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AUD slipped on Thursday despite decent data and stock market rally as USD hits 5-week high

By Nick Parsons

The Aussie Dollar’s price action was a bit of a puzzle on Thursday as it slid lower against the US and Canadian Dollars despite some decent local economic data and a US stock market which was more than 1% higher by the end of the London afternoon and the NY close. From a one-week high in Asia of 0.7725, AUD/USD moved steadily lower throughout the day. It had broken down on to US 76 cents before the European open and hit a low just above 0.7675 during the New York morning. By the end of the day, it was up against the GBP, little changed against the EUR and NZD but down against USD and CAD.

Australia recorded another large trade surplus in February, continuing the solid run of results seen since late 2016. According to the Australian Bureau of Statistics a surplus of $825 million was reported in seasonally adjusted terms, topping forecasts for a smaller figure of $725 million. January’s trade surplus, originally reported at $1.055 billion, was revised down to show a surplus of $952 million. Over the month, exports rose very slightly to $34.23 billion whilst imports were $33.4bn. If the performance over the last two months continues into March, then external trade could make a positive contribution to Q1 GDP, having subtracted around 0.5% in Q4 2017.

In separate data, the Australian Performance of Services Index rose by 2.9 points to 56.9 in March. This was the highest monthly result in the PSI since December 2016 and marks thirteen months of positive results. All five of the activity sub-indexes expanded. Deliveries were robust over the month rising to 61.3 points, as were new orders at 59.0. Stocks (55.0) lifted over the month while Sales (55.0) also edged higher. Employment continued to grow rising one point to 54.9 in March, marking ten months of growing employment. The Aussie Dollar opens in Asia this morning at USD0.7675, with AUD/NZD at 1.0565 and GBP/AUD1.8230.

By its recent standards, the Kiwi Dollar had a pretty ordinary day on Thursday. As with its Aussie cousin, it fell against the USD and CAD, was little changed against the AUD and EUR but rose against a weaker GBP. NZD/USD peaked during the Asian time zone just above 0.7320 and by late morning in London it had lost almost half a cent. The pair very briefly rallied back up to US 73 cents but couldn’t hold it for more than a few minutes and fell back to a low of 0.7265. The AUD/NZD made a marginal fresh 9-month low just below 1.0530 but then rebounded around a quarter of a point during the New York afternoon.

The latest monthly QV House Price Index shows nationwide residential property values for March increased 7.3% over the past year which is the fastest rate since June 2017. Values rose 1.2% over the past three months. The nationwide average value is now $677,618. QV said that, “Residential property value growth remains subdued compared to recent years but March has seen the usual seasonal pick-up in sales volumes and activity. With restrictions on finance being eased by the retail banks it’s been a little easier for some investors and home buyers to gain finance to purchase. First home buyers appear to be capitalising on subdued investor activity and some are finding they can purchase more easily without the same level of competition from multiple property owners if they are not already priced out of the market.”

In separate figures, ANZ’s index of job advertisements increased 0.9% m/m in March, after falling 1.2% in February. The annual growth rate increased to 6.1%, but remains well below the strong rates seen during 2016. The ANZ analysts said, “We are not surprised to see job ads growing at a modest pace. It reflects the maturity of the economic cycle, with the labour market tight and skilled labour difficult to come by. The current pace of growth is consistent with our forecast for moderating employment growth.” The New Zealand Dollar opens in Asia this morning at USD0.7265 and AUD/NZD1.0570.

The British Pound had a poor day on Thursday, falling against every one of the major currencies we follow closely here. Losses ranged from -0.1% against the NZD and EUR to almost 0.6% against the US Dollar. GBP/USD had hit 1.4090 during the Asian session but was hit by poor UK economic data during the course of the London morning and a further wave of selling once the technical support level from last Friday’s low at 1.4015 was broken. By the end of the day it was below 1.40 for the first time in over 2 weeks with GBP/AUD testing a 2-week low around 1.82.

The IHS Markit/CIPS UK Services PMI dropped from 54.5 in February to 51.7 in March, to signal the weakest service sector performance since July 2016. Survey respondents noted that snow disruption and unusually bad weather conditions in March had been a key factor holding back business activity growth but there were also reports that heightened economic uncertainty continued to act as a brake on growth during the latest survey period. Markit said that, “Mirroring the trend for business activity, latest data revealed a slower upturn in new work received by service sector companies. The latest rise in new business volumes was the weakest seen for 20 months. In addition to bad weather, survey respondents often cited subdued consumer demand, while there were also some reports that Brexit-related uncertainty had led to delayed decision-making and risk aversion among clients.”

Commenting on what the PMI survey might mean for the Bank of England, CIPS said, “A strong rebound is nevertheless likely to be needed to ensure the majority of policymakers feel the economy is ready for another hike in interest rates. Encouragingly, in January 2010 and December 2010, the PMI fell sharply due to heavy snow but in both cases the decline was more than reversed in the following month. Some caution is warranted this year, however, as a drop in business expectations about the year ahead during March suggests the underlying trend remains one of weaker economic growth compared to that seen late last year.” The GBP opens in Asia this morning at USD1.3995, GBP/AUD1.8210 and GBP/NZD1.9270.

The US stock market continues to trade more like a cryptocurrency, with the Dow Jones Industrial Average up another 300 points at one point on Thursday to add to its 800-point rally off the lows on Wednesday. Unusually – certainly over the past couple of months - the higher equity market was accompanied by a higher US Dollar whose index against a basket of major currencies rose to a 5-week high of 90.15 as the EUR and GBP were both hit by softer economic data. By the end of the day, the USD just beat the CAD into top spot on our one-day performance table.

