USD index a few-tenths lower as global stock markets rally. NFIB survey and CPI will be closely watched for inflation clues.
Monday 12 February, 2018
Daily Currency UpdateAfter the previous Friday’s spookily prescient 666-point sign of things to come for the Dow Jones Industrial Average, there were two daily 1,000-point declines last week. Friday looked set for another huge drop before the index then bounced sharply off its 200-day moving average to end the day almost 900 points off its midday low. The US Dollar generally does well in times of equity market turmoil and last week was no exception. From its opening level of 88.90 last Monday morning in Sydney, the USD index against a basket of major currencies rose steadily to a high on Thursday of 90.25; its best level since before Treasury Secretary Mnuchin’s comments in Davos two weeks’ earlier. Overnight in Asia and Europe, as the equity market has edged cautiously higher, so the USD has given back around two-tenths of a point to 89.90.
None of the scheduled Fed speakers last week seemed at all concerned by the stock market. Federal Reserve Bank of New York President William Dudley said recent 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”. This view was largely echoed by Kaplan, Harker, Evans and others. Indeed, there are few signs from the front end of the US money market curve that a 25bp rate hike at the March FOMC meeting is in any more doubt. Two weeks ago, with the stock market at a record high, the market-derived probability of a hike was 76%. Today, it has edged down only very marginally to 74.7%.
To the extent that the 2.9% increase in average hourly earnings was the ‘trigger’ for the stock market sell-off, investors will now be acutely sensitive to any inflation data. On Tuesday we have the NFIB small business survey which contains a question on earnings. Last month’s Press Release breathlessly enthused that, “2017 was the most remarkable year in the 45-year history of the NFIB Optimism Index… With a massive tax cut this year, accompanied by significant regulatory relief, we expect very strong growth, millions more jobs, and higher pay for Americans.” NFIB Chief Economist Bill Dunkelberg said, “There’s a critical shortage of qualified workers and it’s becoming a real cost driver for small businesses… They are raising compensation for workers in order to attract and keep good employees, but that’s a positive indicator for the overall economy.” It may not be so good for the stock market which will be on edge, also, ahead of Wednesday’s CPI numbers. The USD index opens in North America at 89.90 with 10-year US bond yields at 2.88%.
Key MoversThe Canadian Dollar began last Monday around USD/CAD1.2430 but as the week progressed and the USD was persistently well-bid, so USD/CAD moved sequentially higher. On both Thursday and Friday, it briefly broke through the upper end of its 2018 trading range from the mid 1.22’s to the high 1.25’s but settled back to 1.2580 by the New York close despite a near-10% weekly drop in crude oil prices. This has taken WTI down from a recent high of $66.50 per barrel on January 25th to just under $60 earlier this morning.
Over the weekend, Canadian Prime Minister Justin Trudeau finished a 3-day trip to Chicago, San Francisco and Los Angeles as he attempts to win support from US lawmakers and businesses to keep President Trump from pulling out of the North American Free Trade Agreement. As reported by Bloomberg, Trudeau spoke on Friday night at the Ronald Reagan Presidential Foundation & Institute, where he hailed Canada-US ties. He recalled meeting Reagan when Trudeau’s own father, Pierre, was Canada’s prime minister. “I’d just received a master’s class in political charisma, and one I like to think kind of stuck,” he said. In Los Angeles he said he didn’t “think anyone can now entirely predict or understand” the impacts on the three countries if NAFTA were to end. “This accord should and can be modernized and updated, with effort, hard work and willingness to compromise on all sides, this is eminently achievable. If trade between Canada and the US is a bad idea, then there are no good ideas.”
Last week’s major economic news in Canada was Friday’s employment report where consensus looked for a 10k rise after a 78k gain in December. Instead, Stats Canada reported employment fell by 88,000 in January. Part-time employment declined (-137,000), while full-time employment was up (+49,000). At the same time, the unemployment rate increased by 0.1 percentage points to 5.9%. On a year-over-year basis, employment grew by 289,000 or 1.6%. Gains were driven by increases in full-time work (+414,000 or +2.8%), while there were fewer people working part time (-125,000 or -3.5%). USD/CAD surged to the mid 1.26’s when the numbers were announced as computer-driven algorithms responded to the headlines but within a few minutes, nearly all the gains had evaporated when it was realized that all the job losses were in part-time and seasonal employment. The 1.25 area now seems a comfortable place for USD/CAD, with one Canadian Dollar worth 80 US cents. The Canadian Dollar opens in North America at USD/CAD1.2560, AUD/CAD0.9835 and GBP/CAD1.7405.
