NZD out of the firing line; a steady day despite volatile stock markets
Tuesday 6 February, 2018
Daily Currency UpdateAfter the dramas of the last couple of weeks, the Kiwi Dollar had a relatively quiet Monday, with the entire range against the US Dollar from the low (0.7275) to high (0.7327) only slightly more than half a cent. Measured against its Australian cousin, AUD/NZD rose around 20 pips from Friday’s closing level whilst GBP/NZD was down a full cent to 1.9230.
In economic data, the ANZ Commodity Price Index - when measured in global terms - rose 0.7% m/m in January, after a 3-month slide. The lift was broad-based with meat, dairy, forestry and aluminium prices all rising; the only fall was seen in milkfat products. Because the NZD continued to squeeze higher against major trading partners in January (NZD TWI up 1.8% m/m), this pushed the NZD commodity price index down 2.9% m/m. Only aluminium prices managed to increase in local currency terms. Whether measured globally or locally, the annual rates of price growth were 4.1% and 4.8% respectively.
Today in New Zealand is the Waitangi Day national holiday which marks the signing on February 6th 1840 of a treaty whose effect was to secure British sovereignty over the islands of New Zealand, which was proclaimed on May 21st that year. Markets are closed locally, though the NZD will continue to be traded elsewhere in the Asia-Pacific region. The first RBNZ policy meeting of the year is on Thursday this week. Analysts are unanimous that there will be no change in interest rates. Nor are they generally expecting much change to the Central Bank’s forecast track for interest rates, though the markets’ view on the timing of the first hike in early 2019 is a bit later than the RBNZ has so far penciled-in. The New Zealand Dollar opens in Asia today at USD0.7275 and AUD/NZD1.0860.
Key MoversThe Aussie Dollar had a much better day than many people had feared on Monday, rising against all the major currencies we track closely here apart from the resurgent US Dollar. AUD/USD hit a best level of 0.7950 before then losing half a cent to 0.7900 as an extremely volatile session in the US equity market saw the DJIA follow Friday’s 666 point drop with an 1,000+ point loss to erase all the gains for 2018. AUD/USD has now fallen for 6 days in a row, dropping a total of 2.2%. Context Analysis point out that in the 737 trading days since 2 April 2015, the sequence of falls has extended to 7 days only once; on 23 December 2016.
There was certainly nothing in the Australian services PMI report to offer much comfort to the AUD. The PMI registered 53.8 in January, down from 55.1 in December, to signal the slowest pace of expansion in Australian service sector output since last October. Both incoming new orders and employment increased to the weakest extents since data collection began 21 months ago. On the price front, output charges rose at the slowest rate since July 2017 amid a softer upturn in input costs. Despite the general weakness in the survey, confidence strengthened in January to a four-month high. Around two-thirds of monitored companies forecast output to rise over the next year, with positive sentiment attributed to planned expansion into foreign markets, organic business growth and new marketing initiatives.
We’ll see what the RBA has to say – if anything – about the value of the currency when it sits down to its first Board meeting of the new year next today and on Friday when it releases its latest Quarterly Statement of Monetary Policy. The Australian Dollar opens in Asia at USD0.7900, with AUD/NZD at 1.0860 and GBP/AUD1.7705.
The pound had a poor day on Monday as the combination of domestic political uncertainty, the resumption of formal negotiations and poor incoming economic data finally took its toll. The Asian session has been pretty quiet and in early trading in London, GBP/USD actually managed to rally to a high of 1.4145. By mid-afternoon it was down below 1.4000 and though it managed to find some support around last week’s 1.3995 low, the subsequent bounce was far from impressive. The GBP finished firmly at the bottom of our one-day performance table.
The UK service sector PMI fell from 54.2 in December to just 53.0 in January; the slowest upturn in services output for 16 months. Growth was reportedly curtailed by the loss of existing clients and lingering concerns surrounding the UK’s exit from the EU. January data pointed to a slowdown in growth of services activity across the UK, which stemmed from relatively weak gains in new work. Job creation nonetheless picked up as companies retained positive expectations surrounding the outlook. Although the latest results revealed an easing of inflationary pressures, rates of increase in both input costs and output charges remained above their long-run trends.
In a meeting at Downing Street between UK Brexit Minister David Davis and Chief EU negotiator Michel Barnier, Mr Davis claimed with a completely straight face that, “the UK government has published a great deal about what it wants. It wants a comprehensive free trade agreement, and a customs agreement, allowing trade to be as frictionless as possible. It is perfectly clear what the UK wants”. For his part, Mr Barnier said, “Without the customs union, outside the single market, barriers to trade and goods and services are unavoidable… the time has come for the UK to make a choice”. This, of course, is the very opposite of what the Prime Minister wants. Any clear choice or hard decision will immediately inflame half her Cabinet and will heighten pressure for her to quit as Prime Minister. There is no ‘unity candidate’ waiting in the wings because there is no unity on the Government side in the House of Commons. At some point, if the UK political situation continues to deteriorate, a ‘Corbyn discount’ may even have to be priced into the pound. For today, the GBP opens in Asia at USD1.3995, GBP/AUD1.7715 and GBP/NZD1.9230.
