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US stocks fall sharply but AUD claws its way back on to 77 cents ahead of RBA Minutes. GBP soars after UK-EU Brexit deal. GBP/AUD at 20-month high.

By Nick Parsons

The Australian Dollar continued its recent decline during the Asian session on Monday, reaching a low around USD0.7690 before then stabilising in the European morning and actually clawing its way back on to a US 77 cents handle during the North American afternoon. Its modest rally came despite a sharp sell-off in stock markets on both sides of the Atlantic which saw the DJIA at one point more than 400 points lower and the VIX index rise almost 3 points to 19.1.

Today, we get to see the Minutes from the latest RBA Board meeting. There’s unlikely to be any great surprise here, as the key message from the Central Bank recently has been one of steady and gradual improvement towards its goals on inflation and economic growth. The currency won’t have been causing any problems, there are no imminent financial stability risks from the housing market and though trade tensions globally are on the rise, Australia is not one of the countries most threatened by them. Governor Phil Lowe appears more focused on financial stability risks and in this regard the quarterly house price numbers out before the RBA Minutes will be watched closely to see if – even though somewhat out of date – they show signs of cooling in the major city property markets.

Once the Minutes are digested, the focus will quickly shift to the February labour market report on Thursday. In January, there was a 16k increase in employment comprised of a 50k drop in full-time employment and a 66k increase in part-time work. The unemployment rate fell one-tenth to 5.5%. For the February numbers, consensus estimates are for a 20k increase in employment which just about keeps pace with demographic change to leave the jobless rate steady at 5.5%. Unlike the US or the UK, Australia doesn’t publish monthly wage price data in the labour market report so we’ll still be missing an important part of the household consumption jigsaw. The Australian Dollar opens in Asia this morning at USD0.7710, with AUD/NZD at 1.0650 and GBP/AUD1.8200.

The New Zealand Dollar had a decent start to the week on Monday, especially given the souring of risk appetite globally. AUD/NZD fell almost 40 pips to a 7-month low of 1.0650 whilst NZD/USD – which earlier in the Asian session has fallen below 72 cents – was back up around 0.7245. The Kiwi Dollar shared second place with the EUR on our one-day performance table, beaten only by the British Pound which rose to an intra-day high of GBP/NZD1.95 before settling back to the 1.9380 area.

In economic data on Monday, New Zealand's Performance of Services Index experienced a slight dip in expansion levels during February with a 0.7 point drop to 55.0; but still just above its long-term average of 54.4. The fourth quarter GDP numbers out last week showed the service sector grew around 1.1% but on the evidence of the first two months of 2018, it seems the pace of expansion in Q1 may be somewhat slower. Indeed, local experts BNZ who co-produce the PSI have a preliminary estimate of 0.6% penciled-in for GDP.

Acting RBNZ Governor Graeme Wheeler holds his last Board meeting this Thursday before Adrian Orr takes the reins next week. Not a single analyst expects any change in official interest rates, with most attention focused instead on the likely new Policy Targets Agreement between the Government and the Central Bank. Even this is more likely a shift of nuance, rather than substance and it would be a big surprise if there were a material shift towards explicitly targeting unemployment rather than inflation. The New Zealand Dollar opens in Asia this morning at USD0.7245 and AUD/NZD1.0645.

After finishing in top spot last week, the British Pound continued where it left off, rising on Monday against every major currency we closely follow here. GBP/USD was back on a 1.40 handle for the first time since February 26th whilst GBP/NZD reached a 3-month high of 1.95 and GBP/AUD hit 1.82 for the first time since the EU referendum back in June 2016.

The main reason for the continued strength in sterling was confirmation that the UK and EU have reached agreement on the terms of a Brexit ‘transition’ period extending beyond March 29th 2019 until December 31st 2020. Britain has won concessions from the EU to allow it to negotiate and sign trade deals during the period without authorisation, but it will elsewhere have to follow EU rules, with strict sanctions if the government fails to do so. At a joint press conference, Brexit Secretary David Davis and EU negotiator Michel Barnier said they had resolved all the major sticking points to allow the deal to be signed by European leaders this week. The Brexit secretary said that the agreement represented a “significant step” while the EU’s chief negotiator described it as “decisive”. The director-general of the Confederation of British Industry, said: “Agreeing transition is a critical milestone that will provide many hundreds of businesses with the confidence to put their contingency planning on hold and keep investing in the UK.”

The UK-EU agreement is especially important in the context of this week’s Bank of England MPC meeting. BoE Governor Mark Carney has previously said that an assumption of smooth progress on Brexit negotiations was the Bank’s central working assumption. With this now apparently achieved, one of the remaining obstacles to another interest rate hike has arguably been removed. Whether or not it will actually be required might become a little clearer after today’s CPI figures are published. Consensus looks for the annual rate of inflation to slip back from 3.0% to 2.8% in February. The GBP opens in Asia this morning at USD1.4040, GBP/AUD1.8200 and GBP/NZD1.9360.

