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AUD/USD little changed on Wednesday as lower global risk appetite offsets higher gold price

By Nick Parsons

Wednesday was a day of very tight ranges for the AUD/USD pair, with its entire high-low range across the three main time zones covered by just 30 pips and a close in New York almost exactly where it had opened in Asia. That said, the pattern was for a lower AUD in the first part of the day and a rally during the North American session which took the AUD to a high just above US0.7770; its best level in almost two weeks and a close around 0.7760.

In economic news, the Melbourne Institute and Westpac Bank survey of 1,200 people showed its index of consumer sentiment dipped 0.6 percent in April, from March when it rose 0.2 percent. Sluggish wage growth, rising living costs and high levels of household debt have been weighing on the consumer mood, offsetting broad-based strength in employment. The concerns showed in a sharp 5.8 percent drop in the survey's index of family finances over the next 12 months, which outweighed gains in all the other measures. The survey's barometer of economic conditions over the next 12 months edged up 0.6 percent and the outlook for the next five years bounced 2.9 percent.

Commenting on the data, Westpac said, “Sentiment continues to hold in slightly optimistic territory with April marking the fifth consecutive month the Index has been above the 100 level, indicating optimists outnumber pessimists. That is a more encouraging signal than we saw in most of 2017 when pessimists outnumbered optimists. However, the 10% rally we saw in the Index through the second half of 2017 has stalled. Indeed, since the beginning of the year the Index has fallen by around 2.5%. Certainly, at 102.4 the Index is still well below the strong 105–115 levels typically associated with a robust consumer. The Reserve Bank Board next meets on May 1. There is little chance of a move by the Board at this meeting. Indeed, markets which six months ago were fully priced for a rate hike by August 2018 are now not priced for a move until mid- 2019. Westpac continues to expect the cash rate will remain on hold through 2018 and 2019.” The Aussie Dollar opens in Asia this morning at USD0.7760, with AUD/NZD at 1.0545 and GBP/AUD1.8270.

Price action in the New Zealand Dollar across the three major time zones on Wednesday was identical to that of its Aussie cousin: down against the USD in the first part of the day and a recovery during the New York session, all contained within a relatively narrow 30 pip trading range. NZD/USD opened around 0.7370 and fell to a low just below 0.7350 before rallying to a day’s best near 0.7380 before closing almost exactly unchanged on the day around 0.7360.

In economic news, ANZ released its wonderfully-named Truckometer index. ANZ say this is a set of two economic indicators derived using traffic volume data from around the country. Traffic flows are a real time and real-world proxy for economic activity - particularly for the New Zealand economy, where a large proportion of freight is moved by road. It represents an extremely timely barometer of economic momentum. The ANZ Heavy Traffic Index shows a strong contemporaneous relationship to GDP, while the ANZ Light Traffic Index has a six month lead on activity as measured by GDP. Their latest update shows, "The Heavy Traffic Index fell 0.3% m/m in March, to be down 0.7% for the quarter. This isn’t a strong signal for GDP growth, but the index has been volatile lately. With anecdote suggesting a decent quarter, we will wait for more pieces of the GDP puzzle before drawing any conclusions. On the other hand, the Light Traffic Index bounced 2.2% m/m, after a few months of fairly lacklustre performance. This index is giving a softer signal for growth from mid-year, but the bounce-back is encouraging."

The RBNZ announced on its website that Assistant Governor and Head of Economics John McDermott will today deliver a speech titled “Inflation targeting in New Zealand: an experience in evolution.” We’ll also get the March credit card spending numbers. The New Zealand Dollar opens in Asia this morning at USD0.7360 and AUD/NZD1.0545.

The British Pound ebbed and flowed a little more than its Antipodean rivals on Wednesday. At times it was out at the top of our one-day performance table but ultimately ended somewhat mixed; little changed against the USD and EUR, up against the Australian and New Zealand Dollars and down against the CAD. GBP/USD reached a one-week high of 1.4215 before losing half a cent after some softer UK economic data and then rallying back up to 1.42 before a close around 1.4175.

Figures released by the Office for National Statistics showed that in February, total industrial production increased by just 0.1% compared with January’s level; energy supply provided the largest upward contribution, increasing by 3.7%. Manufacturing production declined by 0.2%; the first time output has fallen since March 2017 and the ONS noted that, “within this sector 7 of the 13 sub-sectors decreased on the month”. January’s previously-reported +0.1% m/m increased was revised to flat. Taking the last 3 months together, total industrial production was down -0.1% compared to the previous 3-month period, whilst manufacturing output was up 0.6%. Separate figures on the construction sector showed output fell by 1.6% m/m in February, largely due to a 9.4% decrease in infrastructure new work. Compared with February 2017, construction output fell 3.0%; the biggest year-on-year fall since March 2013. The ONS said it had received some anecdotal information from a small number of survey respondents regarding the effect of the snow on their businesses in the final week of February 2018. The adverse weather conditions across Great Britain could have potentially contributed to the decline in construction output, although it was difficult to quantify the exact impact on the industry.

