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The Australian Dollar rose for three days of last week then fell for the final two with a net loss from the previous Friday’s close around 1 ¼ cents. For the early part of the week, continuing the price action seen since the US non-farm payrolls report was published ten days ago, the AUD tracked risk sentiment very closely. Indeed, on Wednesday, the high of the US equity market coincided almost exactly (in fact within 10 minutes) with the high of the AUD/USD exchange rate at 0.7905. The AUD managed to stay on a US 79 cents ‘big figure’ for less than two hours, however, and by Thursday afternoon in New York it was trading on a 77 handle. Its close on Friday just above 0.7710 was the lowest since Christmas.
After the mixed messages from surveys of business activity and the GDP report – explained in part, by the different time periods which they covered – investors will now be focusing solely on Q1 data. The most important of those this week will be the February labour market report on Thursday. Last time around, there was a 16k increase in employment comprised of a 50k drop in full-time employment and a 66k increase in part-time work. The unemployment rate fell one-tenth to 5.5%. For the February numbers, consensus estimates are for a 20k increase in employment which just about keeps pace with demographic change to leave the jobless rate steady at 5.5%. Sadly, we don’t get monthly wage price data from the official statisticians so we’ll get only a partial answer to the question of how household expenditure is likely to be holding up.
Before the labour report, on Tuesday we’ll get to see the Minutes from the latest RBA Board meeting. There’s unlikely to be any great surprise here, as the key message from the Central Bank recently has been one of steady and gradual improvement towards its goals on inflation and economic growth. The currency won’t have been causing any problems, there are no imminent financial stability risks from the housing market and though trade tensions globally are on the rise, Australia is not one of the countries most threatened by them. The Australian Dollar opens in Asia this morning having closed on Friday at USD0.7710, with AUD/NZD at 1.0690 and GBP/AUD1.8075.
GBP / AUD
The British Pound had a good week, finishing up against a generally well-bid US Dollar and gaining against every one of the major currencies we follow here. Tuesday was the Chancellor’s well-received Spring Statement and by Wednesday in Asia, GBP/USD hit a best level of 1.3995. Trading was quite volatile on Thursday and Friday but the GBP finished only half a cent down from the week’s high and almost a cent up from Monday’s opening level. GBP/AUD hit 1.80 for the first time since June last year whilst GBP/NZD hit a one-week high of 1.93.
The UK media is still totally focused on a diplomatic row between the UK and Russia, with the weekend’s political TV talking of little else but that and an unseasonably cold spell of late-Winter weather which brought rare mid-March snow to much of the country. According to a somewhat alarmist report in The Guardian newspaper, “Banks, energy and water companies are on maximum alert over the threat of a serious cyber-attack from Moscow as concern continues over the safety of Russian exiles in the UK. Fears that Russia will target Britain’s critical national infrastructure have prompted round-the-clock threat assessments by the UK’s financial sector, energy firms and GCHQ, the UK’s largest intelligence agency, along with the security services MI5 and MI6.”
For the week ahead, two main events look set to dominate financial markets. After its none-too-subtle warnings of a rate hike in May, the voting patterns at Thursday’s Bank of England MPC meeting will be scrutinised for further hints on signaling. Also beginning on Thursday is a two-day EU Summit in Brussels. The European Council is expected to officially sign off an agreement effectively extending Britain’s membership of the EU’s single market and customs union until December 31, 2020. Though there are still plenty of threats coming from both the UK and EU about what would happen in the event of no deal being agreed, many of the differences which existed over the terms of the transition period have been removed by the UK agreeing to all the demands made from Brussels on freedom of movement and citizens’ rights. The GBP opens in Asia this morning having closed on Friday at USD1.3945, GBP/AUD1.8075 and GBP/NZD1.9325.
AUD / EUR
The EUR ended last week marginally lower against the USD, having followed the pattern of all the major currencies by rallying for the first half but then falling persistently through Thursday and Friday. EUR/USD opened on Monday at 1.2310 and added exactly one cent to a best level in Asia on Wednesday of 1.2410. As ECB officials took the opportunity to talk the currency lower, EUR/USD fell almost three-quarters of a cent on Thursday and on Friday afternoon hit an 8-day low of 1.2260 before then rallying around 30 pips into the New York close
Figures released on Friday showed the final Eurozone annual inflation rate was 1.1% in February 2018, down from 1.3% in January. This was one-tenth below the provisional estimate. The core rate excluding food and energy prices was unchanged at 1.0%, in line with the consensus and first estimate. Looking at the whole of the European Union rather than just those countries which use the euro currency, annual inflation was 1.3% in February 2018, down from 1.6% in January. The lowest annual rates were registered in Cyprus (-0.4%), Greece (0.4%), Denmark and Italy (both 0.5%). The highest annual rates were recorded in Romania (3.8%), Estonia and Lithuania (both 3.2%). Compared with January, annual inflation fell in eighteen Member States, remained stable in two and rose in seven.
With a still very subdued inflation backdrop, the main data for the week ahead will be survey-based. On Tuesday we have Germany’s ZEW survey of investor expectations, and on Thursday it’s the ifo Survey which has recently been incredibly upbeat in its numbers and commentary. Sandwiched between these are the so-called ‘flash PMI’s’ for manufacturing and service sector activity in France, Germany and the Eurozone. The ECB will publish its monthly Economic Bulletin on Thursday; something to which markets never used to pay attention but will which now be pored over for any signals hinting at a shift in monetary policy settings. The euro opens in Asia today after ending the week at USD1.2290, AUD/EUR0.6275 and NZD/EUR0.5875.
