Amidst a further sell-off in US equity markets, AUD back at 77 cents. RBA SoMP now awaited.
Thursday 8 February, 2018
Daily Currency UpdateThe volatility across asset classes continues with the Dow Jones Industrial Average down 600 points in just 4 hours during the North American morning and 800 points in the last 24 hours. The latest move lower came with little or new fresh news, and amidst a general feeling that many of the forced buyers of VIX had already covered their short positions in the week. Instead, there’s now a worry that the so-called ‘risk-parity’ funds might be the next wave of forced sellers, liquidating positions as both equities and bonds are delivering simultaneous negative returns. The US Dollar tends to do well in periods of asset market chaos and so Thursday was another day of general USD strength. AUD/USD traded down on to a US 77 cent ‘big figure’ for the first time since December, reaching a low around 0.7785.
NAB’s Quarterly Business Survey was released Thursday. The bank notes that, “The business conditions index (an average of trading/sales, profitability and employment) rose 1 point, to +15 in the December quarter – which is well above the long-run average – driven by improvements in employment, while trading conditions eased slightly and profitability was steady. Employment conditions have been holding up at levels that suggest we are likely to see further improvement in unemployment over coming quarters. Meanwhile, the business confidence index eased slightly to +6 points in the quarter, which is only a little above the average.” Almost all industries reported very elevated levels of business conditions for the December quarter, but despite some improvement since Q3 (inching back into positive territory), the retail sector continues to lag well behind the rest. NAB says, “The health of the retail sector remains quite critical to the economic given that consumption makes up the lion’s share of the economy. If subdued business conditions are telling us something about the mindset of the consumer, then faster and more sustainable growth will be more of a challenge if things don’t improve.”
In his speech to the A50 Australian Economic Forum dinner, RBA Governor Phil Lowe did not sound a man in any hurry to raise interest rates. He said, “given recent developments in Australia and overseas, it is likely that the next move in interest rates in Australia will be up, not down. If this is how things play out, the likely timing will depend upon the extent and pace of the progress that we make. As I have discussed, while we do expect steady progress, that progress is likely to be only gradual. Given this, the Reserve Bank Board does not see a strong case for a near-term adjustment in monetary policy. It will of course keep that judgement under review at future meetings.” The Australian Dollar opens in Asia at USD0.7790, with AUD/NZD at 1.0790 and GBP/AUD1.7855.
Key MoversThe New Zealand Dollar has not been immune to the volatility seen across all assets and geographies. It was falling even before Thursday morning’s RBNZ interest rate announcement and then proceeded to fall even further as investors reflected on the contents of the Statement and the subsequent Press Conference. AUD/USD rose all the way from 1.0750 to 1.0885 whilst NZD/USD dropped to a 3-week low of 0.7180 early in the London morning. By the end of the day in Europe, however, AUD/NZD had reversed all its gains and was back on a 1.07 ‘big figure’ and NZD/USD was back on 72 cents.
The RBNZ left interest rates unchanged at 1.75% but cut its inflation forecasts and predicted it won’t reach the 2-percent midpoint of its 1-3 percent target range until late 2020, more than two years later than previously expected. Despite that, it maintained its projection that the official cash rate will remain on hold this year and start to rise in mid-2019. The RBNZ has been weighing the potential impact of Prime Minister Jacinda Ardern’s policies around immigration, housing, welfare and industrial relations on economic activity. The RBNZ said it has reviewed its estimates and “the net impact of these policies has been revised down in the near term.” The economic growth profile is “weaker in the near term but stronger in the medium term”. For the currency specifically, RBNZ said, “The exchange rate has firmed since the November Statement, due in large part to a weak US dollar. We assume the trade weighted exchange rate will ease over the projection period…. Monetary policy will remain accommodative for a considerable period. Numerous uncertainties remain and policy may need to adjust accordingly.”
