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AUD falls on a cocktail of negatives: stock markets, volatility, gold and interest rates.

By Nick Parsons

As a perfect cocktail for a lower Aussie Dollar, simply mix together higher US short rates, a fall in the gold price, 700 points off the Dow Jones Average and a two-point jump in the VIX. Sprinkle on some weaker local economic data and it makes quite a powerful punch. From a high in Sydney yesterday morning just above 0.7780, AUD/USD fell almost a full cent before lunchtime in New York and was down against every one of the major currencies we follow closely here. AUD/EUR was down around five-tenths of a percent whilst AUD/CAD, AUD/USD and AUD/NZD were all almost seven-tenths lower.

Employment in Australia rose 17,500 in February, slightly below consensus expectations for a 20,000 increase but still the 17th consecutive monthly gain. Full-time jobs rose 64.9k whilst part-time fell -47.4k but this split merely reverses the equally volatile movements seen in January and isn’t really telling us much about underlying conditions. The Australian working-age population has grown around 27k per month over the past year and a greater percentage of them are available for work. The so-called ‘participation rate’ has risen from around 64.5% to 65.7% over the past 12 months. Putting these two factors together, employment needs to grow almost 30k a month to keep the unemployment rate steady. It clearly didn’t do this in February so the jobless rate rose to 5.555% which was rounded up to show a one-tenth increase to 5.6%.

RBA Governor Phil Lowe continues to stress that progress towards what he sees as full-employment rate of 5% jobless will be “slow and gradual”. In February, it actually went very slightly into reverse. Unlike the UK or US, the official statisticians in Australia don’t produce wage numbers in the employment report so we don’t know what’s happening to earnings and whether employers are having to pay up to attract or retain staff as more people find jobs. With the unemployment rate ticking very slightly higher, though, there is certainly no rush to be raising rates. As CBA puts it, “Under-employment and under-utilization rates continue to trend lower but still indicate that spare capacity is available in the job market. We expect that the next move in rates will be up, but we can’t see a change happening until late 2018 at the earliest.” The Australian Dollar opens in Asia this morning at USD0.7710, with AUD/NZD at 1.0675 and GBP/AUD1.8305.

Having risen to almost 0.7240 after the FOMC announcement, NZD/USD went on to a best level in Europe yesterday morning just under 0.7260. This was as good as it got, however and as the USD got a bit of a lift after the soft Eurozone PMI numbers, this developed in more broad-based dollar strength during the Northern Hemisphere day. NZD/USD fell to a low just below 0.7215 but this wasn’t specific Kiwi Dollar weakness. AUD/NZD actually fell around 70 pips whilst NZD/EUR and NZD/GBP both finished higher on the day.

As expected, the RBNZ left the Official Cash Rate (OCR) unchanged at 1.75 percent. Its Statement noted, “The outlook for global growth continues to gradually improve. While global inflation remains subdued, there are some signs of emerging pressures. Commodity prices have continued to increase and agricultural prices are picking up. Equity markets have been strong, although volatility has increased. Monetary policy remains easy in the advanced economies but is gradually becoming less stimulatory. GDP was weaker than expected in the fourth quarter, mainly due to weather effects on agricultural production. Growth is expected to strengthen, supported by accommodative monetary policy, a high terms of trade, government spending and population growth. Labour market conditions are projected to tighten further… CPI inflation is expected to weaken further in the near term due to softness in food and energy prices and adjustments to government charges. Tradables inflation is projected to remain subdued through the forecast period. Non-tradables inflation is moderate but is expected to increase in line with a rise in capacity pressure. Over the medium term, CPI inflation is forecast to trend upwards towards the midpoint of the target range. Longer-term inflation expectations are well anchored at 2 percent.”

