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Stunning US stock market rally drags AUD/USD back up to US 77 cents

By Nick Parsons

Wednesday saw very different price action across the three major time ones for the Australian Dollar. In the Asia session, AUD/USD was supported by some slightly better than expected economic numbers, rising from 0.7680 all the way up to 0.7715. Just before the opening of European markets came the announcement that China was retaliating to US tariffs with new measures of its own targeting US exports of soybeans, planes, cars and chemicals. As stock markets plunged, AUD/USD lost almost exactly half a cent to 0.7665. During the US morning, as various Fed and Administration officials hit the TV studios and newswires, the DJIA regained 800 of the 550 points it had earlier lost (!!) and AUD/USD rallied back up to close at its highs around 0.7715

Incoming Australian economic data yesterday were a touch stronger than had been expected. Retail sales rose 0.6% during the month of February after an upwardly-revised +0.2% gain in January. Household Goods and Clothing & Footwear both rose 1.1% in the month, Cafes, Restaurants and Takeaway Food rose 0.7%, while Food Retailing and the catch-all Other Retailing rose 0.3% and 0.2% in the month. A strong increase in the number of people in employment over the last year will have helped boost spending levels though what matters more for the RBA is growth in wages and prices rather than employment and output.

In separate data, building permits fell by 6.2% to 18,700 in February though much of the decline came in the highly volatile apartment sector where permits were down more than 16% over the month following a more than 40% surge in January. In more stable trend terms that smooth out the monthly volatility, apartment approvals have been heading lower for the past five months. The value of all building approved in February rose 4.3%, with a surge in non-residential building (+22.6%) more than outweighing the decline in value of residential construction (-4.3%). The Aussie Dollar opens in Asia this morning at USD0.7715, with AUD/NZD at 1.0560 and GBP/AUD1.8240.

Normal service was resumed in the New Zealand Dollar on Wednesday. It seems that almost every day this most volatile of the major currencies is either top or bottom of our one-day performance table. Yesterday it was in top spot, falling less than the Aussie Dollar in the equity-driven sell-off and almost keeping up with it during the astonishing subsequent rally. NZD/USD rallied from 0.7260 to 0.7310 which at one point pushed the AUD/NZD cross down to a 9-month low of 1.0530 before the pair rallied around a quarter of a cent later in the New York day.

Figures out on Wednesday showed New Zealand consumer confidence lifted slightly in March, continuing to recover from last year's weakness as house price growth expectations rose. The ANZ Roy Morgan consumer confidence index rose to 128 in March from 127.7 in February. The current conditions index rose 0.4 points to 127.7 while the future conditions index gained 0.2 points to 128.2. The analysts at ANZ noted, "Consumer confidence remains high. And why not? Jobs are plentiful, there’s talk of higher wages, and the Auckland housing market has found a floor… The strong labour market is supporting household incomes and various government policies are intended to provide a further boost, while at the same time strong commodity prices are boosting exporter incomes. With household debt already at a record high as a proportion of incomes, a steady-as-she-goes housing market is just the ticket.”

There are no numbers scheduled for release by the officials at Statistics New Zealand this week, though today we get to see the QV house price data and ANZ job advertisements. The New Zealand Dollar opens in Asia this morning at USD0.7310 and AUD/NZD1.0560.

The British Pound had a very mixed and choppy day on Wednesday, finishing in the middle of the FX pack. GBP/USD reached a high of 1.4095 in Asia but then a combination of yet more poor UK economic data and a plunging US stock market sent the pair down to 1.4020 before a 60 pip rally as equity markets recovered all – and more - of their earlier losses. The GBP finished the day net higher against the USD and CAD, little changed against the EUR and AUD but more than a cent lower against a buoyant NZD.

The IHS Markit/CIPS UK Construction PMI fell sharply from 51.4 in February to 47.0 in March, to register below the 50.0 no-change threshold for the first time in six months. Moreover, the latest reading signaled the fastest overall decline in construction output since July 2016. The detailed release noted, “The overall reduction in construction output was driven by the sharpest drop in civil engineering work for five years in March. Commercial activity also decreased during the latest survey period, with the rate of decline the most marked since September 2017. Housing bucked the wider trend for construction activity in March, although the latest upturn in residential building was only marginal. Construction companies indicated a decline in new business volumes during March, which continued the downward trend seen so far in 2018. The latest deterioration in new order books was the sharpest since July 2016. Survey respondents noted that subdued underlying demand and, in some cases, weather-related disruption had weighed on sales in March.”

We’ve been warning here about weather disruptions and the knock-on effect on retail sales and GDP. Commenting on its’ survey, CIPS said, “It’s a few years since the UK experienced such bad weather in March and it’s obvious that supply chains were woefully unprepared to deal with the disruption. So though March’s figures could be viewed as a temporary blip, without a strong pipeline of work, and strong risk strategies in place, the sector’s health remains in question as we’re still a long way off seeing it operate the way it has over the last year.”. The GBP opens in Asia this morning at USD1.4080, GBP/AUD1.8240 and GBP/NZD1.9265.

