing bias’. This signaling prompted a wave of buying for the EUR. We have said many times that Mr Draghi is a master of managing market expectations and this meeting showed him on top form. In his Q+A session, he downplayed the significance of this move, calling it “a backward-looking move without signals for either our expectations or our reaction function.” He also stressed the Statement’s line that an “ample degree of monetary stimulus remains necessary for underlying inflationary pressures to continue to build up to support headline inflation developments over the medium-term.” Traders quickly changed tack, and the EUR more than reversed all its earlier gains. Mr Draghi can certainly look back at the Press Conference as a job very well done: changing the communication in a less dovish direction whilst pushing the EUR simultaneously lower. <br><br> For the week ahead, a central bank which claims only to be driven by the inflation outlook will be watching carefully the final German CPI numbers on Wednesday and those for the wider Eurozone on Friday. There are plenty of Central Bank speakers, too, with President Draghi, Vice President Constanciao and Chief Economist Peter Praet all on Wednesday. Often, the week after an ECB Council meeting is one where monetary officials try to recalibrate any unwelcome market movements or policy expectations but this time around there’s no need at all for that. They’ll all be very happy with currency and interest rate movements since last Thursday’s Press Conference. The euro opens in Asia today having ended the week at USD1.2305, AUD/EUR0.6375 and NZD/EUR0.5915.

AUD

Expected Range

The Australian Dollar finished on Friday on a high note against a USD whose trade weighted index was little changed over the course of the week. It began last Monday morning in Sydney at 0.7760 and held around that level until well after the RBA Board Statement had been fully digested. As the US Dollar sold-off in the European morning on Tuesday on rumours that the President’s chief economic advisor was likely to quit, so AUD/USD jumped over half a cent to a best level of 0.7825. On Thursday it made a marginal fresh high for the week around 0.7835 but then joined in the ‘risk-on’ party after Friday’s US employment report to end the week at a 10-day high around 0.7850. <br><br> After an unchanged RBA and a lower-than-expected Q4 GDP print, the only positives for the AUD at present are a continued recovery in global asset prices and a reduction in asset market volatility, most generally measured by the VIX index. Absent either of these two, the case for long or overweight positions in the AUD looks pretty threadbare. In their latest update, the analysts at Westpac are particularly negative on the Australian housing market. They note, “Dwelling investment contracted in 2017 by 5.8%. Based on the downturn in the trend in high rise approvals and a flat outlook for detached housing, we expect this downturn has further to run with the contraction accelerating into 2019. Oversupply and a marked slowdown in sales to foreigners are weighing on the outlook for residential building. House price inflation is disappearing. On a six month annualised basis, prices are now falling in Sydney and Perth and slowing in Melbourne and Brisbane… We expect a long, extended period of flat house prices on a national basis with weakness particularly centred on the Sydney and Melbourne markets. This will represent a considerable change in the “atmospherics” around housing wealth and may weigh further on prospects for consumer spending.” <br><br> For the week ahead, NAB’s monthly business survey is out on Tuesday and on Wednesday we have the consumer confidence numbers. Three RBA speeches are also scheduled. The first is from Michele Bullock, Assistant Governor (Financial System), at the Seamless Australia Payments Conference in Sydney on Tuesday, followed by Christopher Kent, Assistant Governor (Financial Markets) speaking at the KangaNews DCM Summit on Wednesday. Deputy Governor Guy Debelle ends the week with a speech on “Risk and return in a low rate environment.” The Australian Dollar opens in Asia this Monday morning having closed on Friday at USD0.7850, with AUD/NZD at 1.0760 and GBP/AUD1.7655.

By Nick Parsons

Protectionist trade and central bank policy announcements dominate direction


GBP / AUD

Expected Range

The Great British Pound moved sharply lower against the USD through trade on Thursday as concerns Britain will not secure a favourable transition deal before the end of this month’s round of EU negotiations forced the unit back below 1.38. Sticking points surrounding Irish border concerns and restrictions placed on London’s financial services engine continue to delay talks. European Council President Donald Tusk remarked on Thursday that negotiations would continue to face delays if Britain could not present a realistic proposal to exit and failed to accept EU fallback proposals. <br><br> Brexit remains the key driver behind broader GBP direction through the short term and as negotiations continue to fall down the upward momentum fostered by increased optimism in December and January is undermined. Sterling continues on a softer footing and if a deal cannot be struck in the coming months then we may see a shift in expectations supporting a BoE rate hike as early as May. The possibility of tighter monetary policy to combat inflation is providing a floor under the cable at present however should Brexit negotiations break down or prove unfavourable for the UK then we may see a return to a bearish GBP outlook. <br><br> Attentions now turn to a raft of domestic macroeconomic indicators, headlined by manufacturing production, for direction through Friday with broader trends driven by ongoing Brexit talks and broader global trade moves.

