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Wednesday’s CPI is the most important number of the week for the AUD

By Nick Parsons

The Aussie Dollar began last Monday just below US 80 cents, having broken above this psychological level a couple of time the previous week, but on both occasions having failed to hold there. By the end of last week, a combination of decent local economic news (the Westpac leading index) and US Treasury Secretary Mnuchin’s words on the benefits of a weaker dollar helped cement the AUD onto this new ‘big figure’. Indeed, from Wednesday afternoon local time the Aussie Dollar never looked back and it went on to reach a high on Friday of USD just below 0.8135; its best level since January 2015 when it was around three-quarters of the way through its multi-year decline from an all-time high around USD1.10 to just 70 cents.

As Australians head back to work at the end of the Summer holidays and a long weekend, so too economic news flow begins to pick up. On Tuesday its the monthly NAB Business Survey but more important will be Wednesday’s quarterly CPI numbers. It is a constant source of wonder – though probably linked to internal politics around funding – that the official statisticians don’t produce monthly inflation numbers. It means the government and central bank have to rely on private sector estimates for a timely read on price pressures, then have a whole series of official numbers (headline, trimmed mean, weighted median etc) which can sometimes be difficult to interpret. Anyhow, the general consensus is that headline CPI will rise around 0.7% q/q to take the annual rate up to 2.%.

The RBA doesn’t have a Board meeting in January so its meeting on Tuesday February 6th will be its first chance for two months to publicly review all the incoming data. Too great a focus on the AUD/USD exchange rate would be misleading as it’s more of a story around the US Dollar, whilst the AUD/NZD cross rate is pretty much unchanged from the day of the last RBA meeting back in early December. As for its other pairs, the AUD is around one cent firmer against both the GBP and EUR than it was when the RBA last met to decide official interest rates. Whilst any comment they make on exchange rates will be seized on by analysts, it’s probably still the case that monetary policy in 2018 will be determined more by growth in wages than by what’s happening to the external value of the Aussie Dollar. The Australian Dollar starts this new week having closed on Friday at USD0.8105, with AUD/NZD at 1.1025 and GBP/AUD1.7460.

The New Zealand Dollar outperformed its Aussie cousin in the first part of last week before reversing all the gains and more in the final two days. AUD/NZD started around 1.0980 but fell all the way to 1.0860 on a combination of poor Australian consumer confidence numbers and a decent performance of services index locally. On Wednesday, as the USD slide accelerated and deepened after the Mnuchin comments in Davos, NZD/USD hit a high around 0.7430; the first time it had been on a US 74 cents ‘big figure’ since early-August 2017. After a much weaker than expected set of CPI numbers, however, the NZD went into reverse. NZD/USD immediately tumbled a full cent to around 0.7325 and then on to a low Thursday around 0.7290 with AUD/NZD back up to 1.09 then 1.10.

The median published estimates were for a quarterly increase in CPI of 0.4% which would have left the annual rate at 1.9%. Instead, StatsNZ reported that prices rose just 0.1% in the December 2017 quarter to take the annual rate down to 1.6% as higher petrol prices, air fares, and housing-related costs were offset by lower prices for vegetables, new cars, and a range of household goods. Analysts were quick to revise down their interest rate expectations. ANZ said the data have pushed its expectations for the Reserve Bank of New Zealand to hike the official cash rate back from November 2018 to mid-2019. ASB said, “it reinforces that there is no need for the Reserve Bank to raise interest rates anytime soon," whilst amongst the offshore banks Morgan Stanley noted “the weakness seen in 4Q inflation should see the RBNZ on-hold over 1H18, possibly with an added emphasis on the need for a weaker currency”.

There’s plenty of data to be released locally this coming week. December trade figures on Tuesday should rebound from a very poor performance in November whilst on the housing market, today brings residential lending data and Friday we get the building consents numbers. On Thursday we get the ANZ job advertising figures and at the end of the week, the always fascinating numbers on net migration and visitor arrivals. It’s a holiday in Auckland today which might keep activity low but the FX market is open locally and through the rest of the Asia time zone. The New Zealand Dollar opens this Monday morning having closed in New York on Friday at USD0.7360 and AUD/NZD1.1025.