The euro had a remarkably calm week stuck between the opposing forces of stock market turmoil which was good for the USD and further strong economic data in the Eurozone. Indeed, since last Wednesday lunchtime, EUR/USD has remained on a 1.22 ‘big figure’ with the volatility elsewhere in global asset markets completely passing it by. Overnight in Asia and Europe, the pair has edged modestly higher in line with a recovery in stock index futures but with no economic data scheduled for release today, the focus away from equities might still be on political developments in Germany.
Whilst there is relief that Germany has avoided a fresh, destabilizing Federal Election, there is concern amongst analysts and investors that Angela Merkel might have conceded too much to the left-wing SPD. Reports suggest that the SPD will be handed the Finance, Labour and Foreign Ministries - a major victory for the Social Democrats - while CSU leader Horst Seehofer, one of the most conservative figures on Merkel's side, would become Interior Minister. Over the weekend, a cartoon in Der Spiegel magazine showed Angela Merkel naked while SPD politicians run away with her clothes, whilst Die Zeit had a cartoon of German eagle crash landing on its head… In a prime-time ZDF television interview on Sunday, Ms. Merkel defiantly brushed aside any suggestion of quick change. “I ran for a four-year term. I promised those four years and I’m someone who keeps promises. I totally stand behind that decision.” Giving Finance to the Social Democrats is “acceptable” and “European policy will be formulated jointly” within the government, limiting the SPD’s ability to set the agenda, Merkel said.
There are plenty of ECB speakers this week, chief amongst them Bundesbank President Jens Weidmann who last Thursday said, “The favourable economic outlook lends credence to the expectation that wage growth and therefore domestic price pressures will gradually increase in keeping with a path towards the Governing Council’s definition of price stability… If the expansion progresses as currently expected, substantial net asset purchases beyond the announced amount do not seem to be required”. As for the currency, ““The recent appreciation of the euro seems unlikely to jeopardise the expansion… Research suggests that the exchange rate pass-through, which is to say the impact of exchange rate movements on inflation, has declined.”. The EUR opens in North America this morning at USD1.2270 and EUR/CAD1.5410.
So far, we’re only half a day into the new week, so it’s unwise to draw any firm conclusions from the price action which – as we’ve seen – can turn around sharply on little or no incoming news. That said, there is at least a consistent theme which is for a modest rebound in global equities and a somewhat lower US Dollar. As we go to print this Monday morning, futures markets are signally around a 300-point gain for the DJIA with the USD index a few-tenths lower. GBP/USD on Friday clawed its way back on to a 1.38 ‘big figure’ after a low in the 1.3770’s and during the European session this morning has extended gains to 1.3865.
In economic news today, The Times newspaper splashes with the headline, “consumer spending falls to its lowest in five years”. The paper reports household spending fell by 1.2% in January compared with 12 months ago, according to research by Visa, the payments business. It is the first time that there has been a decline at this time of year since 2013. Individuals’ spending has now fallen in eight of the past nine months, with clothing, furniture and household goods bearing the brunt of consumers’ caution, according to figures on spending on Visa cards, which account for more than £1 in every £3 spent in the UK. According to Markit who compiled the survey, ““Subdued spending trends coincide with a slowing of the overall UK economy during 2017. Lingering uncertainties around the outcome of the Brexit negotiations are also weighing on consumer confidence, which has stayed well below the levels seen prior to the 2016 Brexit vote.”
The weekend Press in the UK seems to have taken a break from bashing the government, though this is more likely to be a tactical retreat rather than any great change of strategy. Having said nothing of any substance on Brexit since a speech in Florence back in September last year, UK PM Theresa May is set to give her next major set-piece in Berlin in three weeks’ time. Before then, senior ministers are due to set out this week Britain’s “road to Brexit”, with Foreign Secretary Boris Johnson said to be making the case for a “liberal Brexit” designed to reassure Remain voters. In economic news, the big event will be Tuesday’s CPI figures. Inflation last month slowed from 3.1% to 3.0% and consensus looks for another drop to 2.9% in January. With BoE interest rate policy now aligned very closely with current and expected inflation, it should be a straight read-across for the GBP. The British Pound opens this morning in North America at USD1.3860, GBP/AUD1.7690 and GBP/CAD1.7400.