Overall, the RBNZ statement reads pretty dovishly. Assistant Governor John McDermott said the bank’s stance on rates is neutral. “There is a significant probability that the next rate move could be an increase sometime in the future, and there’s also a substantial probability that the next move could actually be a cut.” So, rates could go up or down, inflation expectations are well anchored and will reach the mid-point of target in 2 years’ time; a situation he summed up in the Press Conference by saying “That’s central bank nirvana.” The New Zealand Dollar opens in Asia today at USD0.7220 and AUD/NZD1.0790.
The GBP was a bit firmer Thursday morning in London as investors looked forward to what’s become known as ‘Super Thursday’; a Bank of England MPC meeting with a rate announcement, published Minutes then a Press Conference to introduce the new Quarterly Inflation Report. In his appearance before a House of Lords Select Committee last week, BoE Governor Carney had hinted that the Bank was preparing to upgrade the forecasts in its Inflation Report and this is exactly what happened; albeit the language was more aggressive than had been expected. GBP/USD surged more than 1½ cents from 1.3890 to a high just over 1.4050. So far, so easy to explain…. Within the space of four hours, however, as the carnage continued in US asset markets, GBP/USD had reversed all its gains, coming back to its launching point with the precision of a Falcon-Heavy booster. GBP was still the best performer of the day although its 200+ pip gains against both the AUD and NZD were more than halved.
In revising up both its UK and world growth forecasts, the Bank of England said that, “Over the past year, a steady absorption of slack has reduced the degree to which it was appropriate for the MPC to accommodate an extended period of inflation above the target. Consequently, at its November 2017 meeting, the Committee tightened modestly the stance of monetary policy in order to return inflation sustainably to the target. Since November, the prospect of a greater degree of excess demand over the forecast period and the expectation that inflation would remain above the target have further diminished the trade-off that the MPC is required to balance. It is therefore appropriate to set monetary policy so that inflation returns sustainably to its target at a more conventional horizon. The Committee judges that, were the economy to evolve broadly in line with the February Inflation Report projections, monetary policy would need to be tightened somewhat earlier and by a somewhat greater extent over the forecast period than anticipated at the time of the November Report, in order to return inflation sustainably to the target.”
In his subsequent Press Conference, the Governor was keen to play down the scale and speed of interest rate hikes and despite much probing from journalists, refused to agree that interest rates are likely to rise in May. The Statement noted, “Any future increases in Bank Rate are expected to be at a gradual pace and to a limited extent”. Market pricing doesn’t yet have a may hike as a done deal, though the implied probability of a 25bp increase has increased from just under 50% to something nearer 70%. All this, of course, is predicated based on two Brexit factors – that there is “a smooth transition”, and that it leads to an “average of potential outcomes”. Let’s see now what the politicians can do to facilitate this… GBP opens in Asia this morning at USD1.3925, GBP/AUD1.7845 and GBP/NZD1.9255.
We said at the top of our report today that the latest plunge in US equity markets came with little or new fresh news, and amidst a general feeling that many of the forced buyers of VIX had already covered their short positions in the week. Instead, there’s now a worry that the so-called ‘risk-parity’ funds might be the next wave of forced sellers, liquidating positions as both equities and bonds are delivering simultaneous negative returns. The US Dollar tends to do well in periods of asset market chaos and so Thursday was another day of general USD strength, albeit still in very choppy market conditions. The USD Index reached a 2-week high of 90.25 in the European morning but by the New York afternoon stood at 89.90.
Federal Reserve Bank of New York President William Dudley said recent stock-market declines weren’t that big and don’t yet change his outlook for the U.S. economy. “This wasn’t that big a bump in the equity market… The stock market had a remarkable rise over a very long time with extremely low volatility…. My outlook hasn’t changed just because the stock market’s a little bit lower than it was a few days ago. It’s still up sharply from where it was a year ago. Having a bump up like this has virtually no consequence on my view of the economic outlook”. In US stock markets over the past two decades, there has been lots of talk of the “Greenspan put”, the “Bernanke put” or the “Yellen put” to describe how stock market traders feel they are insured against declines by the Federal Reserve Bank. Perhaps the strike price on the “Powell put” is a bit lower than they’ve become used to…
There are no top-tier US economic data releases scheduled for today and FX traders have never, ever been interested in wholesale sales numbers. However, the inventories number feeds directly into the Atlanta Fed GDP model which will be updated later on Friday afternoon. The USD index opens in Asia this Friday morning around 89.90.
