US trade tariff threats and labor market report could make a very volatile day in stocks and FX
Friday 6 April, 2018
Daily Currency UpdateThe US stock market continues to trade more like a cryptocurrency, with the Dow Jones Industrial Average up another 300 points at one point on Thursday to add to its 800-point rally off the lows on Wednesday. Unusually – certainly over the past couple of months - the higher equity market was accompanied by a higher US Dollar whose index against a basket of major currencies rose to a 5-week high of 90.15 as the EUR and GBP were both hit by softer economic data. By the end of the day, the USD just beat the CAD into top spot on our one-day performance table. As President Trump is reported this morning to be looking at an additional $100bn of tariffs on Chinese goods, futures markets are signaling a loss of around 200-points for the DJIA, though the USD index is steady at 90.05.
With all the focus on tariffs and trade over the past few weeks, Thursday brought a timely reminder of why President Trump is so agitated about the subject. The US trade deficit grew by 1.6% in February from $56.7bn to $57.6bn and was the highest monthly trade deficit in ten years, going back to the GFC in 2008. Exports of goods and services increased $3.5bn, or 1.7% , in February to $204.4bn. Exports of goods increased $3.0bn and exports of services increased $0.5bn. On the other side of the ledger, imports of goods and services increased slightly more in absolute dollar terms, by $4.4bn, or also 1.7% of total, in February to $262.0bn. Imports of goods increased $3.3bn and imports of services increased $1.1bn. When analysed by trading partner, the figures show surpluses, in billions of dollars, with South and Central America ($3.4), Hong Kong ($3.1), Brazil ($0.9), United Kingdom ($0.6), and Singapore ($0.5). Meanwhile, the countries with whom the US runs the largest trade deficit are China ($34.7), European Union ($15.3), Germany ($6.7), Mexico ($6.6), Japan ($6.0), Italy ($2.8), OPEC ($2.3), India ($1.9), Taiwan ($1.5), France ($1.4), South Korea ($1.1), Saudi Arabia ($0.4), and Canada ($0.4).
The President’s chief economic advisor did what he’s known best for and toured the TV studios to talk up the markets and produce some wildly optimistic US growth forecasts. He said on Fox Business that the US will get a trade deal with China "over a period of time" as the latest measures are "just proposals right now" and that barriers will come down on both sides. He also said that China's "unfair and illegal" actions that are "damaging to economic growth for the US, for China and for the rest of the world." Kudlow, who said the focus of his job is "growth", then added that the US economy might expand between 3% and 4% this year and that 5% growth is possible, but likely won't be sustained for long.” As far as Q1 is concerned, that’s not quite how things are shaping up. After the news on the trade deficit, the Atlanta Fed yesterday revised down its GDP forecast from 2.8% to 2.3%. Ahead of the March labor report later today, the USD index opens this morning in North America around 90.05.
Key MoversThe Canadian Dollar had another good day on Thursday, not quite keeping up with the USD but gaining against every other major currency we follow closely here. USD/CAD edged marginally higher from 1.2765 to 1.2770 but on its crosses, GBP/CAD fell below 1.80 for the first time in 3 weeks whilst AUD/CAD fell towards 0.9800 and NZD/CAD fell back on to 92 cents. In Europe this morning, the stronger US Dollar has lifted USD/CAD to 1.2790 but it has now been below 1.28 for the almost 3 full days.
Speaking in Quebec City, Canadian Prime Minister Justin Trudeau said NAFTA talks have picked up momentum. “We are in a moment where we are moving forward in a significant way, hopefully, there will be some good news coming… Right now, we are having a very productive moment.” Trudeau said his officials are willing to meet as frequently as the U.S. wants to work toward getting a deal, though his country’s ambassador to Washington said on Wednesday there are “still lots of issues” to settle. U.S. Trade Representative Robert Lighthizer said last week he was hopeful they can soon reach a deal “in principle.”
