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Aussie Dollar was the worst performer on Tuesday. AUD/NZD at a fresh 8-month low

By Nick Parsons

Foreign exchange can be a very frustrating asset class. Despite a strong correlation between US stocks and the AUD/USD exchange rate throughout Monday, the relationship completely broke down yesterday. The high around 0.7755 came at lunchtime in Sydney and from that point onwards it was steadily lower for the pair, even as the futures market signaled another triple-digit gain for the Dow Jones Industrial Average before a late plunge into the close. The Aussie Dollar fell on every one of its crosses and was the worst performer of all the major currencies we follow here. AUD/NZD is back on a 1.05 handle whilst AUD/CAD threatened is at 98 cents for the first time in almost six weeks.

Amidst all the various impacts on the Australian Dollar, the analysts over at Bank of America Merrill Lynch reckon the outlook for industrial metals prices is the major reason to be bearish. “The deceleration in iron ore shipment growth warrants caution against buying AUD until the data distortions dissipate. Moreover, a stronger USD, firmly neutral RBA and rising trade tensions at a global level are unlikely to present a constructive backdrop for the currency.” They say, “It is clear the downtrend in iron ore shipments began well before the Lunar New Year distortions, coinciding with the broader slowdown in fixed-asset investment. The smoothed growth rate (3m% y/y) of iron ore shipments in value terms is now at its weakest since February 2016, falling 23.7% y/y. This is partly related to high inventory at Chinese ports, but at least partly symptomatic of a weaker demand trend [which] bodes poorly for Australia's exports to China.”

As for incoming economic data, the weekly consumer confidence numbers were no help to the AUD with the headline index slipping 0.9% last week following a 2.2% bounce previously. Views towards current economic conditions deteriorated sharply by 6.8% to 101.9, its lowest value in 18 weeks. Future economic conditions were also hit, falling 3.6% to 108.7, a five-week low. The team at ANZ who produce the data noted, “Last week’s back-and-forth on import tariffs between the US and China roiled global and domestic equity markets, fuelling fears of retaliatory measures by governments worldwide. This is likely responsible for the sharp deterioration in households’ views around the economic outlook. Additionally, the unexpected tick up in the unemployment and underemployment rate in February may also have impacted. Stepping away from the week-to-week volatility, views around economic conditions (four-week average) have fallen by about a third from their February peak. However, they remain above their long-term average and consistent with our expectations of solid economic growth in 2018.” The Aussie Dollar opens in Asia this morning at USD0.7685, with AUD/NZD at 1.0575 and GBP/AUD1.8415.

After Monday’s decent rally, the New Zealand Dollar couldn’t quite keep up the same run rate, rising against the AUD and GBP, unchanged against the EUR but down against the USD and CAD. Just as with its Aussie cousin, the Kiwi Dollar peaked against the USD around lunchtime locally in Asia but spent barely half an hour on a 73 cents ‘big figure’. The steady decline afterwards was a bit less marked than for AUD/USD (which is why the AUD/NZD cross fell) and it extended less than half a cent to a low around 0.7260 into the New York close.

Amidst all the understandable focus on the changes at the RBNZ, we still have the regular incoming economic data. Statistics New Zealand reported that the monthly trade balance in February 2018 was a surplus of $217 million but had a fascinating explanation for the lowest monthly value of imported cars since March 2013. “The delay in final unloading of four vehicle carriers at New Zealand ports had an impact on the total value of vehicle imports in February. The discovery of stink bugs on these vessels meant that around 8,000 cars could not enter New Zealand as scheduled. The goods on these vehicle carriers would normally have been included in February’s import statistics, but will now be included in the statistics of the month when the respective shipments are unloaded.” Make sure you give your new car a very thorough pre-delivery inspection!

This morning we’ll get to see the ANZ business confidence numbers and on Thursday before the Easter weekend starts, we’ll have both the building consents and private sector credit data. Confidence has been picking up gradually after the Election-shock and it would certainly be a positive for investor sentiment if it could unwind all the subsequent drop. The New Zealand Dollar opens in Asia this morning at USD0.7265 and AUD/NZD1.0575.

After its decent start to the week on Monday, the British Pound spent nearly all of Tuesday firmly at the bottom of our one-day performance table and it wasn’t until the New York afternoon that it managed finally to climb above the Australian Dollar. There was no single specific catalyst for the downward pressure on GBP but there’s always talk as we approach quarter-end of significant selling interest in GBP/EUR from an official European institution which may well cop some of the blame this time around too. Even if it’s not true, it’s a way for institutional foreign exchange salespeople to feign knowledge and pass on ‘insight’ to their clients.

After the soft mortgage approvals on Monday night, yesterday brought news on UK house prices. Hometrack reports price growth in London has hit a seven-year low with prices falling in almost half of all London postcodes, while the market in cities further north is “powering ahead”. The average price of a home in London is £487,900. Edinburgh is enjoying the fastest growth at 8 per cent in the year to February to £277,300. This is followed by 7.8 per cent in Liverpool to £115,700 and 7.7 per cent in Birmingham to £155,600.

An interim report commissioned by the British government from the Migration Advisory Council warned that firms were not prepared for a tightening labour market. The review - commissioned by Home Secretary Amber Rudd - took views from more than 400 businesses, industry bodies, government departments and other organisations. UK employers see EU workers as "more reliable" and eager than their British counterparts and the MAC said businesses are concerned about their ability to recruit workers from the EU after Britain leaves the European Union. “Lower migration would very likely lead to lower growth in total employment, and lower output growth.” The GBP opens in Asia this morning at USD1.4155, GBP/AUD1.8425 and GBP/NZD1.9495.