The US Dollar Index rose modestly through Monday’s Asian session to reach a best level just below 89.95 before then turning sharply lower as the GBP jumped above 1.40 and the EUR found solid buying interest after its early dip to a low of USD1.2260. By mid-afternoon in New York, the US Dollar had tumbled to 89.35, unable to benefit from a sharp decline in the stock market. More than $100bn was wiped off the value of US technology shares with Facebook alone accounting for $35bn of these losses. According to the Financial Times, this was one of the top ten daily losses in value ever suffered by a technology company.

The drop in Facebook shares wasn’t just in reaction to allegations about the use of personal data in the US election campaign. It followed reports from the G-20 meeting in Buenos Aries that officials are considering a digital tax which would also impact companies such as Google, Amazon and others. A US Treasury Official said the US strongly opposes such measures on the digital sector but the so-called “FANG” group of stocks was sold heavily on Monday, dragging the US down in its wake. If only the US Administration had a market friendly face always available to pop up on 24-hours financial TV to reassure the markets…

It’s not a busy week in terms of the regular flow of incoming economic data and until Wednesday’s existing home sales numbers and FOMC Statement, the calendar is pretty much empty. After last week’s news on residential construction and industrial production, the Atlanta Fed yet again revised down its so-called ‘Nowcast’ estimate for Q1 GDP, this time nudging it down to 1.8%; the lowest it has been at any point this quarter and significantly down from the peak estimate of 5.4% back in early February. The USD index opens in Asia this morning at 89.35.

After a generally underwhelming performance last week, the euro kicked off Monday by re-testing Friday’s lows in the USD1.2260 area. Throughout the Northern hemisphere day, however, the Single European Currency was progressively well-bid and by the middle of the New York afternoon had gained almost a full cent to a shade under 1.2360. As we go to print with this commentary, it shared second-spot on our one-day performance table with the NZD; beaten only by the surging British Pound.

With trade figures very much in the spotlight recently, Eurostat yesterday announced that in January 2018 compared with December 2017, exports decreased by 0.7%, while imports increased by 1.1%. The seasonally adjusted balance was +€19.9bn, a fall compared with December (+€23.2bn) and lower than most observers had been expecting. The EU’s trade surplus with the United States, however, widened to €10.3bn from €9.7bn in the same month a year ago. President Trump has long been critical of this surplus and it will be interesting to see if his new economic team specifically call this out.

On today’s economic calendar we have Germany’s ZEW survey of investor expectations, and on Thursday it’s the ifo Survey which has recently been incredibly upbeat in its numbers and commentary. Sandwiched between these are the so-called ‘flash PMI’s’ for manufacturing and service sector activity in France, Germany and the Eurozone. The ECB will publish its monthly Economic Bulletin on Thursday; something to which markets never used to pay attention but will which now be watched carefully for hints about policy normalization. The EUR opens in Asia this morning at USD1.2355, AUD/EUR0.6250 and NZD/EUR0.5875.

As the negative sentiment surrounding the Canadian Dollar continued over the weekend, USD/CAD yesterday morning hit a high of 1.3125; its highest level since late June. GBP/CAD hit 1.83; its best level since the EU referendum 20 months ago although both AUD/CAD and NZD/CAD slipped a little from their recent 9-month highs. By the middle of the New York afternoon, however, USD/CAD had fallen around three quarters of a cent, though this was more a reflection of a poor session for the US Dollar than any new-found enthusiasm for its northern neighbour.

In its latest report on Canada, credit ratings agency Moody’s warns that while the end of NAFTA would be worse for Canada than for the US, the impact on Canada's overall economy would be "marginal" – although there would be winners and losers in terms of different industries and regions of each country. It identified New Brunswick and Ontario as having the highest exposure in terms of trade with NAFTA partners based on their output and export mix and said that of all the provinces, New Brunswick's exports to the US account for the largest share of its gross domestic product — nearly 30 per cent overall — with "significant exposure to higher-risk" food, agricultural commodities and forestry sectors. Meantime, Ontario exports more to the U.S. than any other province, largely because of its significant exposure to the manufacturing industry, including the auto sector. Despite these concerns, Prime Minister Justin Trudeau sounded quite upbeat on Monday: “We’re renegotiating NAFTA, we’ve seen from the President he’s enthusiastic about getting to a deal,” he said during a panel discussion, adding that Canada was continuing to work on resolving the trade talks.

Most of the important Canadian events come at the end of this week. On Thursday afternoon Senior Deputy Governor Carolyn Wilkins is scheduled to speak whilst on Friday we have retail sales and CPI numbers. Before then, wholesale trade numbers are released today. The Canadian Dollar opens in Asia this morning at USD/CAD1.3070, AUD/CAD1.0085 and NZD/CAD0.9475.