The US stock market is making Bitcoin look stable by comparison! After a 600-point plunge on Monday, the Dow Jones Industrial Average rose 400 points on Tuesday. Yesterday morning, it fell 600 points once again but then rallied almost 800 points off its earlier lows to end the day up more than 200 points. Throughout this period of extreme volatility, the US Dollar index against a basket of major currencies has remained remarkably steady; moving only within a half-point range from 89.40 to 89.90 and last night closed almost exactly at the mid-point of this band. e

China’s Ministry of Commerce yesterday forcefully condemned the US announcement of widespread tariffs on its export industries. “Disregarding strong representations by China, the United States announced the tariff proposals that are completely unfounded, a typical unilateralist and protectionist practice that China strongly condemns and firmly opposes,” the Ministry said in a statement overnight. “We have the confidence and ability to respond to any US trade protectionist measures… As the Chinese saying goes, it is only polite to reciprocate.” Within hours, China had announced 25% tariffs on 106 US products, most prominent of which were soybeans, aircraft, cars and chemicals. As the US stock market dived – dragging all global equity indices lower in its wake – the Presidents new economic advisor, Larry Kudlow, duly popped up on 24-hour financial TV. Speaking on CNBC he said, "Don't overreact, we'll see how this works out... At the end of this whole process, the end of the rainbow, there's a pot of gold." Asked on Fox News if there is a trade war, he replied, “Absolutely not. Absolutely not. And let me just say right at the top, number one, blame China, not President Trump.”

Away from trade, there was plenty of incoming US economic data too. The ADP Survey of private sector payrolls showed an increase of 241k on the month whilst factory orders rose 1.2%. The ISM non-manufacturing index printed at 58.8, which was 0.7 percentage point lower than the February reading of 59.5. The Business Activity Index decreased to 60.6, 2.2 percentage points lower than the February reading of 62.8, reflecting growth for the 104th consecutive month, at a slower rate in March. The New Orders Index registered 59.5, 5.3 percentage points lower than the reading of 64.8 in February. The Employment Index, meantime increased 1.6 percentage points in March to 56.6 from the February reading of 55.0. The USD index opens in Asia this morning at 89.65.

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The Single European Currency had mixed day on Wednesday, up against the USD, CAD and GBP, little changed against the AUD but down against the NZD. In early European trade as stock markets tanked, EUR/USD fell to test Tuesday’s low just below 1.2260 but then rallied as stocks recovered, even though it was ultimately unable to hold on to a 1.23 ‘big figure’.

In economic news, headline annual inflation in the Eurozone rose to 1.4% in March from a downwardly-revised 1.1% in February, in line with the consensus. The core rate was unchanged at 1.0%, below the consensus, 1.1%. Looking at the main components of euro area inflation in this ‘flash estimate’, food, alcohol & tobacco is expected to have the highest annual rate in March (2.2%, compared with 1.0% in February), followed by energy (2.0%, compared with 2.1% in February), services (1.5%, compared with 1.3% in February) and non-energy industrial goods (0.2%, compared with 0.6% in February).

Separate figures from Eurostat showed the Eurozone unemployment rate was 8.5% in February 2018, down from 8.6% in January 2018 and from 9.5% in February 2017. This is the lowest rate recorded in the euro area since December 2008. The broader EU28 unemployment rate was 7.1% in February 2018, down from 7.2% in January 2018 and from 8.0% in February 2017. This is the lowest rate recorded in the EU28 since September 2008. Among the Member States, the lowest unemployment rates in February 2018 were recorded in the Czech Republic (2.4%), Germany and Malta (both 3.5%) as well as Hungary (3.7% in January 2018). The highest unemployment rates were observed in Greece (20.8% in December 2017) and Spain (16.1%). The EUR opens in Asia today at USD1.2280, AUD/EUR0.6290 and NZD/EUR0.5955.

The Canadian Dollar had a very choppy but ultimately pretty good day on Wednesday. During the Asian session, USD/CAD moved down to 1.2775; its lowest level since February 28th, whilst GBP/CAD was below 1.80 for the first time in three weeks. As the China news on tariffs was announced, USD/CAD rallied more than half a cent to a high just above 1.2840 but then retraced all of these gains and more to finish around 1.2770.

Speaking to reporters at the White House’s north driveway, Larry Kudlow suggested Trump’s proposed steel and aluminum tariffs could be little more than a move to get China to the negotiating table over its trade practices. And he hinted a U.S.-Canada-Mexico trade deal could be near. “Everybody wants to solve this the best way they can… We don’t want to hurt businesses. We don’t want to hurt districts. We don’t want to hurt congressmen. And I think, at the end … of my mythical rainbow, they’re all going to come out ahead.” Calling Trump a “free-trader,” Kudlow said the President “wants to solve this with the least amount of pain… Here’s a key point: Both sides benefit by positive solutions that lower barriers and open markets. This is a growth action. … Sometimes the path to this kind of growth is a little rocky. That’s the way the world works.” On ongoing talks to negotiate the North American Free Trade Agreement, Kudlow said the three countries are “moving in the direction of a NAFTA deal… I think we’re going to see some very positive news on NAFTA, and maintaining NAFTA, and reforming NAFTA. And, heck, the stock market is going to love that.”

The next focus on data will be the Canadian employment report on Friday, published at the same time as the US jobs report. The Canadian Dollar opens in Asia this morning at USD/CAD1.2770, AUD/CAD0.9855 and NZD/CAD0.9335.