Stock markets rally ahead of US CPI this afternoon. USD and GBP worst performers overnight. UK Foreign Secretary’s Brexit speech now awaited.
Wednesday 14 February, 2018
Daily Currency UpdateThe British Pound had a better day on Tuesday, finishing in second place behind the EUR on our one-day performance table, with GBP/USD having been up on a 1.39 handle for the first time since Friday and GBP/AUD having briefly revisited 1.77. Overnight it has performed much less well; still clinging on to USD1.39 but down against all the other major currencies.
UK inflation figures showed the headline CPI stuck at 3.0% rather than falling to 2.9% in line with consensus expectations. The Office for National Statistics noted that, “The largest downward contribution to change in the rate came from prices for motor fuels, which rose by less than they did a year ago. The main upward effect came from prices for a range of recreational and cultural goods and services, in particular, admissions to attractions such as zoos and gardens, for which prices fell by less than they did a year ago.” It’s not often that the cost of looking at giraffes and penguins moves international foreign exchange markets, but the GBP got a lift from the fact that inflation didn’t fall as had been anticipated.
In separate figures, UK house price growth accelerated to 5.2% in the year to December, up from 5.0% in November. The house price index compiled by the Office for National Statistics and the Land Registry shows average UK house price hit £227,000 in December 2017, up £1,000 from the previous month and £12,000 higher than in December 2016. Scotland and the South West experienced the highest annual house price growth, registering 7.7 per cent and 7.5 per cent respectively. Average prices in England rose 5 per cent in the year, to £244,000 while Wales saw house prices increase by 5.4 per cent over the last 12 months to stand at £154,000. There are no fresh economic data scheduled for release today and the focus, instead, will turn to the speech on Brexit which Foreign Secretary Boris Johnson is due to deliver.
Key MoversTuesday was the first day for while that the DJIA didn’t move at least 500 points from peak to trough. It’s a reflection of just how much volatility we’ve seen recently that a 250-point high-low range seems very quiet indeed. Although stock index futures remained in the red through most of the European and North American trading sessions – moving only into the green in the last couple of hours - it was a poor day for the US Dollar whose index against a basket of major currencies fell more than half a point to 89.30; its lowest level since last Wednesday. Nearly all the losses were accounted for by the movements in EUR and GBP, whilst the USD actually eked out a small gain versus the CAD. Overnight in Asia, the DJIA has extended yesterday’s gains with futures indicated another 80 points higher. This has pressured the USD even further, with its index now down to 89.15.
The US small business federation NFIB’s optimism index jumped a further two points to 106.9 in January. “Main Street is roaring,” said NFIB President and CEO Juanita Duggan. “Small business owners are not only reporting better profits, but they’re also ready to grow and expand. The record level of enthusiasm for expansion follows a year of record-breaking optimism among small businesses. Amongst the various sub-indices, ‘Now Is a Good Time to Expand’ registered at 32%, the highest level in the history of the NFIB survey, which began in 1973. ‘Actual Earnings’ climbed up 11 points from December, the highest level reported since 1988. ‘Plans to make Capital Outlays’ jumped up two points, and ‘Plans to Increase Inventories’ gained four points. There’s no disguising where the NFIB’s political allegiances lie. “The historically high index readings over the last year tell us small business owners have never been more positive about the economy… This is in large response to the new management in Washington tackling the biggest concerns of small business owners – high taxes and regulations.”
Behind the headlines and the political lobbying, the NFIB survey raised a few warning flags for any bond investors who actually bothered to read it. Reports of higher worker compensation rose 4 percentage points to a net 31%, the highest reading since 2000 and among the highest in survey history. 22% (up 3 points) selected “finding qualified labor” as their top business problem, the highest reading since 2000, the peak of the last expansion. Plans to raise compensation rose 1 point in frequency to a net 24% in response to tighter labor markets, the highest reading since 1989. Small firms are raising compensation to attract and keep the employees they need. The focus for most analysts will of course be this afternoon’s CPI data where the headline figure is expected to be up +0.3% m/m to take the annual rate down from 2.1% to 1.9%. The USD index opens this morning around 89.15.
After four consecutive days stuck on a 1.22 ‘big figure’, EUR/USD finally moved up to 1.23 on Tuesday and, in doing so, took top spot in our one-day currency performance table. It did so on a day when there were no fresh economic data and amidst a total radio silence from the ECB who had no speakers after the talk-fest of the last couple of weeks. With the USD on the defensive overnight, EUR/USD has been able to extend its gains into the high 1.23’s.
Lovers of detailed economic statistics found plenty to pore over in a 100-page monthly document from the EU agency Eurostat which released its less than snappily titled, “Data for Short-term Economic Analysis”. This enables cross-country comparisons of the whole EU as well as the Eurozone but in truth is a very dull and dry publication with nothing in the way of policy clues. More interesting was a video interview with President Mario Draghi published on the ECB’s website in which he answered questions from the public. Speaking about cryptocurrencies and Bitcoin, he said, "Many of you posted questions about whether the ECB is going to ban Bitcoins or it's going to regulate Bitcoins. I have to say it's not the ECB's responsibility to do that.” He cited high volatility and the fact that it was not backed by any Central Bank or Government as reasons to be very cautious, stating proudly instead that “a euro today is the same as a euro tomorrow”.
A euro today might well be the same as a euro tomorrow, but Mr Draghi is tasked with ensuring that its purchasing power falls by 2% a year; something his very polite interviewer failed to take him to task on! Today we’ll see final CPI figures for Germany which will show that Mr Draghi is failing to cut the euro’s value quickly enough; prices there are expected to have risen only 1.4% over the past 12 months. His ECB colleagues Weidmann and Mersch are due to give speeches on Wednesday whilst we’ll also get to see the more detailed breakdown of Q4 GDP.
