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AUD/USD falls to 3-month low. Nothing new from RBA ahead of Thursday’s employment report.

By Nick Parsons

It’s the Autumnal Equinox in the Southern Hemisphere today as the Earth begins to tilt away from the sun leading to shorter days and longer nights. Up North, it’s the official start of Spring, though try telling that to Bostonians or New Yorkers who are forecast to receive 8-14 inches of snow on Wednesday! The start of Fall seems quite timely when looking at the recent price action of the Aussie Dollar: AUD/USD has fallen more than 2 cents in less than 5 full trading days, whilst AUD/GBP has fallen to just 0.5475; its lowest since the day of the UK referendum back in June 2016. Of note, we’ve now begun to see the AUD fall on days when the stock market has risen (like yesterday) as well as fall when there’s more of a general risk-off mood (as on Monday). AUD/USD yesterday again fell on to a US 76 cents handle and moved down to the lowest since the week before Christmas.

Because Australia has a different mix to its economy than many other countries – a much greater proportion of resource and mining output – GDP is arguably less of a guide to the correct stance of monetary policy. GDP may rise substantially without necessarily directly impacting jobs and wages across the whole economy. For this reason, household consumption may be the more appropriate gauge for an inflation-targeting Central Bank such as the RBA. The Minutes of the March Board meeting out yesterday noted that, “Wages growth had remained low. The wage price index had increased by 0.6 per cent in the December quarter and growth over the year had increased slightly to 2.1 per cent. Across the states, wages growth had risen to almost 2½ per cent in Victoria, and in Queensland and Western Australia had increased from the lows recorded during 2016/17. In contrast, wages growth in New South Wales had been steady at around 2 per cent for a couple of years, despite the strong labour market conditions in that state. By sector, wages growth had been rising in an increasing number of industries over the prior year. In particular, some (but not all) of the industries with a relatively high share of employees on individual agreements had seen wages growth pick up.”

The reference to a pick-up in individual agreements (rather than those which are firm-wide or union-driven) was a straw for some analysts to clutch at, but overall there is no sense of anything other than a very slow pick-up in pay and activity. As the RBA puts it, “Employment had grown strongly and the unemployment rate had fallen over the preceding year. However, the improvement in overall conditions had not yet translated into a definitive pick-up in wages growth, which remained low. Forward-looking indicators suggested that spare capacity in the labour market would continue to decline gradually over 2018 and, as a consequence, wages growth was expected to rise gradually.” If there is one word which thus far defines Phil Lowe’s time as Governor, it is “gradual”. The Australian Dollar opens in Asia this morning at USD0.7685, with AUD/NZD at 1.0690 and GBP/AUD1.8225.

After its decent start to the week on Monday, the New Zealand Dollar slumped to the bottom of our one-day performance table on Tuesday, falling against all the major currencies we follow closely here. AUD/NZD rose around 35 pips to 1.0690 but losses elsewhere for the Kiwi extended to as much as 0.4-0.5% against the GBP and USD. Indeed, NZD/USD again fell back on to a US 76 cents ‘big figure’ and went on to hit the lowest level in almost 2 weeks even though the incoming economic data was at the upper end of consensus expectations.

According to the latest Westpac McDermott Miller survey for March, consumer confidence has now returned to pre-Election levels. The index rose 3.8 points to 111.2; reversing almost all its drop over the past few months. The analysts at Westpac said, “"The past few months have also seen mortgage rates pushing down and a related second wind in the housing market. We've also continued to see positive conditions in some key sectors of the economy, like the hospitality sector." Westpac said households are feeling more optimistic about the outlook for their own financial situation over the coming year. "They have also become more upbeat about the economy's longer-term trajectory more generally… The lift in confidence was widespread across geographic regions and household groups.”

Acting RBNZ Governor Grant Spencer holds his last Board meeting this Thursday before Adrian Orr takes the reins next week. He has had a distinguished career at the Central Bank: he was Deputy Governor and Head of Financial Stability from April 2007 until September 2017 whilst previous positions included Assistant Governor and Head of Economics. Not a single analyst expects any change in official interest rates at his last meeting, with most attention focused instead on the likely new Policy Targets Agreement between the Government and the Central Bank. Before the RBNZ meeting, Wednesday brings the net migration numbers. The New Zealand Dollar opens in Asia this morning at USD0.7185 and AUD/NZD1.0695.

After its clean sweep on Monday, rising against every major currency we closely follow here, the GBP couldn’t do quite as well on Tuesday, up only against three and down against both the US and Canadian Dollars. GBP/USD couldn’t maintain its hold on a 1.40 handle whilst GBP/CAD is down almost a cent from its recent high with GBP/AUD more than a full cent lower after a somewhat softer than expected CPI report led to some profit-taking after the pound’s recent strong run.

Today’s UK CPI numbers came in below the consensus expectation of 2.8% and, crucially, below the 2.9% which the Bank of England had been assuming when it warned last week of a somewhat faster pace of UK interest rate hikes. Annual inflation fell from 3.0% to 2.7% in February according to the Office for National Statistics which said, “The largest downward contributions to the change in the rate came from transport and food prices, which rose by less than a year ago.” Petrol prices fell by 0.2 pence per litre between January and February, to 120.8 pence per litre. Food and non-alcoholic beverages prices, meantime, rose by 0.1% between January and February this year compared with a rise of 0.8% a year ago.