We also saw the NIESR’s estimate of GDP in the first quarter. The National Institute has had a very good record over the last few years of predicting the official GDP numbers and it is updated every month with an estimate of growth over the previous three months. Today is one of the four occasions each year when its estimate lines up in time with the official numbers. The NIESR reports that, “We estimate that economic growth nudged lower to 0.2 per cent in the first quarter of 2018. The main reason for the weakness was severe weather in March which is likely to have disrupted activity in all major sectors of the economy.” This was below consensus estimates for a 0.3% q/q increase and is also below what the BoE was assuming in its latest Inflation Report. The GBP opens in Asia this morning at USD1.4175, GBP/AUD1.8270 and GBP/NZD1.9265.

Volatility in US equity markets now seems a permanent feature of the investment landscape with yet another 200+ points range for the Dow Jones Industrial Average and 25 points for the S&P 500 Index. Indeed, for the whole of last year, the S&P 500 gained or lost more than 1% on a single day 8 times, the least since the mid-'60s. There have already been 27 1% moves in the first 67 trading days of 2018. Against this background, the performance of the US Dollar looks pretty tame and although it looks technically weak having broken down on to an 88 ‘big figure’, its entire range over the last two weeks has been less than 1¼ points. It opened on Wednesday around 89.20 and having hit a low around 0.8895, the USD index closed only one-tenth down at 89.10.

The latest US inflation figures came in pretty much in line with consensus expectations, albeit the headline CPI number fell -0.1% against a median forecast of unchanged on the month. The annual rate rose as expected from 2.2% in February to 2.4%. Stripping out the often-volatile food and energy components, core CPI rose 0.2% on the month to take the annual rate up from 1.8% to 2.1%. The main reason for the jump in the annual rate is fairly well-known; this time last year saw some aggressive price reductions for cellphone plans and as the falls now drop out of the y/y calculation, so the annual rates jump. Fed Chair Jerome Powell explicitly referenced this in his speech last Friday. Just because it is well known by policymakers and analysts doesn’t mean that everyone is aware of it, though. With both the headline and core measures now above 2%, surveys of consumers will now be very closely watched for any sign that they are revising up their own expectations of future inflation because of what is happening currently. If they do, then investors will have to start thinking about 3, rather than 2 more Fed hikes for the rest of 2018.

Arch-dove Neel Kashkari, President of the Federal Reserve Bank of Minneapolis, is due to speak on Thursday afternoon and we’ll also have the latest weekly initial jobless claims numbers. Otherwise, the economic data calendar in the United States looks pretty thin on Thursday and investors, instead, will be more focused on the POTUS Twitter feed to see which of the current disputes with China, Russia and Syria are most likely to be escalated. The USD index opens in Asia this morning at 89.10.

The Single European Currency finished in second place to the Canadian Dollar on Wednesday as investors wondered whether Mr Nowotny’s remarks on Tuesday might, in fact have been part of some cunning plan to introduce the idea of a 20bp rate hike without Mr Draghi himself having to be implicated and blamed for a policy U-turn. Conspiracy theorist love these mind-games and we’ll never have a definitive answer, though EUR/USD did manage to extend gains up to a high just above 1.2385; its highest level in two weeks before closing at 1.2365.

Speaking in Frankfurt yesterday, ECB policymaker Ardo Hansson gave very little away. He said, “Some people say err on the side of caution; let’s wait and wait. But the risk there is that you wait too long and you’re forced to do a bit of catch up. All these changes have to be very gradual and the ECB has a very strong track record in doing things in a gradual and predictable fashion”. Concluding a very even-handed speech, he said, “The recent low inflation in the euro area has been the result of a combination of factors. Most of them are of a temporary nature and their impact will weaken over time. Therefore, we need to be more patient in achieving our price stability goal.”

Thursday brings the ECB’s monetary policy heavyweights Coeure and Weidmann to the newswires with the economic data limited to Eurozone industrial production where consensus looks for a +0.4% m/m increase. France releases its final March CPI numbers, though Germany’s are not due until Friday. The EUR opens in Asia today at USD1.2365, AUD/EUR0.6275 and NZD/EUR0.5950.

Having only just been knocked out of top spot on our leader board by the AUD and NZD on Tuesday, the Canadian Dollar took gold medal position on Wednesday; up against every one of the major currencies we follow closely here with gains between one and three-tenths of a percentage point. USD/CAD fell to a low of 1.2564; its lowest since February 19th whilst AUD/CAD fell to a 3-month low around 0.9750.

After a decent run of economic data recently, the Canadian Dollar got a further boost on Wednesday from higher global oil prices. As major news agencies all reported that Saudi Arabian defence forces had intercepted missiles of the capital Riyadh, West Texas Intermediate Crude (WTI) prices jumped above $67 per barrel; the highest since December 2014 whilst gold jumped $17 per ounce to $1,356. This lifted the Canadian stock market even as US indices gave up early gains and moved into the red. US President Donald Trump had earlier warned Russia of imminent military action in Syria over a suspected poison gas attack and blasted Moscow for standing by Syrian President Bashar Assad.

More data on housing comes later this week. Thursday is new home prices and Friday is nationwide home sales. The Bank of Canada has raised its benchmark interest rate three times since July to 1.25%. Money markets, as well as economists polled by Reuters, expect the central bank to hike twice more this year. The Canadian Dollar opens in Asia this morning at USD/CAD1.2575, AUD/CAD0.9755 and NZD/CAD0.9250.