AUD / USD
The US Dollar fell for 2 ½ days, rallied for 2 ½ days and ended a week of high political drama with its index against a basket of major currencies almost exactly unchanged. It opened on Monday at 89.75 but as stock index futures gave back a large part of the previous Friday’s gains ahead of US CPI figures on Tuesday, the USD index fell around a quarter of a point. The inflation numbers were then completely overshadowed by the firing of US Secretary of State Rex Tillerson which added to a sense of chaos in the Trump Administration and the USD fell to a low around 89.15. As the revolving door into government turned once more, former Bears Stearns economist and TV pundit Larry Kudlow was announced as the President’s Chief Economic Advisor. As he hit the financial TV studios talking up the USD, so it rallied to a best level of 89.95 before ending the week unchanged at 89.75.
One thing we can say for certain is that nothing is certain any more. As we look at calendars, diaries and schedules and try to pick out the highlights for financial markets, they can be quickly overtaken by events or one short Tweet from President Trump. The economic and political agenda is now more fluid and rapidly changing; something which itself will lead to an increase in volatility across asset classes. With this caveat in mind, the week’s main event that we thus far know of is the two-day FOMC meeting beginning on Tuesday. A new Statement, dot-points and economic projections will be available at 2pm Eastern Time on Wednesday and markets are pricing a 94.4% probability of a 25bp hike in rates; the sixth time rates have been raised since December 2015. Half an hour afterwards will be Jerome Powell’s first post-FOMC Press Conference and he’s sure to be grilled on his views on inflation, growth, tariffs and trade.
It may not be a hard and fast rule, but it’s a long-held tradition that only the Fed speaks about interest rates and only the US Treasury makes official comments on the Dollar. When asked about interest rates last week, however, Karry Kudlow said on TV, “the profit picture is good. It’s looking real good, and growth is not inflationary just let it rip for heaven's sakes. The market is going to take care of itself. The story takes care of itself let it rip. The Fed will do what it has to do, but I hope they don’t overdo it.” The USD index opens in Asia this Monday morning having ended last week at 89.75.
AUD / CAD
The Canadian Dollar had a very poor week, the worst performer amongst the six major currencies we follow closely here. USD/CAD opened around 1.2820 and the pair fluctuated in a range 20 pips either side of this level for the next 36 hours as traders awaited a speech on Tuesday from Bank of Canada Governor Stephen Poloz. As the headlines hit the newswires USD/CAD jumped more than a full cent to 1.2970 and after a very soft set of housing numbers on Thursday and more talk of US tariffs, it broke 1.30 for the first time since June last year. GBP/CAD hit 1.82; its best level since the EU referendum 20 months ago whilst AUD/CAD and NZD/CAD registered 9-month highs.
In his major speech which focused on labour market slack, the Governor of the Bank of Canada said the country 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 BoC has an “obligation” to nurture. On monetary policy, Mr. 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.” It sounds like Mr Kudlow’s comments on the Fed have a very receptive audience north of the border.
Most of the important Canadian events come at the end of this week. On Thursday afternoon Senior Deputy Governor Carolyn Wilkins is scheduled to speak whilst on Friday we have retail sales and CPI numbers; a good chance to see just how much room Mr Poloz has to let the economy run a little hotter without tightening monetary policy. The Canadian Dollar opens in Asia this morning having ended the week at USD/CAD1.3095, AUD/CAD1.00100 and GBP/CAD1.8265.
AUD / NZD
The New Zealand Dollar had very similar price action to its Aussie cousin last week, though its peak on Wednesday came somewhat earlier during the day and the sell-off against the US Dollar on Friday was less marked; allowing the AUD/NZD cross to trade down on to a 1.06 ‘big’ figure by the New York close. Indeed, whilst AUD/NZD fell to its lowest since Christmas, NZD/USD only eased back to the lowest in 10 days, closing in New York around 0.7215; around 1 ¼ cents below its midweek peak.
The long-awaited Q4 GDP figures released last week fell short of consensus expectations. Most of the banks locally had penciled-in growth of 0.7% but the New Zealand economy actually grew 0.6% in the final three months of 2017, the same pace as the previous quarter. Although the year-on-year rate accelerated to 2.9%, it was also below the 3.1% expansion expected by economists. For the full year 2017, the economy grew by 2.9%, down from 4% in 2016. On Thursday this week, the RBNZ Board meeting will be the last under the interim leadership of Grant Spencer. Incoming Governor Adrian Orr takes up his post on March 27th and the big focus of attention will be the new Policy Targets Agreement. In an interview last week, Finance Minister Grant Robertson said, “I understand the limits of monetary policy, so we want [the Reserve Bank] to be considering maximising employment but, unlike a particular inflation target, we would not be seeking a particular employment target through monetary policy.”
The current PTA between the Government and Central Bank outlines the RBNZ’s commitment to keep inflation between 1% and 3% on average over the medium term, with a focus on keeping future average inflation near a 2% target midpoint. The 2% target was added when Graeme Wheeler took over in 2012; mainly to signal a symmetry of tolerance around a mid-point but also to underscore that a number persistently just under 3% would not be a desired outcome. Before the focus turns exclusively to the RBNZ, today we have the Performance of Services index, on Tuesday we get Westpac’s consumer confidence report and Wednesday brings the net migration numbers. The New Zealand Dollar opens in Asia this morning having closed on Friday at USD0.7220 and AUD/NZD1.0690.
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