US jobs report holds key for stocks and the dollar. EUR is softer post-ECB, AUD and NZD steady.
Friday 9 March, 2018
Daily Currency UpdateThe US Dollar rose sharply on Thursday. This was due to a big reversal in the EUR after the ECB Council Meeting and a softening of the President’s position on trade tariffs with exemptions already announced and more potentially still to come. The USD index against a basket of major currencies rose from 89.10 at lunchtime in Europe to a best level of 89.90 in Asia overnight; fully reversing the losses which had been seen earlier this week. With the US labour market numbers still to come, though, it would take a brave person to bet on where markets might finish this evening.
President Trump yesterday signed a proclamation to impose steep tariffs on imported steel and aluminium. The protectionist policies were needed to stop America’s trading partners from “stealing our wealth”, he said. Surrounded by steel and aluminium workers, Trump said he had to act to stop the “decimation of entire communities” and insisted there would be a very fair process as the administration used the next 15 days to negotiate exemptions with allies. Canada and Mexico will be exempted. More than 100 Republican House members signed a letter on Wednesday expressing “deep concern” about the plan. They pressed Trump to change course and “avoid unintended negative consequences to the US economy and its workers”. They added that “tariffs are taxes that make US businesses less competitive and US consumers poorer.”
Today brings the monthly US labour market report; delayed by a week from its usual ‘first Friday’ slot. It was the big jump in hourly average earnings a month ago which triggered the stock market rout with a 666-point drop for the DJIA on the day the numbers were released. For the February data, consensus is for non-farm payrolls to have risen 210-220k with the unemployment rate at 4.0% and a slight fall in average earnings from 2.9% to 2.8% y/y. The USD index opens this morning in North America around 89.90.
Key MoversThe 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. Sentiment had become increasingly bearish over the past week to ten days and 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.
President Trump’s tariffs on steel and aluminium, which are being enacted under section 232 of the little used Trade Expansion Act of 1962, will exempt both metals coming from Canada and Mexico on national security grounds - at least initially. The so-called "carve out" of Canadian steel and aluminum will allow U.S. trade negotiators to have what a senior administration official described as "ongoing discussions" about various issues involving the three countries. Mr Trump himself was less coy, “We're going to hold off the tariff on those two countries to see whether we can make the deal on NAFTA." Reacting to the decision by the US president to hold off on imposing the duties on Mexico and Canada, Foreign Affairs Minister Chrystia Freeland said politicians of all stripes, stakeholders and businesses worked energetically to reach a positive outcome. "This has been a true Team Canada effort," she said.
Though most attention today will be on the US labour market data, we also have the simultaneous release of the Canadian employment report. Economists in a Reuters poll expect jobs to rebound by 20,000 after slumping 88,000 in January. The Canadian Dollar opens in North America at USD/CAD1.2875, AUD/CAD1.0050 and GBP/CAD1.7785.
The EUR had a two-stage reaction to Thursday’s ECB Council meeting. Initially, EUR/USD spiked almost half a cent higher to 1.2435 but by the end of the afternoon it had fallen more than a full cent from the high to just 1.2320. Overnight in Asia and this morning in London, the pair has traded on a 1.22 ‘big figure’ but has subsequently steadied as it awaits the latest US jobs report.
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 an initial wave of buying for the EUR. We have said many times that Mr Draghi is a master of managing market expectations and yesterday 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 and pushing the EUR simultaneously lower.
As well as a change to the language, we also saw new ECB staff economic projections. Inflation forecasts have been revised down one-tenth to 1.4% for 2018 and two-tenths for 2019 at 1.5%. GDP was moved up one tenth for 2018 to 2.4% though unchanged for 2019 and 2020 at 1.9% and 1.7% respectively. The EUR opens in North America today at USD1.2295 and EUR/CAD1.5830.
It’s now more than 24 hours since GBP/USD was last on a 1.39 ‘big figure’ whilst both in New York yesterday evening and in Asia overnight, it has actually traded on 1.37. In part this reflects a more general improvement in the US Dollar after President Trump granted some exemptions to his proposed tariffs but it also reflects GBP-specific weakness. The pound is this morning lower against all the major currencies we follow closely here apart from the euro, with GBP/CAD down more than 2 cents from Thursday’s high.