Racking up the air miles, Mr Trudeau’s office announced he will travel to Lima, Peru, Paris and London in an eight-day whirlwind trip later this month. He will be in Lima, April 12-14, Paris, April 15-17 and London, April 17-20 for the Commonwealth heads of government meeting. The theme of the Commonwealth summit is "Towards a Common Future" and the Prime Minister's Office says Trudeau plans to emphasize the need for action on climate change and ocean protection and the need to create economic growth that benefits everyone. The immediate focus for financial markets, however, is this morning’s Canadian employment report, published at the same time as the US jobs report. The Canadian Dollar opens in North America at USD/CAD1.2780, AUD/CAD0.9820 and GBP/CAD1.7905.
The euro had a poor day on Thursday, up against a very weak GBP, little changed against the AUD and NZD, but down against the US and Canadian Dollars. From a low point of USD1.2225, its weakest in more than a month, the EUR rallied overnight to a best level just under 1.2260 but then fell a quarter of a cent on yet another set of weaker than expected economic data. EUR/USD has now spent more than 36 hours on a 1.22 ‘big figure’ with EUR/CAD on 1.56 since Wednesday lunchtime.
In this morning’s economic data, German industrial production fell much more than had been expected. Output fell by 1.6% in February after rising by a revised 0.1% in January, data from the Economy Ministry showed. February’s drop was the biggest since August 2015 and compared with a consensus forecast for a rise of 0.3%. A breakdown of the data showed a big slump in the production of capital goods, down 3.1% on the month, with output of consumer goods falling 1.5% and intermediate goods down 0.7%. Construction activity was also weaker overall.
In March, German business confidence deteriorated for a second straight month, dropping to its lowest level in nearly a year, as managers in Europe’s largest economy became more concerned about the rising threat of protectionism. The DIHK Chambers of Commerce and Industry sounded very cautious, saying escalation of a dispute between China and the United States over import duties could harm the global economy and weaken demand for German goods and services. “On the demand side, the main question is how the current trade conflict develops… If the duties cut or hinder global value chains, this could also affect the sales opportunities of German companies in the medium term.” The EUR opens in North America today at USD1.2245 and EUR/CAD1.5645.
The British Pound is so far this week the worst performer of all the major currencies we follow closely here though this morning is up from Thursday’s worst levels. GBP/USD hit 1.3975 – its first time below 1.40 in more than 2 weeks – whilst GBP/CAD hit a 3-week low around 1.7850. This morning, the so-called ‘cable’ rate has edged up to 1.4020 with GBP/CAD clawing its way back on to a 1.79 ‘big figure’.
Figures out this week show sales of new cars in the UK plunged in March as economic uncertainty weighed on demand and consumers turned their backs on diesel, extending the run of falling sales to 12 months. A total of 474,069 new cars were driven off the forecourts of car showrooms last month, down 15.7% compared with March 2017 and the sharpest monthly fall since April last year. Sales were inflated in March last year, when customers brought forward purchases to beat a tax rise, meaning the sector had expected a drop as demand in Europe’s second-biggest car market cools. Taking the first quarter as a whole, however, sales were still down 12.4% in Q1, compared with the same period last year, with 720,000 vehicles driven off UK forecourts.
The Times today covers the latest monthly retail sales report by the accountants BDO. “Year-on-year sales as measured by its high street sales tracker fell 10.1 percent in March, the largest drop since November 2008 when retailers were hit by snow and the global financial crisis. Online stores did not escape as sales grew by 11 percent, the lowest monthly increase since December 2015.” The report gloomily concluded that, “March was a brutal month for stores… People couldn’t get to the shops, but they weren’t spending online to make up the shortfall either. Whilst many have cited this to be due to consumers not trusting deliveries to get through, it’s also a clear indicator of the wavering underlying spending power.” The British Pound opens in North America this morning at USD1.4010, GBP/EUR1.1445 and GBP/CAD1.8225.
