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By Nick Parsons

AUD had a good day Wednesday even as US stocks and risk appetite fell. EUR was the day’s main loser on ECB comments


GBP / AUD

Expected Range

We wondered yesterday morning whether the British Pound could hold onto the gains made on the back of the Chancellor’s Spring Statement. As we noted here, “Rarely has such poor news been so well received; both by backbench MP’s and a usually more skeptical foreign exchange market”. On Wednesday it seems the market had second thoughts and it was only the weakness of the EUR which prevented the GBP from taking bottom spot on our one-day performance table. It’s trading range against the USD was only a little over half a cent from high to low but the pound lost between one and three-tenths against most of the major currencies we follow closely here. <br><br> With no official economic data released on Wednesday, the day in London was dominated by a furious row between the UK and Russia which ended with the expulsion of 23 Russian diplomats. This is likely to completely overshadow preparations for next week’s EU Summit and is already showing a fractured response by UK allies in Europe. In contrast to German chancellor Angela Merkel and US president Donald Trump who assured British Prime Minister Theresa May they were taking her government’s views on possible Russian involvement in an alleged assassination attempt extremely seriously, President Emmanuel Macron and other French officials have declined to mention Russia directly. <br><br> There is a more serious split potentially between the two major parties in the UK, with the opposition Labour Party being much more hesitant and circumspect in criticising Russia than the ruling Conservative-led Coalition Government. How all this plays out is impossible to predict, but it serves to show how even in an age of careful news-management, unforeseen events can introduce a huge degree of political and economic uncertainty into financial markets. The GBP opens in Asia this morning at USD1.3960, GBP/AUD1.7730 and GBP/NZD1.9055.

AUD / EUR

Expected Range

After an Asian session in which it reached a high of USD1.2410, the EUR came under steady pressure in the Northern Hemisphere on Wednesday, falling to a low in the European afternoon of 1.2350 and taking bottom spot on our one-day currency performance table. AUD/EUR ended the day around 30 pips higher with NZD/EUR up about half that amount. <br><br> Speaking to the annual “ECB Watchers” conference in Frankfurt, its President Mario Draghi said the European Central Bank will avoid surprising investors with sudden changes to its stimulus plans, stressing that inflation is still too low and US trade policies and a stronger euro are concerns. “Adjustments to our policy will remain predictable, and they will proceed at a measured pace… We still need to see further evidence that inflation dynamics are moving in the right direction. So monetary policy will remain patient, persistent and prudent.” Speaking about US trade tariffs, he said that while the initial impact is likely to be small, “there are potential second-round effects that could have much more serious consequences. These include the risk of retaliation across other goods and an escalation of trade tensions, and the potential for negative confidence effects which would weigh on business investment in particular.” <br><br> In a separate interview in Dublin, Governing Council member Philip Lane who heads Ireland’s Central Bank said the European Central Bank must keep its guard up against the risk of a sudden appreciation in the euro. “There’s no concern about the current level. But if it moves a lot within a short time interval then you have to think about the implications.” Repeating this message, Mr Draghi said that “any further sharp repricing” must be watched carefully. The euro opens in Asia today at USD1.2370, AUD/EUR0.6370 and NZD/EUR0.5925.

AUD / CAD

Expected Range

As markets continued to digest Tuesday’s speech from Bank of Canada Governor Stephen Poloz, the CAD stabilised after its initial sharp losses. USD/CAD opened around 1.2955 and traded in a relatively tight 40 pip range throughout the Northern Hemisphere day, finishing towards the lower end of its trading band around the 1.2940 mark. AUD/CAD extended its gains by another 20 pips to 1.0200 whilst NZD/CAD was steady around 0.9480. <br><br> Analysts are busy revising down their Canadian Dollar forecasts. TD Securities, for example, write that, “CAD is on the cusp of a renewed down-leg. Though there was no new substantive information in Governor Poloz's speech, the market appears to have finally heeded the message that there is no urgency for the Bank to tighten anytime soon. We continue to view July as the earliest hike… We have recently noted that the market needs to curb its enthusiasm in CAD; economic growth should decelerate while Canada's largest trading partner is leaning towards more protectionist policies. NAFTA negotiations remain unresolved and still far apart on the contentious issues.” <br><br> Thursday brings existing home sales data in Canada; these fell 14.5% in January from December to the lowest monthly level in three years as tighter mortgage rules hit demand. New and tougher rules on mortgage lending were imposed at the start of January amid fears of a housing bubble, requiring lenders to “stress test” borrowers to ensure they could withstand higher interest rates. The changes mean fewer buyers qualify for loans. The Canadian Dollar opens in Asia this morning at USD/CAD1.2940, AUD/CAD1.0200 and NZD/CAD0.9490.