According to the Financial Times this morning, Brexit impact assessments published by the Exiting the EU Committee on Thursday show that the government’s policy of allowing regulatory divergence with the EU is estimated to cost the economy the most. It says that, “The document gives a detailed account of the cross government new economic model, which shows that in a classic Free Trade agreement with the EU27, the total hit to the economy would be 5 per cent less growth than otherwise after 15 years.” The other main conclusion, not already in the public domain, is that the public finance costs of Brexit are now thought to be more onerous than previous Treasury modelling suggested, with a net cost of 3 per cent of national income from an FTA agreement.
In economic data today, UK manufacturing output, which has been a bright spot thanks to the strong global economy, inched up only 0.1% m/m in January after a 0.3% rise in December. January marked the ninth month in a row of manufacturing growth in monthly terms - the longest such run since records began 50 years ago - but the overall picture was one of slowing momentum. Over the three months to January, manufacturing output rose 0.9%, the weakest pace since mid-2017. Separate figures showed construction output plunged 3.4% m/m in January after a 1.6% in December, the biggest drop since June 2012 and worse than any analyst forecast ahead of publication. The UK economy grew at a quarterly rate of 0.4% in the three months to December 2017 and today’s figures do nothing to offer any hope of a pick-up in the pace of growth. The British Pound opens in North America at USD1.3865, GBP/EUR1.1200 and GBP/CAD1.7930.
The Australian Dollar has slipped gradually lower from Tuesday’s high of USD0.7835. The fall hasn’t been dramatic by any means but three times it has slipped back on to a US 77 cents ‘big figure’ and the price action suggests the downside may be the more vulnerable. Against the Canadian Dollar, meantime, the Aussie is around 40 pips down from Wednesday’s 1.0135 high, having broken above parity on Monday for the first time in more than 6 months.
Australia’s latest monthly trade figures were released overnight. The headlines were much better than expectations, with a $1.05 billion surplus, a more than $2 billion turnaround on the $1.1 billion deficit the month before. Details showed a 4.3% m/m jump in exports whilst imports fell -2.4%. Digging a little deeper in to the numbers, around three-quarters of the surplus was made up by a $770 million contribution by gold, with exports jumping 54 per cent over the month. A $208 million jump in the export of transport equipment also improved the monthly picture. Elsewhere, iron ore (+0.6% m/m) and coal (0.0% m/m) added little to exports growth, although last month’s figures were revised up slightly. According to CBA, generally stronger commodity prices so far this year point to another solid result next month and an improvement in the terms of trade — the ratio of the prices received for exports to prices paid for imports. "This will provide a short-term boost to nominal GDP and therefore national income."
The latest foreign exchange survey from Reuters showed the median forecast of 41 analysts is for the AUD/USD exchange rate at 78 cents in one, three and six months’ time. This would be an unusually flat profile for the typically volatile currency pair. Over 2017, for example, the Aussie went from as low as 0.7165 to as high as 0.8125 before ending the year just above $0.7800 where it currently sits. The median forecasts, however, disguise a wide range of views about the AUD. Looking at the one-year time horizon, the range of expectations is between 70 and 86 US cents. The Australian Dollar opens in North America this morning at USD0.7795, with AUD/NZD at 1.0740 and AUD/CAD1.0095.
The New Zealand Dollar hasn’t seen US 73 cents since lunchtime on Tuesday, though its decline against the USD has been measured and orderly. Indeed, it only had a very brief spike below 0.7250 yesterday afternoon and has otherwise spent the whole of the past 60 hours in the high 72’s.
In economic data, total card spending across all industries was relatively flat (up 0.1 percent) in February 2018, when adjusted for seasonal effects, Stats NZ said today. Retail card spending dipped 0.3 percent in February, after five consecutive monthly increases. February’s decline was led by a 0.5 percent fall in spending on consumables, which includes grocery and liquor retailing and the statisticians commented that, “This is the first decrease in the consumables group since May 2017 and could be the effect of people hunkering down during the two ex-tropical cyclones that hit this month.” Spending was subdued across most of the six retail industries. There was little or no change in durables (includes hardware, furniture, and appliances), hospitality (accommodation, bars, cafes, restaurants, and takeaways), apparel (clothing and footwear), and fuel.
As the North Island of New Zealand spends the weekend worrying about a potential hit from Cyclone Hola on Monday and Tuesday, the Kiwi Dollar opens in North America at USD0.7280 and NZD/CAD0.9370.
- USD/CAD: 1.2820 - 1.2960 ▼
- EUR/USD: 1.2170 - 1.2370 ▼
- GBP/USD: 1.3720 - 1.3860 ▼
- AUD/USD: 0.7715 - 0.7835 ▼
- NZD/USD: 0.7190 - 0.7305 ▼