AUD

Expected Range

The Australian Dollar edged marginally higher throughout the domestic session on Thursday but failed to make any meaningful forays above resistance at 0.7830. Despite a week filled with heavy hitting macroeconomic data sets and central bank policy updates political brinkmanship and trade have dominated direction and ensured the market would largely gloss over domestic trade balance data. A surprise return to surplus in January failed to provide the catalyst to drive the AUD higher as the broader consensus remained largely unchanged with a majority of analysts anticipating a return to deficit in February. <br><br> Intraday highs topped out at 0.7836 before the dollar began reversing gains enjoyed above 0.8 and slid back to touch session lows at 0.7773 and now appears to be entrenched in a broader downtrend channel. Stable resistance appears to have formed on moves approaching 0.7830 and while we remain reasonably well supported on moves approaching the weekly and year to date lows at 0.7720/30 the threat of increased protectionist trade policies and an RBA with little drive to amend accommodative monetary policy through the short term leaves the AUD vulnerable to deeper corrections. <br><br> Attentions remain strictly focused on U.S Protectionist trade policy for direction through the rest of the week as Trump’s Whitehouse seems set on introducing tariffs on steel and aluminum. The question is will there be caveats and exemptions that include Australia or is this the first step in a broader global trade war that could undermine the global economic recovery.

AUD / USD

Expected Range

The U.S dollar advanced against most major currency counterparts and forced a sell off in emerging market currencies through trade on Thursday as the threat of a global trade war escalated after President Trump signed in section 232 proclaiming an increase in tariffs on steel and aluminum. While specifics of the import duties are still to take shape the proclamation appears largely wide reaching with only Canada and Mexico appearing to enjoy exemptions at this current stage with future exemption dependent on ongoing NAFTA negotiations. <br><br> The continued advance of republican protectionist and America first policies threaten to derail the global growth recovery, especially if the latest move sparks a fully-fledged trade war as other nations and trading blocs respond. Trade wars undermine productivity and increase prices for domestic consumers reducing the impetus of consumer led growth as purchasing power diminishes. While the U.S is somewhat insulated from the impacts of such moves thanks to the power of its domestic led economy the ramifications of an all-out trade war could derail the post GFC economic recovery and force a rapid revision in expectations for tighter global monetary policy. <br><br> Attentions now turn to the global response as politics continues to dominate direction while macroeconomic pundits will shift their focus to key Non-Farm Payroll data this afternoon. A strong read will only support suggestions the U.S labour market is nearing full capacity with an uptick in average hourly earnings raising expectations for a spill over into key GDP and inflation indicators.

AUD / CAD

Expected Range

The Canadian dollar while edging marginally lower as oil prices continued to slip through trade on Thursday managed to stave off broad scale losses as suggestions Canada and Mexico would be exempt for US imposed tariffs on imports of steel and aluminum bolstered demand for the loonie. CAD direction has been largely driven by risk lays surrounding trade expectations this week as investors try to gauge just what this means for ongoing NAFTA negotiations. <br><br> Touching intraday lows at 0.7715 the CAD has rallied on open this morning as Trump signed section 232 proclaiming the introduction of a 25% steel tax and 10% aluminum tax on imports which would see Canada and Mexico enjoy exemptions. Recovering much of the days losses the CAD jumped half a cent to trade through 0.7750 toward resistance at 0.7775 and 0.78. <br><br> Attentions now turn to key US labour market data for direction through trade today while NAFTA negotiations remain the primary driver of broader direction. Today’s Trans Pacific trade agreement will perhaps offer some support to Canada when they next sit down and if a largely unrevised agreement can be reached then CAD upside should ensue through the medium term.

