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AUD/USD still stuck in a familiar range ahead of labour market data today. GBP and CAD tumble

By Nick Parsons

After two days of essentially directionless, albeit somewhat choppy trading, the Aussie Dollar yesterday finally threatened to break down below the 30 pip range from 0.7760 to 0.7790 in which it had been stuck for more than 36 hours. During the European morning, the pair briefly dipped below 0.7750 but the move was very quickly reversed and by the afternoon it was back up once more testing the topside at 0.7790 before closing, yet again, within 10 pips of where it had begun. The AUD finished higher also against the NZD, CAD and GBP and claimed second place on our one-day performance table.

In economic data, the six month annualised growth rate in the Australia’s Westpac–Melbourne Institute Leading Index, which indicates the likely pace of economic activity relative to trend three to nine months into the future, fell from 1.43% in February to 0.69% in March. The analysts at Westpac note, “Drivers of the slowdown in the month have been from the domestic components – a slowing labour market; and some weakness in housing while rising short term interest rates have reflected liquidity pressures from global markets.” They go on to say that, “It appears likely that the Reserve Bank will lower its upbeat 3.25% growth forecast for 2018. The latest minutes from the Board refer to growth as “expected to exceed potential growth” (consistent with the signal from the Leading Index). However, with potential growth at 2.75% we expect the RBA will lower its growth forecast for 2018 to 3.0%.” In separate data from the Department of Jobs and Small Business, the internet job vacancy index rose 0.9% in March and has now risen for 18 consecutive months; the longest such run since March 2011.

In its massive 280-page document on the World Economic Outlook released on Tuesday (we read it so you don’t have to!) the International Monetary Fund (IMF) upgraded its forecasts for economic growth in Australia to 3% this year, a sharp rise from 2.3% in 2017, and up from the 2.9% rate expected in February. Next year, Australia’s GPD is forecast to grow by 3.1%. The numbers are pretty much in line with the federal government’s mid-year budget update which had GDP forecast to grow by 2.5% in 2017-18 and 3% in 2018-19 after growth of 2% in 2016-17. The IMF sees the consumer price index increasing 2.2% this year, and then 2.4% in 2019. Inflation is currently running at 1.9%. The Aussie Dollar opens in Asia this morning at USD0.7780, with AUD/NZD at 1.0630 and GBP/AUD1.8255.

After finishing second from bottom and then bottom of our one-day performance table in the first two days of the week, the Kiwi Dollar improved marginally to third-last on Wednesday; rising against the CAD and GBP but lower against the AUD, EUR and US Dollar. NZD/USD opened around 0.7340 but fell to a low during the London morning just below 0.7310; its weakest in 8 days. The pair then recovered to 0.7340 before selling off once more in the New York afternoon to finish around 0.7320.

Ahead of the quarterly CPI numbers today(see below) Statistics New Zealand earlier this week produced its fascinatingly detailed look at monthly food prices. Tomato, lettuce, cauliflower, cabbage, and broccoli prices rose sharply in March 2018, boosting vegetable prices 9.5 percent in the month after adjusting for typically seasonal changes. The statisticians noted, “Vegetable crops have been affected by a run of storms in recent weeks – lower supply due to bad weather usually means higher prices” Overall, food prices rose 1.0 percent in March. This rise was mainly driven by the lift in vegetable prices, up 11 percent. Meat prices rose 1.2 percent in the month. There was no change in grocery and non-alcoholic beverage prices in March and little change in restaurant and takeaways prices (up 0.1 percent).

Most of the major bank forecasts for today’s quarterly CPI numbers are now published. ANZ expect headline CPI rose 0.4% q/q in Q1, which would see annual inflation slow from 1.6% to 1.0% y/y – a touch below the RBNZ’s expectation of 1.1%. They say, "The fall in annual headline inflation is more noise than signal. Nonetheless, evidence of a broadening in domestic price increases beyond housing remains elusive. Core inflation measures are expected to be broadly stable." BNZ forecast a 0.3% increase for the quarter, a result that would pull annual inflation down to 0.9% and highlight a very large drop in education prices reflecting recent policy changes making first year tertiary education free. Over at Westpac, meantime, they also factor in the fall in education prices but see a 0.5% increase in the March quarter to take the annual rate down to 1.1%. One of the three banks will probably be right! The New Zealand Dollar opens in Asia this morning at USD0.7320 and AUD/NZD1.0630.