The RBNZ Statement concluded with the line that, “Monetary policy will remain accommodative for a considerable period. Numerous uncertainties remain and policy may need to adjust accordingly” and it was interesting that it made no reference at all to the exchange rate for the first time since 2012. The analysts at Westpac commented, “The RBNZ still expects that the economy will accelerate this year, eventually pulling inflation slowly up towards two percent. We doubt very much that the economy will accelerate as the RBNZ expects, but our expectation of exchange rate depreciation leaves us with an inflation outlook that is similar to the RBNZ’s. The main point is that both we and the RBNZ are much more dovish than financial market pricing, and comfortably so.” The New Zealand Dollar opens in Asia this morning at USD0.7225 and AUD/NZD1.0670.

The GBP has had a pretty volatile 24 hours. 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 moved up to 1.4150. Yesterday morning in Europe, the pound traded up to a near 3-week high of 1.4175 immediately before the retail sales data were published and then reached an intra-day high just under 1.42 as the results of the Bank of England MPC meeting were announced. Anyone unlucky enough to have bought GBP/USD on this spike upwards lost more than a cent in just a few hours and by the end of the day in London, GBP/USD stood at 1.4110.

Figures from the Office for National Statistics showed retail sales increased by 0.8% in February when compared with the previous month, with increases seen across all main sectors except non-food stores. February’s rise follows two monthly declines in December and January, resulting in an overall decrease of 0.4% in the past three months. The Press Release accompanying the data was pretty downbeat with the statisticians noting, “the underlying three-month picture is one of falling sales, mainly due to strong declines across all main sectors in December… Store prices continue to rise across all store types, but at a lower rate than the previous month due to a slowdown in price growth, though clothing and household goods stores continued to see stronger price rises.” Looking forward, we’d point out that the official numbers covered the 4-week period up to February 24th; before the very bad weather which paralysed much of the UK the following week. This means the March data will likely show a big drop in retail sales and the three months Jan-March which comprise Q1 might see total sales fall by around half a percentage point.

As for the Bank of England MPC meeting, the 7-2 split with two members voting for an immediate rate hike is the same tactic employed in September last year to prepare the market for a rate hike in December. We are, however, probably reaching the limits of how many times the GBP can react to the same signal. It did so at the Press Conference for the February Quarterly Inflation Report. It did so again at the Governors House of Commons testimony and it very briefly did so again yesterday. It’s fair to say that a rate hike is now already fully discounted, as indeed is a Brexit transition agreement. The risks, if anything, are perhaps now skewed to the downside: what if CPI falls further or GDP disappoints, or a political rebellion gathers momentum? The GBP opens in Asia this morning at USD1.4110, GBP/AUD1.8300 and GBP/NZD1.9535.

On the basis that no-one will do it for us, sometimes we need to blow our own trumpet! In this commentary 24 hours ago, we wrote, “Quite why [a higher US rate profile] 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.” By the close of business on Wednesday, the USD was at the bottom of our one-day performance table. Yesterday morning in Europe, the US Dollar briefly traded down to a low of 89.00 but by the New York afternoon it had regained almost all its post-FOMC losses and was up against every currency except the Canadian Dollar to leave its index at 89.40.

The US stock market took fright at the prospect of higher tariffs on Chinese exports which were announced at 1.30pm local time in Washington and by the close of business, the DJIA was down 700 points. In a Memorandum the President has directed his Administration “to take a range of actions responding to China’s acts, policies, and practices involving the unfair and harmful acquisition of U.S. technology.” According to a Reuters report, “Trump will target the Chinese imports only after a consultation period, a measure that will give industry lobbyists and legislators a chance to water down a proposed target list which runs to 1,300 products. China will also have space to respond to Trump’s actions, reducing the risk of immediate dramatic retaliation from Beijing, and Trump struck an emollient tone as he started speaking, saying “I view them as a friend.” The United States runs a $375 billion goods trade deficit with China.