The Aussie Dollar’s price action was a bit of a puzzle on Thursday as it slid lower against the US and Canadian Dollars despite some decent local economic data and a US stock market which was more than 1% higher by the end of the London afternoon. From a one-week high in Asia of 0.7725, AUD/USD hit a low just above 0.7675 during the New York morning. By the end of the day, it was up against the GBP, little changed against the EUR and NZD but down against USD and CAD. Overnight in Asia, AUD/USD has printed a low of 0.7660 with AUD/CAD at 0.9790 before a quarter of a cent rally in both pairs.
After a run of decent data this week – overseas trade, retail sales and the performance of services – there were no fresh official statistics published today. Research released yesterday by Digital Finance Analytics (DFA) shows that across Australia, around 956,000 households were estimated to now face ‘mortgage stress’ – the circumstances homeowners face when their income struggles to cover ongoing living costs. As reported on 9News, 'Mortgage stress' is defined as having more money being spent on a monthly basis than income being earned. In many cases, families dip into savings or increase loan borrowings to fund their lifestyle and overcome the 'stress'. The data shows that more than 21,000 households are in ‘severe stress’, or being unable to make repayments at all, and more than 55,000 households risk 30-day bank defaults over the coming year. Household debt is something which the RBA is monitoring closely and helps explain why this week it left interest rates unchanged for an 18th consecutive meeting.
A Reuters survey of 44 analysts plots a very uneventful future for the Australian dollar, which is seen at $0.77 in one-month, $0.78 in three months, $0.77 in six months and $0.79 over a one-year horizon. These median point forecasts disguise a pretty wide spread of views, with analysts’ estimates from as low as $0.70 and as high as $0.86 on a one-year horizon. The Australian Dollar opens in North America this morning at USD0.7685, with AUD/NZD at 1.0605 and AUD/CAD0.9825.
By its recent standards, the Kiwi Dollar had a pretty ordinary day on Thursday. As with its Aussie cousin, it fell against the USD and CAD, was little changed against the AUD and EUR but rose against a weaker GBP. NZD/USD peaked during the Asian time zone just above 0.7320 but then fell back to a low of 0.7265. The AUD/NZD made a marginal fresh 9-month low just below 1.0530 before then rebounding around a quarter of a point during the New York afternoon. Overnight in Asia and this morning in Europe, the NZD has been generally out of the spotlight, but a little lower against both the USD and CAD.
With no official economic statistics scheduled today, we’ll draw instead on Bloomberg’s annual Global Vice index which compares the costs of a weekly basket of six so-called vice goods including cigarettes, alcohol, marijuana, amphetamines, cocaine and opioids across more than 100 countries. New Zealand is the second most expensive country in the world to buy this basket of vice goods and is one of only three countries where the gross weekly cost exceeded US$1,000. At US$1,366, Japan came in as the most expensive, followed by New Zealand at US$1,241 and Australia in third at US$1,028. New Zealand saw the biggest year-on-year increase with Kiwis having to fork out US$261.10 more for a basket of vice goods last year compared to 2016. By comparison, the same basket cost less than $100 in 21 mostly tropical countries, including the Dominican Republic, Congo, Colombia, and South Africa. The Congo was the cheapest of all at just $18 though a quick look at the WHO website shows it has life expectancy of just 57 years… The data in the Bloomberg index was sourced from the UN, World Health Organization, World Bank and International Monetary Fund.
In a Reuters survey of 37 analysts out today, the median forecast put the currency at $0.72 for one month, three months and six months, ticking up to $0.74 in one year. While the median forecasts were narrowly spread, there was far more variety at the extremes, with the highest prediction for 12-months out at $0.8000 and the lowest at $0.6500. The New Zealand Dollar opens in North America today at USD0.7250 and NZD/CAD0.9265.
- USD/CAD: 1.2705 - 1.2840 ▼
- EUR/USD: 1.2190 - 1.2220 ▼
- GBP/USD: 1.3920 - 1.4060 ▼
- AUD/USD: 0.7640 - 0.7725 ▼
- NZD/USD: 0.7205 - 0.7320 ▼