The Australian Dollar struggled to get much traction on Tuesday and on a day when the US Dollar performed quite poorly, AUD/USD ended pretty much where it had begun in Sydney around the mid-0.78’s. The pair had a quarter-cent sell-off early afternoon in Europe as a few Fed headlines hit the newswires but regained all the losses within the space of under an hour. The AUD/NZD cross was again quite lively but in the opposite direction to Monday; falling more than half a cent from a best level just under 1.0840 to the 1.0770 area. Overnight in Asia, a further rally in US stock index futures has helped AUD/USD extend gains into the high 0.78’s with GBP/AUD back on 1.76 having briefly touched 1.77 yesterday.
After Tuesday’s NAB business survey, today we’ve seen the Westpac survey on consumer confidence fell by 2.3% to 102.7 in February from 105.1 in January. The bank notes, “The survey was conducted over the week of February 5 – February 11. That week was marked by a wave of volatility in global share markets. The Australian market, which was more stable than most, still experienced some significant swings, being down a net 4.6% for the week while the US market (S&P 500) was down by a net 7.2%... Extensive media coverage of these developments would have unnerved respondents on two fronts – the impact on their own financial position and concerns for general global stability. These concerns appear to have been acutely felt by retirees whose confidence fell by 13.5%”. Looking at the details, Westpac point out, ““Developments in the components of the Index are consistent with the likely impact from last week’s market volatility. In particular respondents’ assessments of their own finances suffered, the ‘finances vs a year ago’ sub-index fell by 4.5%; and the ‘finances, next 12 months’ sub-index fell by 3.1%. We assume that these components have suffered temporary set- backs associated with market volatility. On face value the ‘year ago’ component is sending a very weak signal about likely spending prospects.”
We noted earlier in the week that Commonwealth Bank of Australia have changed their interest rate forecasts to remove the two hikes they previously had penciled-in for 2018. Westpac haven’t yet done this but note, “While we are less optimistic about the unemployment rate and the growth outlook, the Bank’s forecasts are not entirely out of line with our own view and, arguably, consistent with steady rates over the next few years.” NAB, meantime, still has two 25bp hikes in its forecast profile for H2 2018.
The Canadian Dollar seems to be off the radar as far as international investors are concerned. On each of the last four trading days, USD/CAD has briefly broken through the upper end of its 2018 trading range from the mid 1.22’s to the high 1.25’s but on each occasion the rally has faded and quickly reversed. As attention switches away from an almost exclusive focus on the stock market, however, investors are beginning to pay a bit more attention to oil prices. WTI crude is down from a recent high of $66.50 per barrel on January 25th to just under $59.00 today; having printed as low as $58.60 on Friday. The CAD may need support from higher oil prices if it is not to break more decisively above the year-to-date range.
CBC news reports today that according to Canada's chief negotiator Steve Verheul, the ongoing effort to rescue and revamp NAFTA has made only limited progress because US officials at the table find themselves hamstrung by the demands of the Trump White House and the talks are taking place too quickly. Verheul described the current NAFTA talks as the most unusual negotiation he's ever been involved in. "They do not come to the table - our counterparts - with a lot of flexibility. This is being driven to a large extent from the top, from the administration, and there's not a lot of flexibility," the veteran negotiator told the Canadian Global Affairs Institute. Canada will stay at the negotiating table for as long as it takes, Verheul said, but it's impossible to predict the next move of a notoriously unpredictable president. Even though three chapters have been closed, the pace has amounted to "fairly limited progress overall because there hasn't been enough time between rounds to re-evaluate positions… The pace has been a bit too fast to do a lot of the kind of homework that needs to be done domestically to allow further progress to be made." The seventh round of NAFTA talks is set to begin later this month in Mexico City.
Today we’ll get to see the always excellent monthly house price data from Teranet which breaks down the figures by 11 metropolitan areas, as well as nationally. In December, house prices rose 0.2% m/m to take the annual rate of growth to 9.1% nationwide.
Most of the movement in the New Zealand Dollar is being driven by the AUD/NZD cross rather than by any great shift in sentiment or investor appetite elsewhere offshore. This pair is currently ranging between a 6-month low of 1.0750 and Monday’s high of 1.0840 and as it fell during Tuesday’s Northern Hemisphere session, so NZD/USD recovered in to the high 72’s. Overnight it has extended these gains after the RBNZ’s survey of inflation expectations and is now back on a 73 cent ‘big figure’ for the first time since last Wednesday.
The RBNZ's March quarter survey showed firms lifted their two-year inflation expectations to 2.11% from 2.02 % in the prior period, while one-year inflation expectations remained steady at 1.86%. Elsewhere in the survey, unemployment rate expectations are the lowest since September 2008. The unemployment rate in one year is expected to be 4.55% but then increase to 4.68% two years ahead. The official unemployment rate reported by Statistics New Zealand for the December 2017 quarter was 4.5% (this was released after the survey was completed). Official unemployment is now at a nine-year low. One year ahead expectations for annual growth in wages, meantime, have increased to 2.48% from 2.25% and two-year ahead expectations increases to 2.68% from 2.57%.
Tomorrow we’ll get to see data on home sales in New Zealand and on Friday its the manufacturing PMI survey.
- GBP/USD: 1.3805 - 1.3980 ▼
- GBP/EUR: 1.1105 - 1.1300 ▼
- GBP/AUD: 1.7580 - 1.7730 ▼
- GBP/CAD: 1.7380 - 1.7530 ▼
- GBP/NZD: 1.8860 - 1.9100 ▼