With all the focus on tariffs and trade over the past few weeks, Thursday brought a timely reminder of why President Trump is so agitated about the subject. The US trade deficit grew by 1.6% in February from $56.7bn to $57.6bn and was the highest monthly trade deficit in ten years, going back to the GFC in 2008. Exports of goods and services increased $3.5bn, or 1.7% , in February to $204.4bn. Exports of goods increased $3.0bn and exports of services increased $0.5bn. On the other side of the ledger, imports of goods and services increased slightly more in absolute dollar terms, by $4.4bn, or also 1.7% of total, in February to $262.0bn. Imports of goods increased $3.3bn and imports of services increased $1.1bn. When analysed by trading partner, the figures show surpluses, in billions of dollars, with South and Central America ($3.4), Hong Kong ($3.1), Brazil ($0.9), United Kingdom ($0.6), and Singapore ($0.5). Meanwhile, the countries with whom the US runs the largest trade deficit are China ($34.7), European Union ($15.3), Germany ($6.7), Mexico ($6.6), Japan ($6.0), Italy ($2.8), OPEC ($2.3), India ($1.9), Taiwan ($1.5), France ($1.4), South Korea ($1.1), Saudi Arabia ($0.4), and Canada ($0.4).

The President’s chief economic advisor did what he’s known best for and toured the TV studios to talk up the markets and produce some wildly optimistic US growth forecasts. He said on Fox Business that the US will get a trade deal with China "over a period of time" as the latest measures are "just proposals right now" and that barriers will come down on both sides. He also said that China's "unfair and illegal" actions that are "damaging to economic growth for the US, for China and for the rest of the world." Kudlow, who said the focus of his job is "growth", then added that the US economy might expand between 3% and 4% this year and that 5% growth is possible, but likely won't be sustained for long.” As far as Q1 is concerned, that’s not quite how things are shaping up. After the news on the trade deficit, the Atlanta Fed yesterday revised down is GDP forecast from 2.8% to 2.3%. Ahead of the March labour report later today, the USD index opens in Asia this morning at 90.05.

The euro had a poor day on Wednesday, up against a very weak GBP, little changed against the AUD and NZD, but down against the US and Canadian Dollars. EUR/USD had printed just under 1.2290 in Asia but this proved to be the high of the day. It was knocked down around a quarter of a cent in the European morning by weak economic data and after a very feeble rally then fell another half a cent to 1.2225; its weakest in more than a month. AUD/EUR was little changed around 0.6275 with NZD/EUR also steady around 0.5940.

Eurozone economic activity expand at the weakest pace since the start of 2017 in March, as rates of increase moderated in both the manufacturing and service sectors. The final Markit PMI Composite Index posted 55.2, down from 57.1 in February and below the earlier flash estimate of 55.3. The headline index has nonetheless signaled expansion in each of the past 57 months. Manufacturing production rose to the lowest extent since November 2016, whereas service sector business activity increased at the weakest pace since August last year. Markit noted that, “National PMI data indicated that the upturn remained broad-based in nature, with output expanding in all of the countries covered. However, signs of a growth slowdown were also widespread, with the ‘big-four’ nations and Ireland all seeing moderations during the latest survey month. March saw the level of incoming new business rise at the weakest pace for 14 months, with slower increases signaled in Germany, France, Italy and Ireland. The pace of expansion held steady in Spain. Growth in new orders remained sufficient to test capacity, however, as indicated by a further solid increase in backlogs of work.”

As for signs of progress towards the ECB’s inflation target, the survey noted, “Price pressures moderated in March, with rates of increase in output charges and input costs both slowing. That said, almost all of the nations reported higher input and output prices during the month, the sole exception being a slight decrease in output charges at Italian service providers… Output charge inflation eased to a three-month low, while costs increased at the slowest pace since last September.” The EUR opens in Asia today at USD1.2235, AUD/EUR0.6275 and NZD/EUR0.5940.

The Canadian Dollar had another good day on Thursday, not quite keeping up with the USD but gaining against every other major currency we follow closely here. USD/CAD edged marginally higher from 1.2765 to 1.2770 but on its crosses, GBP/CAD fell below 1.80 for the first time in 3 weeks whilst AUD/CAD fell towards 0.9800 and NZD/CAD fell back on to 92 cents.

Speaking in Quebec City, Canadian Prime Minister Justin Trudeau said NAFTA talks have picked up momentum. “We are in a moment where we are moving forward in a significant way, hopefully there will be some good news coming… Right now, we are having a very productive moment.” Trudeau said his officials are willing to meet as frequently as the U.S. wants to work toward getting a deal, though his country’s ambassador to Washington said on Wednesday there are “still lots of issues” to settle. U.S. Trade Representative Robert Lighthizer said last week he was hopeful they can soon reach a deal “in principle.”

Racking up the air miles, Mr Trudeau’s office announced will travel to Lima, Peru, Paris and London in an eight-day whirlwind trip later this month. He will be in Lima, April 12-14, Paris, April 15-17 and London, April 17-20 for the Commonwealth heads of government meeting. The theme of the Commonwealth summit is "Towards a Common Future" and the Prime Minister's Office says Trudeau plans to emphasize the need for action on climate change and ocean protection and the need to create economic growth that benefits everyone. The immediate focus for financial markets, however, is today’s Canadian employment report, published at the same time as the US jobs report. The Canadian Dollar opens in Asia this morning at USD/CAD1.2765, AUD/CAD0.9805 and NZD/CAD0.9280.