AUD / USD

Expected Range

The US Dollar ended Wednesday little changed as a generally weaker EUR offset a stronger CAD on the USD index. Having opened in Asia around 89.25, it fell to a low of 89.05 before rallying up to a high just above 89.40 then closing around the mid-point of its daily trading range. <br><br> The US political circus show seems to have many rings, with plenty of action to occupy the spectators in each one. Around lunchtime in New York, it was reported by CNBC that President Donald Trump plans to name Larry Kudlow as his top economic advisor to replace Gary Cohn, who left the White House earlier this month amid disagreements about tariffs on steel and aluminum imports. Separately, it was reported by the New York Times that that Attorney General Jeff Sessions is reviewing a recommendation to fire the former FBI deputy director, Andrew G. McCabe, just days before he is scheduled to retire on Sunday. Rounding out a busy day, in a statement on the USTR website, Trade Representative Robert Lighthizer announced that the United States has requested dispute settlement consultations with the Government of India at the World Trade Organization (WTO) challenging Indian export subsidy programs. <br><br> In economic news, US retail sales fell for a third straight month in February as households cut back on purchases of motor vehicles and other big-ticket items. The Commerce Department said retail sales fell 0.1% last month against consensus expectations of a +0.3% monthly rise. It was the first time since April 2012 that retail sales have declined for three straight months. After the numbers were published, the Atlanta Fed yet again slashed its Q1 GDP forecast; this time from 2.5% to just 1.9%. As recently as end-January, the model was signaling a 5.4% pace of growth in Q1. Still to come this week we have housing and industrial production data. The USD index opens in Asia around 89.25.

AUD / NZD

Expected Range

The New Zealand Dollar underperformed its Aussie cousin on Wednesday. The peak of NZD/USD actually came during the Asian session around 0.7350 and at the time of the peak in AUD/USD, it had fallen short of this level by around 10 pips. It’s subsequent decline extended only another 20 pips, however and the Kiwi has now remained on a 73 cents ‘big figure’ ever since late Tuesday morning in the Sydney time zone. <br><br> After the Governor of the Reserve Bank of New Zealand’s speech on macroprudential policy, there was always going to be plenty of interest in the REINZ survey of house prices released less than 24 hours later. The median house price for New Zealand rose 6.9% in February to $530,000 up from $496,000 in February 2017 according to the latest data from the Real Estate Institute of New Zealand. The median house price for New Zealand excluding Auckland rose even higher, seeing an 8.4% increase to $450,000 from the same time last year. Prices in Auckland increased at a more moderate 3.7% to $858,000 from the same time last year (up from $827,000) and were up 4.6% month-on-month. REINZ said, ““Median house prices increased in 14 out of 16 regions across New Zealand during February 2018 compared to February 2017, including a record high in the Hawke’s Bay. The only regions not to experience an increase were the West Coast and Gisborne which saw decreases of 10.7% and 3.1% respectively.” <br><br> With a very solid start to 2018 for the housing market, the statisticians still have to release one more missing piece of the 2017 economic jigsaw. This comes today with the Q4 GDP numbers. 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%. The New Zealand Dollar opens in Asia this morning at USD0.7325 and AUD/NZD1.07245.

AUD

Expected Range

Yet again, the high of the US equity market on Wednesday coincided almost exactly (in fact within 10 minutes) of the high of the AUD/USD exchange rate. The Aussie Dollar rose steadily through the whole of the Asia day and the European morning to reach a best level at 12.20pm of 0.7910; the first time it had been back on a 79 cents ‘big figure’ since February 20th. From its level at that point of 25,110, the Dow Jones Industrial Average then fell almost 430 points over the next 4 hours, dragging AUD/USD down to a low of 0.7870. Overall, however, the Aussie has been pretty resilient. The US stock market is lower than it was before Friday’s labour market numbers but AUD/USD is almost exactly one cent higher. <br><br> RBA Assistant Governor (Financial Markets) Christopher Kent yesterday gave a speech on developments in the Australian corporate bond market. He noted that, “accommodative monetary policies have encouraged greater risk-taking by both lenders and borrowers. This is one of the important ways in which the monetary transmission mechanism works. It has supported the decline in spreads and other positive developments I've just discussed. At the same time, however, the combination of low interest rates and low volatility in financial markets is of concern to the extent that it can lead to excessive risk-taking via a search for yield. This is something that the Reserve Bank has been noting for a time.” He wasn’t ringing any bells at all, but if credit spreads do widen or volatility picks up again, then the RBA has shown that it is on the case. <br><br> As for incoming economic data, Westpac’s Index of Consumer Sentiment rose 0.2% to 103.0 in March from 102.7 in February. Their analysts noted, “Sentiment continues to hold in slightly optimistic territory with March marking the fourth consecutive monthly reading above the 100 level. That followed a year in which pessimism dominated. However, the index is still well below levels typically associated with a robust consumer.” The Australian Dollar opens in Asia this morning at USD0.7875, with AUD/NZD at 1.0745 and GBP/AUD1.7725.

By Nick Parsons

AUD/USD moving closely with stock markets but quite resilient


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.

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 / 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.

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.

By Nick Parsons

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


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.

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 / 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 / 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 / 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.

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>

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