After finishing equal bottom of the table with the New Zealand Dollar on Tuesday, the GBP looked set to repeat the same dismal performance on Wednesday until it managed to close up against a very out of favour Canadian Dollar. GBP/USD spent most of the Asian session in a tight range either side of 1.4300 but when the UK CPI figures were published at 09.30 local time in London, it plunged more than a cent to a low of 1.4180. GBP/AUD lost 1 ½ cents to 1.8250 whilst GBP/NZD fell on to a 1.93 ‘big figure for the first time since Monday morning.

UK inflation figures came in not just lower than consensus expectations, but lower than the whole range covered by most professional forecasters. Prices rose just 0.1% in March to take the annual rate of inflation down from 2.7% to 2.5% against expectations that it would be unchanged at 2.7%. This means that CPI inflation is at its lowest in a year and March’s fall in the annual rate is the 2nd consecutive month in which the annual rate has fallen; we haven’t seen that since August – September 2015. The Office for National Statistics said that women’s clothing prices rose slower than usual for this time of year, rising by 0.7% between February and March 2018 compared with a larger rise of 2.0% between the same two months in 2017. Alcohol and tobacco also helped ease inflation pressures, with tobacco duty rises linked to the Budget being announced in November 2017 instead of March 2018.

It is not only investors holding British Pounds who are left nursing losses. The Bank of England has also suffered yet another blow to its credibility, having publicly agitated for at least two months about the likelihood of a rise in interest rates at its May MPC meeting. This might of course still happen, but the probability of it now is much lower than it was just a few days ago. And, with inflation on a sharp downtrend towards its 2% target, the feeling will persist that a rate hike in May is designed to save face on the MPC rather than being truly ‘data dependent’. The GBP opens in Asia this morning at USD1.4205, GBP/AUD1.8245 and GBP/NZD1.9395.

US equity markets had a much more subdued day on Wednesday, with barely 100 points separating the high and low for the Dow Jones Industrial Average. The USD index against a basket of major currencies had finished unchanged on Tuesday around 89.05 having at one point been as low as 88.80, but yesterday morning in Europe as the GBP weakened sharply and the EUR initially struggled, it rose to a high just over 89.30 before settling up just one-tenth of a point around 89.20.

Although Tuesday was the deadline for filing tax returns in the United States, the Internal Revenue Service extended this to Wednesday due to a computer malfunction. Last year, about 90 percent of tax returns submitted by April 21 were e-filed, according to IRS data so the extension was swiftly expedited. With ‘Tax Day’ being so topical, the Administration was not slow to hit the social media channels. Vice-President Mike Pence tweeted, “Thanks to the historic TRUMP TAX CUTS, today marks the last time the American people will file taxes under a complicated & outdated tax system. Our Tax Cuts– the largest in American history– will save YOU money, increase opportunity & create more JOBS for American workers.” The White House itself said, “When we began our push for tax cuts, I promised that our bill would result in more jobs, higher wages, and tremendous relief for middle-class families, and that is exactly what we have delivered.”

With no incoming monthly economic data, the highlight of the day was the release of the Federal Reserve’s so-called Beige Book. This reported activity remained at “a modest to moderate pace” in March and early April, the same rate as earlier in the year. Overall wage growth was said to be modest, and price gains seen as moderate. Wage pressures “did not escalate,” although labour markets were seen as tight, with continued reports of shortages for high-skilled workers. Contacts in nine of the dozen Fed regional banks expressed concerns about trade tariffs — with 36 mentions of the word in the report, whilst business owners were upset with the price rises for metals in the wake of the Trump administration’s decision to place penalties on steel and aluminum imports. The USD index opens in Asia this morning at 89.20.

