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Employment data offer no support to the AUD which finished Thursday in equal bottom spot with the USD. GBP and EUR extend their gains.

By Nick Parsons

The continued weakness of the US Dollar helped the Aussie reach a high early in the European morning on Thursday of 0.7965; its best level since the day of the US non-farm payroll figures back on February 2nd. Its early strength was not sustained, however, and the Australian Dollar slid steadily throughout the day to be the equal-worst performer (along with the USD) of all the currencies we closely track here. AUD/USD at one point lost almost three-quarters of a cent in Northern Hemisphere trading and was back on a 78 cents ‘big figure’ before closing in New York around 0.7930.

Yesterday’s Australian labour force figures did nothing to boost investor appetite for the AUD. Employment increased 16,000 to 12,453,500. Full-time employment decreased 49,800 to 8,460,900 and part-time employment increased 65,900 to 3,992,600. Since January 2017, full-time employment has increased by 293,200 persons, while part-time employment has increased by 110,100 persons. Seasonally adjusted monthly hours worked in all jobs decreased by 24.1 million hours (or 1.4%) between December 2017 and January 2018 to 1,708.2 million hours. This follows a decrease of 8.6 million hours (or 0.5%) from November to December 2017, and four consecutive increases up to November. The average number of hours worked per employee per week fell to a new record low of 31.7. Employees are on average working 2.7% fewer hours than a year ago and that will limit the boost to household incomes from rising employment.

As some of the Australian banks are either scaling back or abandoning their earlier forecasts for the RBA to be hiking interest rates, they were joined by offshore consultancy Capital Economics who yesterday said, “while the continued strength of the labour market will provide at least some support to income and consumption growth this year, without much more wage inflation the RBA isn’t going to raise interest rates. We expect the RBA will keep interest rates at 1.5% until the second half of 2019.” Amongst the hawks, NAB are sticking with calls for hikes in both August and November though they now add, “we acknowledge the risks are that these hikes could be delayed.” The Australian Dollar opens in Asia at USD0.7930, with AUD/NZD at 1.0715 and GBP/AUD1.7750.

The New Zealand Dollar had another good day on Thursday, which seemed yet again to have been driven by developments in the key AUD/NZD cross. This moved down to a fresh 6-month low around 1.0710 during the European afternoon; the weakest since August 7th. Even as AUD/USD fell, this meant that NZD/USD was able to eke out a daily advance, just getting back to the US 74 cents level which had briefly been seen during the London morning.

Yesterday we saw new figures on house sales from the Real Estate Institute of New Zealand. In a snappy Press Release they said that, “As the mercury rose during January to produce the hottest month on record, sales volumes across New Zealand rose when compared to the same time last year for the first time in 19 months”. The number of properties sold in New Zealand during January 2018 increased by 2.7% when compared to January 2017 (4,366 up from 4,251). The number of properties sold in Auckland increased 0.9% year-on-year to 1,157 up from 1,147. REINZ said, “January can often be a quiet month for the industry as people spend much of their time at the beach. However, clearly the warmer weather has helped sales, as it’s the first time we’ve seen a positive year-on-year sales increase in seven months. There were some really positive figures from around the country, with 11 out of 16 regions experiencing an increase in sales when compared to the same time last year.” The median house price for New Zealand increased by 7.1% to $520,000, up from $485,500 in January 2017. Auckland’s median price decreased by 1.2% to $820,000 down from $830,000 at the same time last year.

Today we’ll get to see the manufacturing PMI survey. The New Zealand Dollar opens in Asia this morning at USD0.7405 and AUD/NZD1.0715.

After the dramas of US CPI on Wednesday, the pound was the quickest of all the major currencies to reverse its losses and went on to a day’s high just below 1.4000; more than a full cent above where it had been prior to the US data release. On Thursday it built on these gains, reaching an intra-day high around 1.4090 and finishing top of our one-day currency performance chart.

In its annual review of the UK economy, the IMF noted, “Economic growth has moderated since the beginning of 2017, reflecting weakening domestic demand. The sharp depreciation of sterling following the referendum has raised consumer price inflation, squeezing household real income and consumption. Business investment has been constrained. In the medium term, growth is projected to remain at around 1.5 percent under the baseline assumption of continued progress in Brexit negotiations that lead to an understanding on a broad free trade agreement and on the transition process.” Executive Directors noted that “output growth remains positive and labor market performance strong, notwithstanding the moderation in economic activity that reflects the impact of the exchange rate depreciation on consumption and the heightened uncertainty following the decision to leave the European Union (EU). This uncertainty will continue to weigh on growth, and the outlook depends crucially on the outcome of the negotiations with the EU”.