The British Pound ended last week after an 11-day sequence of rallying without testing the previous day’s low. From the day the ECB talked about changing the language around forward guidance on monetary policy on January 11th, (ironically in an attempt to smooth market volatility) GBP/USD has risen more than 7 cents and at one point was almost 9 cents higher having reached a best level on Thursday around 1.4330. The GBP’s gains came against a background of improving survey evidence and a solid set of labour market numbers which continue to confound the pessimists who have called for a UK recession ever since the EU referendum 18 months ago in June 2016.

Friday’s Q4 GDP numbers were a touch stronger than consensus forecasts but exactly in line with the +0.5% rise which the Bank of England expected in its November Quarterly Bulletin. The reaction has so far been fairly predictable: “Leave” supporters claim proof the UK can survive post-Brexit whilst the “Remain” camp argue it could all have been so much better. The weekend Press in the UK has focused on what the GDP numbers might mean for monetary policy, with some analysts now bringing forward their forecasts for the next hike in interest rates. HSBC, for example, said that along with increasing numbers of people in work, the figures “support our view that the Monetary Policy Committee will raise Bank Rate again in May.”

In what will be a relatively quiet week for UK economic data – with Thursday’s manufacturing PMI probably the highlight – there’ll be plenty of time to focus on politics and Brexit. Most newspapers reported that Prime Minister Theresa May has cancelled plans to give another high-profile speech such as the one she gave in Florence last year. The reason for this is not just because, allegedly, she does not know what she wants herself, but that anything she says is likely to worsen divisions amongst her own Cabinet and backbenchers. An opinion poll by ICM in The Guardian on Saturday said that voters support the idea of holding a second EU referendum by a 16-point margin. 47% of people would favour having a final say on Brexit once the terms of the UK’s departure are known, while 34% oppose reopening the question. Amidst the political intrigue, the GBP begins the new week having closed in New York on Friday at USD1.4165, GBP/AUD1.7460 and GBP/NZD1.9245.

The US Dollar had a dramatic week which saw it fall a net 1.7% against a basket of major currencies. Its index opened last Monday morning around 90.25 but by Tuesday evening, had fallen all the way to a fresh 37-month low of 89.77. On Wednesday things got worse as the US Trade and Treasury Secretaries unleashed their own particular brand of Alpine diplomacy at the WEF in Davos. Though Treasury Secretary Steve Mnuchin initially stuck to a familiar script that, “longer term the strength of the dollar is a reflection of the strength of the U.S. economy and the fact that it is and will continue to be the primary currency in terms of the reserve currency," he went on to say that, “Obviously a weaker dollar is good for us as it relates to trade and opportunities.” Less than 12 hours later, the USD index was on an 88 ‘big figure’ and on Thursday hit at a fresh low of 88.20; its lowest since early-December 2014.

Late in the New York afternoon on Thursday, in an interview with CNBC, President Donald Trump said, "the dollar is going to get stronger and stronger and ultimately, I want to see a strong dollar,", further adding that Treasury Secretary Steven Mnuchin's comments were taken out of context. After he then delivered his “America First but not Alone” speech to a packed conference hall in Davos on Friday, the USD steadied somewhat to end a very dramatic week at 88.70.

The week ahead brings plenty of news on the US economy as well as Jerome ‘Jay’ Powell’s first meeting as Chairman of the Federal Reserve Bank. Market-derived probability estimates show just a 3% chance of a 25bp hike in rates, with the overwhelming view being this will not come until the March 21st FOMC meeting. On Tuesday we get the latest reading on consumer confidence, Wednesday it’s the Chicago NAPM then on Thursday the ISM manufacturing survey. The first Friday of the new month, as usual, is the labour market report where consensus estimates are for non-farm payrolls to have increased about 180k with the unemployment rate steady at 4.1%. Ahead of all this, the USD index stands at 88.70.