The three main drivers of most of the valuation models of the Australian currency are commodities, interest rate differentials and volatility. Gold is more than $40 off its recent high of $1264 per ounce, the RBA has signaled it is in no rush whatsoever to be raising interest rates, whilst volatility in equity markets has just had one of its sharpest rises in history. All this together pushed AUD/USD last week back on a 77 cents ‘big figure’ for the first time since late December and down almost 4-cents from its peak of 0.8135 back on January 26th. On Friday, the pair rallied very slightly into the NY close at 0.7810 and the further rise in equity markets this morning has seen it extend another quarter of a cent to 0.7835.
On Friday, the RBA released its latest Quarterly Statement of Monetary Policy; a weighty document summarizing the current state and future outlook for the Australian economy. The main phrase for interest rate and currency markets was that, “Over the course of 2017, the unemployment rate declined and inflation increased a little. The accommodative setting of monetary policy has played a role here. Further progress on both fronts is expected over the next couple of years. It will be some time, however, before the economy reaches current estimates of full employment and inflation returns to the mid-point of the target”. It is interesting to see the RBA is now stressing the ‘mid-point’ of the inflation target and it is this which has prompted ANZ Bank to change its interest rate forecasts. It was previously looking for 2 hikes this year but now sees the RBA on hold throughout 2018.
Away from the turmoil in global equity markets, the two main domestic highlights in terms of economic data this week are the NAB Survey on Tuesday and the labour market report on Thursday. It seems pretty clear from what the RBA have written and said that wage growth probably holds the key to monetary policy. If employment picks up without any upward pressure on pay, then there’ll be no rush to raise interest rates. RBA Assistant Governor Luci Ellis is scheduled to speak, though this is at an ABE forecasting conference and might well focus on technical aspects of the data rather than offering any macro policy clues. The Australian Dollar starts in North America this morning at USD0.7730, with AUD/NZD at 1.0800 and AUD/CAD0.9835.
The Kiwi Dollar has been pretty much out of the spotlight given the volatility in global equity markets. Indeed, its best day last week came when the market was closed locally for the national holiday on February 6th. AUD/NZD tumbled from a 5-week high of 1.1067 on January 29th to a 6-month low of 1.0750 in just 6 trading days and has now settled in the low 1.08’s. NZD/USD, meantime, hit a low around 0.7180 last Thursday but has since recovered to around 0.7250.
Statistics New Zealand reported this morning that consumers spent more on eating out and on hardware, furniture, and appliances in January 2018. This contributed to a 1.4% rise in total retail card spending in the month, when adjusted for seasonal effects. Spending rose across four of the six retail industries last month. The largest movements were: hospitality, up $15 million (1.5%) durables, including hardware, furniture, and appliances, up $14 million (1.2%) and fuel, up $9.0 million (1.5%). Core retail spending (which excludes the vehicle-related industries) rose 1.0% in January, after a 0.2% fall in December 2017. Cardholders made 141 million transactions across all industries in January with an average value of NZ$50 per transaction. The total amount spent across all transactions was NZ$7.0 billion.
The RBNZ claims to be living in “central bank nirvana” and for all the volatility in global asset markets, it does seem there’s nothing much to trouble policymakers locally this week. On Wednesday we have data on food price inflation and then it’s the manufacturing PMI survey on Friday. None of these are likely to trouble those in charge of setting interest rates though there’ll be some interest (no pun intended!) in its own quarterly survey of inflation expectations which is released midweek. The New Zealand Dollar opens this morning in North America at USD0.7250 and NZD/CAD0.9105.
- USD/CAD: 1.2490 - 1.2630 ▼
- EUR/USD: 1.2215 - 1.2350 ▼
- GBP/USD: 1.3770 - 1.3995 ▲
- AUD/USD: 0.7770 - 0.7905 ▲
- NZD/USD: 0.7180 - 0.7320 ▲