Friday brings UK retail sales figures. It always used to be the case that December and January were best viewed together to see the impact of discounting in the annual sales. In the internet age, with the advent of Black Friday promotions in November, it is probably wiser to judge the three months as a whole. Thus, we saw a 1.1% monthly increase in November followed by a -1.5% m/m drop in January which left the annual rate of growth for 2017 at just 1.9%; the weakest since 2013. We’ll see today how the new year 2018 began for UK retailers. The pound opens in Asia this morning at USD1.4080, GBP/AUD1.7755 and GBP/NZD1.9025.

Thursday was another frustrating day of sharp reversals for the US stock market and its currency; albeit within narrower trading ranges than seen recently. Ahead of the opening bell, futures markets were signaling the DJIA 200 points higher around 25,150. After the cash market had been open for just an hour, these gains had evaporated and the index then fell to 24,870; a drop of 280 points from the high. Two hours after that, it had regained 200 points of the drop and was back over 25,000 even as 10-year bond yields hit a fresh 4-year high of 2.90%. For the Dollar, its index against a basket of major currencies hit a low of 88.30 in the European morning, rose to a high of 88.65 and then finished back at the day’s low.

In economic news, US factory output was flat for the second straight month in January, raising questions about the manufacturing outlook. Manufacturing output was held back by monthly declines of -0.2% at aerospace factories, -0.5% for those producing plastics and -0.4% in food industries. Output rose modestly overall for primary metals, computers and motor vehicles. What’s more, the statisticians had previously estimated a small increase in output for December but revised the data to show no gain in that month. Separate Fed surveys of manufacturing from New York and Philadelphia showed big increases in Prices Paid. The New York prices index surged from 36.2, to 48.6, the highest in six years, while according to the Philly Fed, their prices paid index increased 12 points to 45.0, its highest reading since May 2011 or in nearly 7 years.

There are no further US economic statistics scheduled this week though whether that is a good thing or not for markets remains to be seen! The USD index opens in Asia this morning around 88.30.

After trading on three different ‘big figures’ on Wednesday, the EUR had a much calmer day on Thursday, albeit one in which it managed to gain against most of the major currencies. EUR/USD managed to trade very briefly on a 1.25 handle and spent most of the day in the high 1.24’s.

In economic news, the trade surplus in the Eurozone rose to €23.8bn in December from a revised €22.0bn in November, above the consensus, €22.3bn and continuing a run which has seen the 3-month average (a better guide to trend than m/m numbers) in surplus for the entire period since 2012. This comes on the back of figures midweek which showed the Eurozone economy expanded 0.6% in Q4 (at an annualized pace of 2.4% to quote it in comparable terms to the US numbers). Healthy growth but a general absence of inflationary pressures leaves 10-year German government bond yields at just 0.77% with the spread between Germany and the US at 216bp; its widest since April last year.

Whilst US trade deficits are most of spoken in the context of US-China or US-NAFTA, Thursday’s figures from Eurostat show the EU had a trade surplus with the United States of 120.8 billion euros ($150.9 billion) in 2017, up from 113.1bn in 2016. Exports from the EU to the US increased to 375bn in 2017 from 363.5bn euros the year prior, while imports from the US grew to 254.2bn from 250.4bn in 2016. The EUR opens in Asia today at USD1.2500, AUD/EUR0.6345 and NZD/EUR0.5920.

The Canadian Dollar ended the day pretty much unchanged having traded in a range from USD/CAD1.2465 to 1.2530. Oil prices had begun to rally sharply on Wednesday afternoon and from a low point for WTI crude of $58.15, hit a high on Thursday of $61.40 which offered some support to the CAD.

There were no economic statistics published Thursday, but there was a very interesting speech from Bank of Canada Deputy Governor Lawrence Schembri in which he reviewed the success of Canada’s inflation targeting monetary policy regime. Whilst winning no prizes for humility, he noted, “Three main factors have contributed to the framework’s credibility and success. First, we have a clear, simple and well-understood inflation target, whose focal point is 2 per cent. Second, the framework has political legitimacy, is coherent with other public policies and is implemented with effective tools. And third, we have a formal review process for continually improving the framework that is widely admired by many of our peers and was cited as one of the factors that earned us the Central Bank of the Year Award we received recently”.

Your author is a particular fan of the BoC and its Governor Stephen Poloz who always has fascinating insights delivered in an interesting and very engaging manner. His deputy’s conclusion that, “We continue to believe that the best contribution the Bank can make to improving the performance of the economy is to ensure that inflation remains low, stable and predictable” could, in all honesty, have been written by any of his peers in G-10 but the speech was thoughtful and interesting. There are no economic statistics released Friday and the Canadian Dollar opens in Asia this morning at USD/CAD1.2500, AUD/CAD0.9910 and NZD/CAD0.9250.