We noted here yesterday that there were some tentative signs that investors might have been lightening up their positions in what had been one of the most crowded trades in the investment universe: long EUR/USD. On Wednesday, the pair fell on to a 1.22 handle for the first time in two weeks and – remarkably, given the volatility elsewhere – it has stayed on the same big figure for every minute of the past 24 hours.
ECB Chief Economist hosted a Q&A session on Twitter yesterday morning; an innovative and transparent method of improving central bank communication. He said the salary increase secured by Germany’s largest trade union this week is “fully in line” with the European Central Bank’s inflation forecasts. His comments dampened speculation that the 4.3% pay rise negotiated by labor union IG Metall and the Suedwestmetall employers’ federation in Germany – which we spoke about here earlier in the week – would prompt the ECB to raise its inflation forecasts and to tighten policy faster. Asked what he would choose if he could pick just one measure of inflation, he said, “If I really had to pick one, I would take the simplest one: core inflation.” Asked about economic models, he said, “Models are important to help us think about economic developments in a structured way, but the real economy is always more complex than models. Always to be complemented by other approaches, conjunctural analysis, and even anecdotal evidence!”
Mr Praet even displayed a great sense of humour for a central banker. One questioner asked, “Peter, how do we pronounce your name? Is the 'e' silent?” and received the classic reply, “In Praet indeed, but not in Peter.” Not to be outdone, his colleague and Executive Board member Yves Mersch said at an event in London that, “At these speeds, if you bought a bunch of tulips with Bitcoin, they may well have wilted by the time the transaction is confirmed”. Let’s hope that their peers around the world can make similarly witty and interesting observations as they try to explain the somewhat arcane business of monetary policy. The EUR opens in Asia at USD1.2265, AUD/EUR0.6365 and NZD/EUR0.5895.
Stepping back from the minute-by-minute movements and taking a bigger picture view, since the beginning of 2018, USD/CAD has been largely contained in a range from 1.2260 to 1.2600 even though we have seen extreme volatility in equity markets, a 25bp rate hike from the Bank of Canada and ongoing uncertainty over the renegotiation of NAFTA. In yesterday’s New York session, the pair rose briefly to a high of 1.2610 but the break lasted less than two hours and soon returned to the 1.2575 area.
In its latest monthly poll, Reuters reports the Canadian dollar is forecast to strengthen over the coming year as expected Bank of Canada interest rate hikes and broad pressure on the US dollar offset uncertainty over the future of the NAFTA trade deal. The poll of more than 40 foreign exchange strategists predicted that the loonie will edge up to C$1.250 to the greenback, or 80 U.S. cents, in one month, from around C$1.255 on Wednesday. After a period of stabilisation, it is then expected to climb to C$1.230 in a year. A cynic might well observe that these moves can be seen in less than one day, let alone a year…
For foreign exchange markets, the speech by Senior Deputy Governor Carolyn Wilkins was something of a disappointment. Making no reference at all to monetary policy, instead she said evidence suggests innovation has been a driver of rising income inequality in advanced countries in recent decades, with technology benefiting skilled workers more than others. This is neither surprising nor insightful, though Ms Wilkins did say the Bank of Canada is currently looking at what impact digitalization and automation might be having on the labour market and the transmission of monetary policy. Ahead of the employment report today, where consensus is looking for only a 10k rise after a 78k gain in December, the Canadian Dollar opens in Asia at USD/CAD1.2595, AUD/CAD0.9820 and NZD/CAD0.9100.
- AUD/NZD: 1.0750 - 1.0885 ▼
- GBP/AUD: 1.7715 - 1.7975 ▼
- AUD/USD: 0.7700 - 0.7845 ▼
- AUD/EUR: 0.6300 - 0.6395 ▼
- AUD/CAD: 0.9750 - 0.9880 ▼