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USD falls sharply despite US FOMC raising rate forecasts. AUD/USD rallies almost a full cent to 0.7765.

By Nick Parsons

In Wednesday’s trading ahead of the FOMC announcement, the Aussie Dollar very marginally extended Tuesday’s losses against the US Dollar. AUD/USD broke through the previous evening’s low of 0.7680 but fell only a few pips more to a lowest level around 0.7685. The last time it had been there was back on December 21st. A 140-point rise in the DJIA and a $12 rise in the price of gold then helped lift the AUD back on to a 77 cents big figure. With the US Dollar generally on the defensive after the Fed Statement, AUD/USD rebounded to 0.7775 which helped lift the AUD on most of its major crosses with AUD/NZD, for example, extending gains to 1.0740.

Yesterday we saw the Westpac–Melbourne Institute Leading Index for Australia. The six month annualised growth rate of this index - which indicates the likely pace of economic activity relative to trend three to nine months into the future - rose from +0.68% in January to +1.30% in February; well above its recent average levels. However, this did not prevent a downbeat commentary from their Research team who noted, “The contribution to growth from the eight components of the Index emphasises the disproportionate impact of international factors. US industrial production (0.53 ppts) and commodity prices (0.40 ppts) explain 0.93 ppts of the overall 1.30 ppts reading. It is disappointing that only 0.18 ppts are contributed by the "domestic" components of the Index – consumer and employment confidence; dwelling approvals and hours worked. Of some concern is that recent prints of the Index have shown a marked deterioration in the contribution of the hours worked series (-0.19 ppt’s in February).”

This morning brings the latest Australian labour market report. 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 USD0.7750, with AUD/NZD at 1.0740 and GBP/AUD1.8230.

After slumping to the bottom of our one-day performance table on Tuesday, falling against all the major currencies we follow closely here, the New Zealand Dollar didn’t do a whole lot better on Wednesday. Ahead of the FOMC announcement it was down against the GBP, CAD and AUD, and little changed against both the USD and EUR. The NZD/USD pair had slipped to a low in the London morning of 0.7155 but recovered around a quarter of a cent immediately prior to the Fed. As the USD then softened against all the majors, so the Kiwi Dollar managed to regain 72 US cents and went on to a best level late in the New York afternoon around 0.7215.

Stats New Zealand released their always-fascinating annual migration figures earlier today. New Zealand saw a net gain of 68,900 migrants in the year ended February 2018, with 131,000 migrant arrivals and 62,000 migrant departures. This is the first time since May 2016 that annual net migration has been below 69,000. Annual net migration reached a record high of 72,400 in the July 2017 year, but has continued to slow since then. The lower annual net migration was mainly caused by an increase in non-New Zealand citizen migrant departures. There were 29,100 departures of non-New Zealanders in the February 2018 year, up 1.5 percent from the January 2018 year and up 22 percent from the February 2017 year. All migrant departures to Asia increased by 31 percent in the February 2018 year to 11,700. Nearly two-thirds of migrant departures to Asia were to China, India, Japan, and the Republic of Korea. In the year to February 2018, more New Zealand citizens left the country than returned, with a net loss of 800 people.

Acting RBNZ Governor Grant Spencer holds his last Board meeting this Thursday. 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. The New Zealand Dollar opens in Asia this morning at USD0.7215 and AUD/NZD1.0740.

The GBP has certainly had a spring in its step over the last 10 days. Although on Tuesday GBP/USD couldn’t maintain its hold on a 1.40 handle, yesterday it traded as high as 1.4075 ahead of the FOMC and was up against four of the five other currencies we track closely here. The exception was the Canadian Dollar, with GBP/CAD down more than half a cent to 1.8245. Once the Fed Statement was released and the USD sold off despite a somewhat higher forecast profile for official interest rates in 2019, GBP/USD extended its gains to 1.4125 though slipped back against the Aussie Dollar to be almost three quarters of a cent down from its earlier high near 1.8310.

There was arguably something for everyone in this morning’s UK labour market report, though on balance the message was definitely a positive one. Unemployment rose by 24,000 in the three months to January to 1.45 million yet there were 32.25 million people in work, 168,000 more than for the previous 3-month period and 402,000 more than for a year earlier. The Office for National Statistics noted the employment rate (the proportion of people aged from 16 to 64 who were in work) was 75.3%; higher than for a year earlier (74.6%) and the joint highest since comparable records began in 1971. The unemployment rate, meantime, was 4.3%, down from 4.7% a year earlier and the joint lowest since 1975.

We wrote in our UK commentary yesterday morning that, “In its February inflation report, the Bank of England suggested that a 4.4% unemployment rate would begin to put upward pressure on wages. If this happens today, then the GBP might well find some more support.” The good news is that this is exactly what transpired. The new figures show that average weekly earnings for employees in Great Britain in nominal terms (that is, not adjusted for price inflation) increased by 2.6% excluding bonuses, and by 2.8% including bonuses, compared with a year earlier. The squeeze on real earnings hasn’t officially ended as today’s numbers were for January whilst the CPI data are for February. But, if the wage data are repeated next month, then the 12-month run of negative earnings growth will finally come to an end; a relief not just for workers, but also for the UK Government and the Bank of England whose forecasts of a return to real pay growth have lately been consistently too optimistic. The GBP opens in Asia this morning at USD1.4125, GBP/AUD1.8220 and GBP/NZD1.9570.