What a week for the US Dollar! On Thursday evening, you’d have been offered very long odds against the USD ending up on the week yet that’s exactly what happened. Neither President Trump’s State of the Union Address nor a somewhat more hawkish FOMC Statement could offer any support to the currency. It opened on Monday with its index against a basket of major currencies at 88.75, hit a best level of 89.25, but by Thursday evening was down at just 88.27; just a tiny fraction above its Davos low.
On Thursday, the incoming data – manufacturing PMI, construction spending and jobless claims -
were very strong indeed and 10-year US bond yields were by then decisively up through 2.70%. But,
having spent all week completely ignoring very strong incoming economic data and being totally
unmoved by higher US bond yields, it was not until Friday that the USD finally snapped higher on after
the employment report showed that average earnings growth had risen to 2.9%; the highest since
2009. Non-farm payrolls were only around the average of the previous 12 months at 200,000 and the
average workweek actually fell. But, with the bond market acutely sensitive to signs of inflationary
pressure, the earnings number sent 10-year Treasuries up to 2.84%; a huge rise in yields of 38bp since
the beginning of the month.
With bond yields surging, stocks tumbling and the Atlanta Fed publishing updated estimates of its Q1
GDP forecast to show 5.4% - the highest since Q1 2012 – the US Dollar finally caught a bid on Friday.
Its’ index against a basket of major currencies was already a couple of tenths higher during the
European morning, but after the employment report was published it jumped to a high of 89.00
before settling into the New York close around 88.90. As well as a new Governor of the Federal
Reserve Bank, there are plenty of his colleagues scheduled to speak later this week. Even arch-dove
Kashkari on Friday noted that he saw inflationary signs in the labour data and it will be interesting to
see if the speakers have soothing words for stock market investors or focus, instead, on the continued
normalization of US monetary policy.
The euro began the week quite well, rising from an opening level around 1.4245 to a best level just below 1.2475 during the European morning but then turned lower throughout the rest of the Northern Hemisphere day to a low point of just 1.2395. ECB chief Mario Draghi addressed the European Parliament in Strasbourg saying, “Our confidence that inflation will converge towards our aim of below, but close to, 2 per cent has strengthened, but… we cannot yet declare victory despite little indication that generalised imbalances are emerging”. Of more interest to FX markets were his remarks that recent volatility in the single currency was also a potential cause for concern, requiring “close monitoring” of the implications for price stability. In truth, there was nothing new whatsoever in these comments but on a day when the USD was finding some support, they were an excuse to knock EUR/USD a few pips lower.
The final Markit Composite PMI Index posted 58.8 in January, its highest level since June 2006 and above the earlier flash estimate of 58.6. The headline index has signalled expansion for 55 successive months. There was a better than expected services PMI in Germany (57.3) which offset a marginal French services PMI of 59.2 which was a touch lower than the initial estimate. Growth of manufacturing production continued to outpace that of service sector activity in January. Although easing over the month, the rate of expansion in manufacturing output stayed close to December’s near-record high. The performance of the service sector continued to strengthen, with business activity growth accelerating to its best since August 2007. Whilst German services activity is at an impressive 81-month high, Italy is the highest for 139 months.
As well as his remarks on the European economy, Mr Draghi also contributed to the Brexit debate, saying that without clarity regarding the shape of the UK’s future relationship with the EU, “well-managed preparations are . . . essential for dealing with frictions in the transition from the current situation to the eventual new equilibrium especially in the event that no transitional agreement is reached between the EU and the UK”. There would have been uproar in the UK if BoE Governor had said something similar! On the economic slate today, we have just German factory orders whilst ECB Board member and Bundesbank President Jens Weidmann is speaking at an event in Frankfurt. The EUR opens in Asia at USD1.2400, AUD/EUR0.6375 and NZD/EUR0.5870.
The Canadian Dollar gave up its hold on US 81 cents on Friday afternoon as USD/CAD punched up through 1.2345 immediately upon publication of the US employment report. By early afternoon in North America yesterday, the CAD lost its hold on 80 cents too. With the US Dollar generally well-bid, USD/CAD reached a high of 1.2515; its highest level in 3 ½ weeks as WTI crude slid almost a dollar per barrel from Thursday to Monday.
There were no Canadian economic statistics on Monday and very little in the way of political news either. Trade data for December is due on Tuesday and might be a reminder for some that Canada runs a trade surplus with the United States between €3-4bn per month, exporting roughly $35bn and importing around $31bn of goods. The former US ambassador to Ottowa made a very good point on Sunday that, “The term NAFTA is a toxic term, and I would leave that term and put it aside and not talk about it. I think that unfortunately it’s become a political punching bag of sorts and if we can replace that name with something else that we wouldn’t get stuck on it”. Now we just need to find a friendly new acronym that won’t upset President Trump…
Away from trade, the biggest event in domestic economic news this week will be Canada’s employment report on Friday. Two consecutive blockbuster jobs numbers prompted the Bank of Canada rate hike in January, though a third strong print would be a genuine surprise. The Canadian Dollar opens in Asia today at USD/CAD1.2515, AUD/CAD0.9890 and NZD/CAD0.9105.
- NZD/AUD: 0.9175 - 0.9260 ▼
- GBP/NZD: 1.9100 - 1.9390 ▼
- NZD/USD: 0.7195 - 0.7360 ▼
- NZD/EUR: 0.5750 - 0.5950 ▼
- NZD/CAD: 0.9045 - 0.9160 ▼