After its bad start to the week, falling against every one of the major currencies we follow closely here on Monday, yesterday was a much better day for the US Dollar which went from bottom to top spot. Its net gains didn’t quite make up all of Monday’s losses even though at one point early in the European afternoon its index against a basket of major currencies had risen to 89.15 compared to its opening level in Asia on Monday morning of 89.00. By the end of the day, the USD index had slipped a quarter of a point from its intra-day high to 88.90.

Federal Reserve Bank of Cleveland President Loretta Mester gave a very thorough speech on monetary policy at Princeton University. She began by noting, “This year is shaping up to be another good year for the economy, and the task before monetary policymakers is to calibrate policy to this healthy economy so that the expansion is sustained. Given the economy’s strength, we don’t want to get behind the curve, but we also don’t want to overreact to the positive outlook and potentially curtail the expansion. This takes some careful balancing, and in my view, last week’s decision on rates reflects this type of balanced approach to achieving and maintaining our policy goals”. Formerly thought of as one of the ‘doves’ on monetary policy, Ms Mester has subsequently moved towards a more centrist position.

On the very topical issue of trade policy, Ms Mester said, “for the first time in many years, economic activity around the world is picking up and forecasts for global growth are being revised up. This should have a positive feedback effect on the U.S. economy via exports. However, the tariffs on steel and aluminum imports and the recent announcement of planned tariffs on certain goods imported from China, as well as the ongoing renegotiations of the North American Free Trade Agreement (NAFTA), add uncertainty to the trade picture. This uncertainty may not be resolved quickly. Assessing the impact on the U.S. macroeconomy will ultimately depend on how other countries react, including whether they impose their own tariffs or other trade barriers in response. I am monitoring trade developments, and while I see them as a risk to the forecast, at this point they have not led me to change my outlook for the overall economy.” The USD index opens in Asia this morning at 88.90.

During Tuesday’s Asian session, the euro initially followed AUD and NZD higher and then extended gains early into the European morning, reaching a best level just above 1.2470. By lunchtime, however, it had fallen almost a full cent from its earlier high after yet another weaker than expected piece of incoming economic data. By the end of the day, the EUR was up against the GBP and AUD, little changed against the NZD but lower against both the USD and CAD.

Figures released by the European Commission showed the Economic Sentiment Indicator (ESI) decreased markedly in both the euro area (by 1.6 points to 112.6) and the EU (by 1.9 points to 112.5) This was the third consecutive drop for both measures. The deterioration of euro-area sentiment resulted from drops in industry, services and retail trade. Confidence among consumers remained unchanged, while it increased among construction managers. The ESI weakened in all the five largest euro-area economies; significantly so in Germany (-2.4), Italy (-1.8) and Spain (-1.2) and, less so, in the Netherlands (-0.5) and France (-0.4).

There’s a clear public split becoming visible on the ECB. Speaking at the Austrian Central Bank on Monday, Bundesbank President and ECB Council member Jens Weidmann had said, “The markets see a first rate hike around the middle of the year 2019, which is probably not entirely unrealistic. However, the end of net purchases is only the beginning of a multi-year process of monetary normalization. That's why it's so important to actually start soon…”. Yesterday morning, however, Governing Council member Erkki Liikanen said that exiting from unprecedented stimulus can be more safely done once expectations for inflation exceed policy makers’ goal. “A gradual tightening of monetary policy will rest on a more solid basis when indications of inflation rates to potentially temporarily exceed 2 percent become more prominent in inflation expectations,” the Finnish central bank governor said. The EUR opens in Asia today at USD1.2405, AUD/EUR0.6195 and NZD/EUR0.5855.

Traders in the Canadian Dollar are struggling to get traction in either direction. On Tuesday, USD/CAD fell from an opening level around 1.2850 to a low just below 1.2820 at the start of the European day but just a few hours later it was up above 1.2890. This proved to be the high of the day, however, and after what was ultimately a pretty directionless North American session, it finished in the top half of the range at 1.2870.

In a move clearly aimed at keeping the NAFTA renegotiations on track, Canadian Prime Minister Justin Trudeau said earlier this month he was aware of concerns that countries facing US tariffs could try to ship supplies through Canada and pretend the metals had been produced in Canadian facilities. Under new measures unveiled by Trudeau’s office yesterday, the Canada Border Services Agency (CBSA) will gain new powers to stop companies that try to dodge duties. The CBSA will also have greater flexibility in determining whether prices charged in the exporter’s domestic market are reliable or distorted. “We will not allow North American industries to be hurt or threatened by unfair trade practices, like the diversion of steel and aluminum ... Canada will not be used as a backdoor into other North American markets,” Trudeau said in a statement. According to a separate statement issued by the Canadian Prime Minister’s office, Mr. Trudeau also spoke to President Donald Trump on Monday and “raised the strong measures Canada is taking to address unfair trade in steel and aluminum.”

The main economic data to be published this week come on Thursday when we have the monthly GDP data as well as industrial raw materials prices. RBC is predicting 1.9% annualized GDP growth for the first quarter of 2018, while TD is predicting an even smaller 1.4% rise. That’s in comparison to the 4% increase recorded in the first quarter of 2017. As for the January numbers (Canada is to be congratulated for being the only country in G7 to produce official monthly GDP statistics), the consensus is a rise of just 0.1% m/m. The Canadian Dollar opens in Asia this morning at USD/CAD1.2875, AUD/CAD0.9895 and NZD/CAD0.9355.