AUD / EUR

Expected Range

The Euro moved sharply lower against the USD through trade on Thursday following largely dovish commentary for ECB president Mario Draghi. The ECB elected to maintain its current monetary policy settings and despite dropping reference to an easing bias failed to outline a clear bath to removing emergency quantitative easing settings. The 19-nation combined unit tumbled 150 points touching intraday lows at 1.2299 as the ECB cited a cautious approach to future decisions on monetary policy tightening given the current low inflation environment and emerging protectionism. <br><br> Most market analysts will tell you they weren’t surprised by the ECB’s dovish undertone with many looking to April as the marker for the ECB to begin laying out plans to close out emergency monetary policy programs and announce an end to the current bond buying program in September and signal a 20-point hike in deposit rates come December. It is this optimism that has ensured the Euro remains largely well supported on moves approaching 1.22 with fair value still considered to sit anywhere between 1.26-1.30. However recent political uncertainty in Italy and increasing concerns surrounding protectionist trade policies could threaten to derail the EU and global recovery and force a revision in such expectations. <br><br> With little of note on the macroeconomic docket today we expect direction to be driven by broader risk trends and global political brinkmanship.

AUD / NZD

Expected Range

Much like its antipodean counterpart the New Zealand dollar edged higher throughout domestic trade on Thursday before giving up efforts to push back through 0.73 and sinking to intraday lows at 0.7246. With little macroeconomic data on hand to drive direction the Kiwi took its cues from broader risk sentiment plays and expectations surrounding global trade policy. Despite announcements a landmark Asia Pacific Trade deal was reached by 11 participants, including New Zealand, the NZD failed to hold on to upward momentum generated through trade on Wednesday. Thursday’s signing of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, while a shot in the arm to protectionist trade policy, did little to quell market concerns a global trade ware could derail the broader economic recovery and failed to bolster risk-based trade. The Trade agreement will reduce trade taxes in 11 countries that make up over thirteen percent of the worlds global economy however perhaps of greater significance is the absence of the U.S. Trumps withdrawal from the ten Trans Pacific Partnership was the first signal the current administration would push an Domestic America first platform when negotiating trade. <br><br> As we edge closer to an environment of reduced global cooperation in trade commodity currencies like the NZD and emerging markets across Asia will meet increasing downward pressures and we turn our attentions now to revision of Tariff section 232 to determine just what Trumps tariff proclamation means for the broader global economy. <br><br>

By Nick Parsons

AUD struggling to hold 78 US cents after soft GDP figures


AUD / NZD

Expected Range

Having found the air on a US 73 cents handle a bit thin, the New Zealand Dollar has spent the last 24 hours catching its breath in the mid to high-72’s. During the European afternoon, a move lower gathered pace and the pair fell from around 0.7295 to 0.7255 in less than a couple of hours although this wasn’t really independent NZD weakness: the key AUD/NZD cross remained steady throughout around 1.0735. <br><br> In economic data, two of the ‘partial data’ which feed in to the calculation of the GDP numbers which are out next week have now been released. The total sales value for wholesale trade rose 3.0% in the December 2017 quarter, after rising 1.4% in the September quarter. The December rise was the seventh-consecutive quarterly rise and the largest since the September 2010 quarter, when the value rose 3.8%. As for Building Work Put in Place, total building activity volume was up 1.4% in the quarter. The volume of activity for hospitals, storage, factories, and other non-residential building rose 4.1% in Q4 whilst for residential building activity, the volume fell 0.4% in the latest quarter, following a 4.1% rise in Q3. <br><br> Commenting on the two pieces of economic news, analysts at ANZ said, “Today’s figures have few implications for our views on Q4 GDP growth. Both the building work figures and separate Wholesale Trade figures were close to our expectations. There are a few partial indicators still to be released, but at this stage we are happy with our provisional Q4 GDP estimate of 0.7% q/q (3.1% y/y).” Over at Westpac, meantime, the analysts say, “With a large pipeline of planned work, the level of construction activity is likely to be elevated for some time. However, headwinds in the construction sector mean that future increases in building activity are likely to be more gradual than we have seen in recent years.” The New Zealand Dollar opens in Asia this morning at USD0.7280 and AUD/NZD1.0735.