All last week’s economic news in the Eurozone was without exception positive. Indeed, Germany’s ZEW Survey noted, “The latest survey results reveal an optimistic outlook for the German economy in the first six months of 2018. With 95.2 out of 100 points, this is the most positive assessment of the current economic situation since the introduction of the survey in December 1991.” For the foreign exchange market, however, none of this was ‘new news’ and the EUR was little changed for the first couple of days around USD1.2250 as investors awaited Thursday’s ECB Council Meeting. Just ahead of that, of course, came US Treasury Secretary Steve Mnuchin’s dramatic intervention which sent the EUR up a couple of cents to 1.2455.

The big issue was whether Draghi would change forward guidance on interest rates (he didn’t), try to talk the EUR lower (he didn’t) or sound in any way concerned about the impact of a strong EUR on growth and inflation forecasts (he didn’t). The standard practice amongst Central Bankers when asked to speak about the actions of another is a diplomatic “no comment”. Instead, Mr Draghi entered a war of words with unnamed (but clearly American) officials for manipulating the currency, saying “someone else’s FX talk doesn’t comply with agreed terms...” EUR/USD hit a high of 1.2530 during the ECB Press Conference before falling one and a half cents on President Trump’s comments about wanting a stronger Dollar. Thursday was a very dramatic and volatile day in the world of foreign exchange.

The week ahead brings Q4 GDP figures on Tuesday where consensus estimates are for a +0.6% quarterly increase. If it is, instead, 0.7%, then the Eurozone will have grown more rapidly than the United States in the final quarter of the year. Also on Tuesday we’ll get German CPI figures which will then see analysts firming up their forecasts for the Eurozone CPI numbers on Wednesday. Thursday brings the final Markit PMI numbers across Europe, whilst investors need to be prepared at any time for the usual post-ECB briefings and clarifications. The EUR ended last week at USD1.2430, AUD/EUR0.6525 and NZD/EUR0.5915 and all eyes this week will be on who can declare victory in the first currency battle after Davos.

All of the drama for the Canadian Dollar came two weeks ago as it became the first G7 Central Bank to raise rates in 2018. Last Monday’s opening level of USD/CAD1.2490 proved to be the high of the week as the USD slid, WTI crude rose steadily to a high around $66.50 per barrel and negotiations around NAFTA seemed to proceeding well, albeit behind closed doors. Much of Prime Minister Justin Trudeau’s speech to the World Economic Forum in Davos focussed on gender inequality and the benefits to be derived from hiring, promoting & retaining women. On more immediately market-sensitive issues, he said, “We’re working very hard to make sure that our neighbour to the south recognizes how good NAFTA is and that it has benefited not just our economy but his economy and the world economy.” He also said the new Trans-Pacific trade deal would create “well-paying middle class jobs for decades to come” even though it did not involve the United States.

Also in Davos, Bank of Canada Governor Stephen Poloz said he did not know what potential there may be for further interest rate hikes this year, reiterating that policymakers remained both data dependent and alert to developments with NAFTA. "We've explained to people that there are a number of important issues that force us to not be mechanical or to use a rule or to plan ahead in that way. We've said we are totally data dependent." Asked if the BoC was also "NAFTA dependent," Poloz said: "Oh yes, very." But he said it was impossible to do the arithmetic ahead of time to know what policy response may be needed if the trade deal is terminated or significantly altered. "If the economy began to slow as a result, then we'd be able to put those pieces together, then it would go into the mix, the inflation target would be at risk, and we'd be cutting rates into that. But a lot of things could move at the time.”

For the week ahead, we get the monthly GDP and industrial production numbers on Wednesday and the manufacturing PMI survey on Thursday. Officials from the United States, Canada and Mexico will wrap up the sixth of seven planned rounds of talks on the North American Free Trade Agreement in Montreal on Monday, with little sign yet of agreement on US proposals to overhaul the $1.2 trillion pact. On Sunday, Mr Trudeau told a televised meeting of Liberal legislators in Ottawa that the government was working hard to get a better NAFTA deal, although it was a day of rest for the three Chief NAFTA negotiators who had the day off. Officials say if the three conclude the process should continue, an additional round of talks will start in Mexico on February 26th. The Canadian Dollar ended last week at USD/CAD1.2315, AUD/CAD0.9990 and GBP/CAD1.7445.