A heavy fall of Spring snow in New York on Wednesday reminds us of when US Treasury Secretary Steven Mnuchin ventured to the Davos snow in late-January and knocked the US Dollar index down from 90.10 to 88.25. It hasn’t quite regained all those losses but by Tuesday’s close, the USD index was back on a 90 ‘figure’ for the first time in almost 3 weeks. Wednesday saw the USD slip around a quarter of a point to 89.75 before the Fed announcement and then extend its losses by a further half-point late in to the New York afternoon despite a somewhat higher forecast profile for official interest rates in 2019.

A very uncontroversial FOMC Statement noted, “the labor market has continued to strengthen and economic activity has been rising at a moderate rate. Job gains have been strong in recent months, and the unemployment rate has stayed low. Recent data suggest that growth rates of household spending and business fixed investment have moderated from their strong fourth-quarter readings. On a 12-month basis, both overall inflation and inflation for items other than food and energy have continued to run below 2 percent. Market-based measures of inflation compensation have increased in recent months but remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.”

There had been some speculation ahead of the FOMC meeting that the Fed would signal a total of four rate hikes in 2018 rather than the three which had previously been forecast. It didn’t do that (which may explain some of the subsequent USD weakness) but it did raise its median estimate for 2019 by 25 basis points. Looked at another way, it was previously penciling-in seven more rate hikes until the end of 2020 but has now added an extra one, with two more to come in 2018, three more in 2018 and another two in 2020. Quite why this should have been taken as a trigger to aggressively sell the USD is something of a mystery but we’d always caution against reading too much into immediate post-FOMC moves which are often prone to re-appraisal and reversal. The USD index opens in Asia this morning at 89.25.

The euro continues its rather lacklustre performance and though on Wednesday it rallied off the Asian lows from USD1.2245, it couldn’t get back on to a 1.23 ‘big figure’ before the Fed announcement; reaching a high of 1.2295 in the European afternoon before then falling around a quarter of a cent immediately pre-FOMC. It fell against the CAD, AUD and GBP, was unchanged against the NZD and rose against the USD. After the Fed Statement and Press Conference, the EUR rallied in line with all the other non-USD currencies, reaching almost 1.2330 by the New York close.

The German Council of Economic Experts (GCEE) slightly revised upwards its growth forecast for 2018. The GCEE now expects real gross domestic product (GDP) to grow by 2.3 % in 2018 and 1.8 % in 2019. The main reason for the upward revision is the renewed improvement of the international economic environment. Its new report says, “After the strong growth of recent years, Germany is experiencing an economic boom. In this situation, the continuing expansionary monetary policy of the ECB contributes to the rise in the degree of overutilisation. Even more expansionary impulses will follow if CDU, CSU, and SPD implement the fiscal measures stated in their coalition agreement”. The GCEE has revised upwards its forecast for GDP growth in the euro area to 2.3% in 2018. It expects a growth rate of 1.9 % next year. Despite the upward revisions, the experts warned that, “Positive growth prospects should not obscure the fact that risks to the economic development have risen in recent times. Next to the election result in Italy and uncertainties about the outcome of the Brexit negotiations, the US announcement to increase customs tariffs on steel and aluminum weighs most heavily. A spiral of protectionist measures would have negative consequences both for the world economy and for the German economy.”

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 ZEW and ifo surveys but if the ifo repeats the downbeat message from investors on Tuesday, the EUR is likely to remain under some near-term pressure. Before then, however, there is all the news from the Fed to digest, whilst tomorrow morning brings the ‘flash estimates’ of the PMI Surveys in France, Germany and the Eurozone. The EUR opens in Asia this morning at USD1.2330, AUD/EUR0.6300 and NZD/EUR0.5860.

The Canadian Dollar topped our one-day performance table for a second consecutive day on Wednesday. Prior to the FOMC Statement, USD/CAD was already back below 1.30 for the first time since last Thursday with a one percent daily drop whilst EUR/CAD and NZD/CAD were both down six-tenths and AUD/CAD was three-tenths lower at 1.0020. Post-Fed, USD/CAD extended its losses and was down almost 1 ¼ percent on the day and threatening to move on to a 1.28 ‘big figure’.

Prime Minister Justin Trudeau reiterated his belief there will be agreement on a renewed North American free trade deal between Canada, Mexico and the United States. Trudeau didn't offer any timeline when questioned about the negotiations on Wednesday, only saying he believed a deal is eminently possible. “We are there working very, very hard and moving forward on trying to get a good deal. We know that there is a good deal eminently possible for Canada, for the U.S. and for Mexican citizen and workers.” According to Bloomberg, there are indications the U.S. is willing to budge on one of its core demands as President Donald Trump pushes to get a deal ahead of looming Mexican elections. One person familiar with the talks, speaking on condition of anonymity, said the Americans are showing flexibility on a demand for a 50 percent, U.S.-specific content requirement, but it hasn’t been formally withdrawn.

Canada’s ambassador to Washington, David MacNaughton, told reporters the U.S. has made suggestions on auto rules that “were actually quite creative” and, if taken “to their logical conclusion,” would eliminate the need for the 50 percent requirement. The Globe and Mail newspaper, citing unidentified sources, reported the U.S. had altogether dropped its demand for 50 percent U.S. content in vehicles. Away from the twists and turns of NAFTA, Bank of Canada Senior Deputy Governor Carolyn Wilkins will deliver a speech today, while domestic inflation data for February is due on Friday. The Canadian Dollar opens in Asia this morning at USD/CAD1.2905, AUD/CAD1.0030 and NZD/CAD0.9330.