As for the UK-EU agreement, we wrote in our North American comment on Tuesday that, “Whether or not the early optimism is well-founded remains to be seen: The reaction of right-wing Conservative MP’s, those in fishing communities and in Northern Ireland may now be crucial in determining whether the GBP can hold on to its gains of the past week.” The environment secretary, Michael Gove, yesterday warned rebellious Tories to keep their “eyes on the prize” as he said he understood the fishing industry’s grave disappointment at Theresa May’s agreement to keep EU fishing policies during the Brexit transition period. Jacob Rees-Mogg, the Conservative MP who leads the powerful pro-Brexit European Research Group of Tory MPs (and who satirists refer to as the Minister for the Nineteenth century!), said he was concerned by Gove’s tone about the negotiation. “The European commission would not allow us something? In a negotiation it is about the importance we put on something as to whether we get it, therefore, what did we get in return?”. Whether the opponents can together unify in blocking the deal is far from clear, but the pound’s recent strong surge appears perhaps to have come to an end. The GBP opens in Asia this morning at USD1.3995, GBP/AUD1.8225 and GBP/NZD1.9490.

The US Dollar had a good day on Tuesday with its index against a basket of major currencies rising from an opening level around 89.45 to 89.95 by late-afternoon in New York. It rallied even as the stock market rose (there is more often a negative correlation between the two asset classes) and despite a lack of any fresh incoming economic data. At the time of writing, Facebook shares were down another 4% to a 5-month low and Twitter tumbled almost 10%, though Amazon and Netflix were both more than 1% higher and Alphabet (the parent company of Google) was unchanged on the day.

In a CNBC survey of top Wall Street names, nearly three-quarters of respondents to the survey say they are now worried about a trade war. Despite the exemptions announced for Canada and Mexico, nearly two-thirds of the survey respondents, including economists, fund managers and strategists, see the president's trade policies as negative for overall economic growth, with 23% saying it's too soon to tell. 48% of respondents say the steel and aluminum tariffs that the president will implement will result in fewer U.S. jobs overall, with 3% seeing no effect on employment. Just 13% said they believe the tariffs will increase jobs. More than 80% said it would be negative for the U.S. to leave NAFTA, including 48% who say it would be "very negative."

The FOMC begins the second day of its monetary policy meeting today; one of four such occasions each year at which it will release new staff economic projections and so-called ‘dot points’ which show members’ estimates of where official interest rates will be over the next 2-3 years. There will also be a Press Conference where the Chairman of the Board of Governors, Jerome Powell, will be questioned on the economic outlook and the prospects for future monetary policy. Before then, however, there are no data scheduled for release other than existing home sales and the Q4 current account balance, so all eyes instead will be on ‘Bubble TV’ and the POTUS Twitter feed. The USD index opens in Asia this morning at 89.95.

The euro had a great start to the week on Monday, sharing second-spot on our one-day performance table with the NZD; and beaten only by the surging British Pound. After a fairly quiet Asian session on Tuesday, however, with less than 20 pips separating the high and low in EUR/USD, the euro turned lower once more and by the end of the day in New York had lost more than three-quarters of a cent to a 2 ½ week low around 1.2250.

In economic news, the ZEW research institute said its monthly survey showed economic sentiment among investors dropped to 5.1, its lowest reading in a year and a half, from 17.8 in the previous month. The consensus forecast in a Reuters poll was for 13.0. ZEW President Achim Wambach said “concerns over an U.S.-led global trade conflict have made the experts more cautious in their prognoses…The stronger euro is also hampering the business outlook of German exporters”, Wambach said, adding that the outlook for the economy as a whole remained “largely positive” despite the risks.

President Trump has warned the European Union it would get hit with a “big tax of 25 percent on their cars” for not treating the United States well when it comes to trade, and this mornings ZEW survey shows the threats are already resonating with investment professionals. On Thursday we get to see the ifo Survey of businesses which has recently been incredibly upbeat in its numbers and commentary. It is not unusual to see a divergence between the two surveys but if the ifo repeats the downbeat message from investors, the EUR is likely to remain under some near-term pressure. The EUR opens in Asia this morning at USD1.2250, AUD/EUR0.6275 and NZD/EUR0.5865.

The Canadian Dollar had a much better day Tuesday after its poor performance over the past week. For sure, USD/CAD is still on a 1.30 handle but the CAD improved on all its crosses and actually finished in top spot on our one-day table, marginally beating the US Dollar which took second place. GBP/CAD fell two-tenths of a point, AUD/CAD was down four-tenths whilst NZD/CAD tumbled seven-tenths.

In economic news, Statistics Canada reports that wholesale sales edged up 0.1% to $63.3 billion in January. Sales were up in four of seven subsectors, accounting for 66% of total wholesale sales. Increases in the food, beverage and tobacco and the machinery, equipment and supplies subsectors were almost completely offset by declines in the building material and supplies and the motor vehicle and parts subsectors. Meantime, wholesale inventories rose for the second consecutive month, up 1.1% to a record $83.5 billion in January. Five of seven subsectors posted increases, representing 73% of total wholesale inventories. The inventory-to-sales ratio rose from 1.31 in December to 1.32 in January. This ratio is a measure of the time in months required to exhaust inventories if sales were to remain at their current level.

It is reported by Bloomberg that, “the Trump administration is pressing countries to ally with the U.S. in pushing back against Chinese trade policies in exchange for relief from American tariffs on steel and aluminum which take effect this Friday. US Trade Representative Robert Lighthizer has laid out five conditions that countries must address before being excluded. They are: Limiting steel and aluminum exports to the U.S. to 2017 levels; actively addressing China’s various trade-distorting policies; being more assertive and cooperative with the U.S. at the G-20 Global Steel Forum; cooperating with the U.S. in launching cases against Chinese practices at the WTO; and enhancing security cooperation with the U.S” Although Canada has already been granted exemption from the steel tariffs, there are fears that this exemption could be revoked unless it takes the US side in disputes with third countries. The Canadian Dollar opens in Asia this morning at USD/CAD1.3080, AUD/CAD1.0055 and NZD/CAD0.9400.