AUD / EUR

Expected Range

On Tuesday, the Single European Currency put the Italian concerns firmly behind it to reach a best level around USD1.2410; the first time it had been back a 1.24 big figure in two weeks. On Wednesday, the EUR extended its gains to a high just under 1.2440 at lunchtime in Europe before then slipping back to the high 1.23’s in the New York afternoon session. <br><br> In crafting its response to the US President, The Times reports that, “Cecilia Malmström, the European Union commissioner for trade, warned Mr Trump that tariffs on EU steel and aluminium would prompt retaliation. The EU has identified an array of US products for potential countermeasure tariffs, including orange juice from the politically influential swing state of Florida; bourbon from Kentucky, the home state of Mitch McConnell, the senior Republican in the Senate; and Harley Davidson motorcycles, which are headquartered in Wisconsin, the home of Paul Ryan, the Republican Speaker of the House.” Tariffs on EU steel would “put thousands of European jobs in jeopardy, and it has to be met by a firm and proportionate response,” said Ms Malmström. <br><br> Back to Italy, where for the currency and stock markets, the worst possible outcome still remains a coalition between the Five Star Movement and the Northern League. It is feared that a government formed by the two populist parties would lead to a surge in public spending, adding to Italy’s record public debt and violating deficit rules set down by the EU. The markets are also worried by the League’s threats to pull the country out of the euro. For the moment, these two parties are busy trading insults with each other so it seems an unlikely outturn. Keep an eye on it though, as any change in sentiment could quickly turn into a negative for the euro which opens in Asia this morning at USD1.2395, AUD/EUR0.6300 and NZD/EUR0.5870.

AUD / CAD

Expected Range

The Canadian Dollar on Wednesday was by quite some margin the worst performer of all the major currencies we monitor closely here. USD/CAD reached an 8-month high just below 1.30, whilst GBP/CAD has hit 1.80 for the first time in 20 months. For the Antipodeans, AUD/CAD extended its gains to a 9-month high of 1.0120 whilst NZD/CAD at 0.9435 is the highest since early July. <br><br> As unanimously expected, the Bank of Canada left its target for overnight interest rates unchanged at 1.25%. Its Statement noted that, “Global growth remains solid and broad-based. In the United States, new government spending and previously-announced tax cuts are anticipated to boost growth in 2018 and 2019. However, trade policy developments are an important and growing source of uncertainty for the global and Canadian outlooks… While the economic outlook is expected to warrant higher interest rates over time, some continued monetary policy accommodation will likely be needed to keep the economy operating close to potential and inflation on target. Governing Council will remain cautious in considering future policy adjustments, guided by incoming data in assessing the economy’s sensitivity to interest rates, the evolution of economic capacity, and the dynamics of both wage growth and inflation.” <br><br> The Bank of Canada statement didn’t directly mention NAFTA, it is clear that concerns about trade are a growing negative. Looking at interest rate markets, they aren’t fully pricing in the next rate increase - which would be the fourth in the cycle - until July whereas a month ago, overnight index swaps were pricing in at least one increase by May, with a good chance of an April hike. The Canadian Dollar has been the worst performing major currency so far in 2018 and it opens in Asia this morning at USD/CAD1.2920, AUD/CAD1.0105 and GBP/CAD1.7950.

GBP / AUD

Expected Range

The British Pound was lower for much of the day on Wednesday but a late afternoon rally left it little changed against a recovering US Dollar and the EUR. It was up around four-tenths of a point against both the AUD and NZD and more than three-quarters of a point higher against the CAD. It would be a mistake to read too much into the price action, however. For ten hours from 7am to 5pm London time, GBP/USD was stuck in just a 40 pip range from 1.3855 to 1.3895 as investors tired of over-interpreting the latest Brexit shadow-boxing. <br><br> The EU’s draft guidelines on the UK’s exit from the EU were presented by European Council President Donald Tusk. He struck a conciliatory but realistic tone saying, "The UK will be our closest neighbour and we want to remain friends and partners after Brexit - partners that are as close as possible, just like we have said from the very first day after the referendum." While the guidelines make clear that the EU wants "as close as possible a partnership" after Brexit, it is expected that there will be negative economic consequences. "Being outside the customs union and the single market will inevitably lead to frictions… Divergence in external tariffs and internal rules as well as absence of common institutions and a shared legal system, necessitates checks and controls to uphold the integrity of the EU single market as well as of the UK market… This unfortunately will have negative economic consequences." <br><br> The free-trade agreement (FTA) on offer "cannot offer the same benefits as membership and cannot amount to participation in the single market". Mr Tusk said that while Brussels wants an "ambitious" FTA with the UK with zero tariffs on goods but limited access for services, it will "not make trade between the UK and EU frictionless or smoother… It will make it more complicated and costly than today for all of us. This is the essence of Brexit." Responding to the publication of the guidelines, a Downing Street spokesman stressed they were a draft version which had not been formally published. "We look forward to seeing the final guidelines when published and hope they will provide the flexibility to allow the EU to think creatively and imaginatively about our future economic partnership," they said. The pound opens in Asia this morning at USD1.3890, GBP/AUD1.7770 and GBP/NZD1.9085.