As for next steps, the U.S. Trade Representative’s office will present a list of products that could be targeted, primarily from the high-tech sector. There will then be a 60-day consultation period before definitive action will be put into force. The tariffs and investment restrictions will be imposed under the U.S. Trade Representative’s “Section 301” investigation into alleged misappropriation of U.S. intellectual property by China. With only durable goods orders to look forward to on Friday’s US economic calendar, the USD index opens in Asia this morning at 89.40.

The euro had another disappointing day on Thursday. After the Fed Statement and Press Conference, the Single Currency rallied in line with all the other non-USD currencies, reaching almost 1.2350 by the New York close on Wednesday. After a jump to 1.2385 early in the European morning on Thursday, however, it subsequently lost more than three-quarters of a cent on softer than expected economic data.

According to the ‘flash estimate’ which is derived from around 85% of survey respondents, the Eurozone composite PMI fell to 55.3 in March, down from 57.1 in February. This was the lowest since January of last year and signaled a second successive monthly easing in the rate of expansion. Output growth moderated in both manufacturing and services, the latter seeing business activity grow at the slowest rate for five months while factory output increased at the weakest pace since January 2017. Both sectors also saw new order inflows wane, with goods export orders showing the smallest rise since November 2016. Measured overall, inflows of new orders showed the smallest monthly increase seen over the past 14 months.

Commenting on the data, Markit said, “While the first quarter average PMI reading remains relatively robust, indicative of GDP rising by 0.7-0.8%, the loss of momentum since the buoyant start to the year has been quite dramatic… The fact that export order book growth has more than halved since the end of last year suggests the stronger euro is taking an increasing toll on export performance. Survey responses also highlighted how political uncertainty also appears to have intensified, dampening demand. The data therefore suggest that eurozone growth peaked around the turn of the year and the region is settling into a slower, but still robust pace of expansion. Price pressures have meanwhile also eased slightly, in part linked to cheaper imports arising from the euro’s recent strength, but remain elevated.” The EUR opens in Asia this morning at USD1.2315, AUD/EUR0.6260 and NZD/EUR0.5865.

The Canadian Dollar topped our one-day performance table for a second consecutive day on Wednesday and yesterday came very close to making it three from three. During the European morning, USD/CAD dropped to a low around 1.2835 – its lowest level in more than a week – before clawing its way back on to 1.29 late in the New York afternoon. GBP/CAD fell two-tenths whilst AUD/CAD fell six-tenths of a point to 0.9955; its lowest level in almost three weeks.

During testimony to the Senate Finance Committee, US Trade Representative Robert Lighthizer confirmed a list of countries which will be exempt from tariffs on steel and aluminium: Canada, Mexico, EU, Brazil, Australia, Argentina and South Korea. Lighthizer told senators that Trump agreed, “based on a certain set of criteria, there are some countries with whom we're negotiating and the question becomes the obvious one that you think, as a matter of business, how does this work? So what he has decided to do is to pause the imposition of the tariffs with respect to those countries." The global impact of the steel and aluminium tariffs is now only 30% of the original announcement. The exemptions for Canada were already known so the direct impact was minimal but, to the extent that it might indicate a willingness on the part of President Trump to continue to negotiate and do deals, there was a mild sense of relief for the Canadian Dollar.

In her speech at the University of Toronto’s Rotman School of Management, Bank of Canada Senior Deputy Governor Carolyn Wilkins said that while much has been accomplished to make the financial system more resilient, the job is not done. “We have accomplished much over the past decade, and we are now reaping the benefits… They might not be durable, though, unless we focus on some unfinished business: refining our understanding of the role of monetary policy in supporting financial stability, keeping regulatory and supervisory policies current as risks evolve, and planning for recovery and resolution when things go wrong.” As for the immediate pressures on monetary policy, we may get more of a clue later today when CPI inflation data for February is published. Consensus expectations are for annual CPI to rise from 1.7% to 2.0%. The Canadian Dollar opens in Asia this morning at USD/CAD1.2920, AUD/CAD0.9960 and NZD/CAD0.9330.