After a sharp rally and subsequent drop before ending unchanged on Tuesday, EUR/USD repeated the price action on Wednesday, albeit within an overall narrower trading range from 1.2355 to 1.2395 before closing with no net gain or loss around 1.2375. The AUD/EUR cross remained on 62 cents throughout the day with NZD/EUR at 59 cents.

Final Eurozone CPI figures showed inflation one-tenth below what had been expected at the time of the ‘flash estimate’ back on April 4th. The statisticians estimated CPI would be at an annual pace of 1.4% in March but the final number this morning showed a rate of just 1.3%. The highest contribution to the annual inflation rate came from services (+0.67 percentage point), followed by food, alcohol & tobacco (+0.41 pp), energy (0.20 pp) and non-energy industrial goods (0.07 pp). Services inflation appears to have risen to 1.5% largely due to early timing of Easter this year, lifting prices of airfares and accommodation services, whilst the usual rebound in clothing prices from the January sales was less visible than in previous years. Across the European Union (rather than just the Eurozone) lowest annual rates were registered in Cyprus (-0.4%), Greece (0.2%) and Denmark (0.4%). The highest annual rates were recorded in Romania (4.0%), Estonia (2.9%), Slovakia and Lithuania (both 2.5%). Compared with February, annual inflation fell in six Member States, remained stable in six and rose in fifteen.

Separate figures from Eurostat showed that construction output in the Eurozone fell by a seasonally-adjusted -0.5% in February, largely due to civil engineering falling by 1.7%, while building construction rose by 0.1%. Although the figures are seasonally adjusted, they can still be heavily affected by weather conditions, especially as those as extreme as seen in Europe over the Winter months. January was relatively mild but February was exceptionally cold and it would not be a big surprise to see the March data next month similarly affected by adverse weather. In year-over-year terms, construction output is up 0.4% but we may have to wait a while longer before more meaningful, distortion-free comparisons can be made. The EUR opens in Asia today at USD1.2375, AUD/EUR0.6290 and NZD/EUR0.5915.

We wrote in our North American commentary yesterday morning that, “Overnight in Asia and this morning in Europe, it seems investors have begun to lock-in profits on long CAD positions ahead of today’s Bank of Canada policy meeting.” They will certainly be glad they did as the Canadian Dollar slumped to the bottom of our one-day performance table. USD/CAD rose from a low immediately prior to the interest rate announcement of 1.2555 to a high just under 1.2660. AUD/CAD jumped more than three-quarters of a cent to 0.9845 whilst NZD/CAD rose from 0.9200 to a best level just under 0.9270.

As expected by the vast majority of analysts, the Bank of Canada left its overnight target rate of interest unchanged at 1.25%. Its Statement noted that, “interest rates remain very low relative to historical experience. This is because the economy is not yet able to remain at full capacity on its own. Furthermore, the sustainability of this level of activity is not assured; although we expected the economy to moderate in the second half of 2017, that moderation has extended into early 2018 and has been more pronounced than expected.” Blaming this on two exceptional factors – changes in mortgage rules and transport bottlenecks – the BoC said, “Accordingly, we expect a strong rebound in the second quarter after a lacklustre first quarter, with an average growth rate of about 2 per cent in the first half of the year and a return to near-potential growth thereafter. Fiscal stimulus, both provincial and federal, is playing a role in this forecast. We will be monitoring the data for the second quarter very closely in the weeks ahead.”

In terms of forward guidance, and though Governor Poloz personally doesn’t like the concept, the Statement went on to say that, “Assuming our forecast remains on track, it is Governing Council’s view that interest rates will need to move higher over time to keep inflation on target… Most of our deliberations, therefore, concerned the appropriate pace of interest rate increases. As we have said repeatedly in the past, this is an intensely data-dependent process of risk management.” Weighing up the risks around capacity constraints, inflation dynamics, wages and the sensitivity of the economy to interest rates given the high level of household debt, The BoC concluded that, “higher interest rates will be warranted over time… but the Governing Council will remain cautious with respect to future policy adjustments, guided by incoming data.” The Canadian Dollar opens in Asia this morning at USD/CAD1.2635, AUD/CAD0.9835 and NZD/CAD0.9250.