AUD / USD

Expected Range

US stocks and its currency have been out of favour ever since President Trump’s proposed steel tariffs announced last week. The DJIA had already fallen 700 points in a couple of days but then fell another 400 points on Thursday and almost 300 more to Friday’s low around 24,270. A 750-point rally off the lows took the index back on to a 25k handle on Tuesday but it is now back down almost 500 points since then. The USD index, meantime, peaked last Thursday morning at 90.50 and has subsequently been back down to 89.00 - its lowest level in just over two weeks. – before a modest rally yesterday to 89.25. <br><br> In economic news, the US trade deficit increased to a more than nine-year high in January, with the shortfall with China widening sharply. The Commerce Department said the trade gap jumped 5.0% to $56.6 billion. That was the highest level since October 2008 and exceeded economists’ expectations of an increase to $55.1 billion. The politically sensitive trade deficit with China surged 16.7% to $36.0 billion, the highest since September 2015. The deficit with Canada soared 65% to a three-year high of $3.6 billion. President Trump in late January imposed broad tariffs on imported solar panels and large washing machines, even before last week’s announcement of import tariffs of 25% on steel and 10% on imported aluminum. <br><br> After the international trade numbers were released, the Atlanta Fed updated its Q1 GDP forecast. From an annualized pace of 3.5% prior to the data, it now has just 2.8% as the contribution of net exports is even more negative than it had previously assumed. Improving global growth and a weaker dollar have been supporting overseas sales of American-made goods, though not enough to outpace inbound shipments and the Atlanta Fed model currently has trade subtracting -0.59 percentage points from Q1 growth. The US Dollar index opens in Asia this morning around 89.25.

AUD

Expected Range

The Australian Dollar couldn’t hold on to Tuesday’s best levels which had seen AUD/USD rise to 0.7835; the highest in exactly a week. After the knee-jerk sell off in reaction to weaker than expected GDP figures, the subsequent recovery took the Aussie in the European afternoon to a high of 0.7825 but by the end of the day it was struggling to hold on to a US 78 cents big figure. Another $10 off the gold price and a modest uptick in the VIX index of equity market volatility did nothing to encourage any buying of the AUD. <br><br> Australia’s economy grew at a slower pace than expected in the fourth quarter of last year as a rebound in household consumption was offset by a fall in exports. Gross domestic product grew just 0.4% q/q in the three months through the end of December, slowing from 0.7% growth in the previous quarter, according to the Australian Bureau of Statistics. That was below a median of economists’ estimates compiled by Reuters forecasting 0.6% growth. According to the analysts at Westpac, “Key surprises in these accounts were to the upside on consumer spending, including a significant upward revision to history, and a sharp 10.3% fall in private infrastructure… The drop in private infrastructure work is not cause for concern, it represents further progress in the mining investment wind-down. Consumer spending increased by 1.0% in the quarter, while Q3 was revised up from a very weak 0.1% to 0.5%. Annual consumer spending growth is now 2.9%. That moves the dial on spending momentum from ‘lacklustre’ to ‘slightly below trend’.” <br><br> Westpac’s fairly downbeat analysis went on to note, “The detail of this update will provide policy makers with some comfort. Consumer spending growth at close to 3.0% suggests that the economic expansion is more broadly based than previously assessed… That said, going forward, the household sector remains vulnerable at a time of relatively weak wages growth and high debt levels. A likely slowing in employment growth from the current hiring burst will act to reduce consumer spending power.” The Australian Dollar opens in Asia at USD0.7815, with AUD/NZD at 1.0735 and GBP/AUD1.7775.

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