US stocks tumble despite FOMC Minutes. USD extends gains for a 4th day. GBP is again the worst performer on Brexit and political worries.
Thursday 22 February, 2018
Daily Currency UpdateAhead of yesterday evening’s FOMC Minutes, the most commonly watched US equity index – the Dow Jones Industrial Average – was trading up around 150 points. When fears of a more aggressive path for US rate rises were not confirmed by the Minutes, the index added another 100 points to a high of 25,250. By the close of business in New York, however, the market had fallen over 400 points to close down -166 and as we write this morning has shed another 100 points from that level. The USD hasn’t been aggressively bought on this latest sell-off in stocks but currency markets remain stressed and the GBP is struggling to hold on to a USD 1.39 ‘big figure’. Indeed, it is down against all the major currencies overnight and for the third time this week takes bottom spot so far on our one-day performance table.
In economic news, the UK unemployment rate ticked up to 4.4% in the three months to December, up from 4.3% (a four-decade low) and the number of people out of work rose by 46,000 to 1.47 million. But, the number of people in work also rose, by 88,000 during the quarter, to 32.147 million. The one-tenth rise in the unemployment rate was the first increase in two years but there was a 109,000 fall in the number of people classed as economically inactive, which helped lift the jobless rate. Only a couple of weeks ago, the Bank of England expectation was for an unemployment rate of 4.3%, a slight drop to “around 4.25%” up until Q3 and a further drop to 4.1% by the first quarter of 2021.
Ahead of a Cabinet ‘offsite’ meeting on Brexit at Chequers, details have been leaked of a so-called ‘position paper’ which the UK Government has shared with EU member states. The document appears to leave open the possibility of an open-ended transition. “The UK believes the period’s duration should be determined simply by how long it will take to prepare and implement the new processes and new systems that will underpin the future relationship,” the draft paper said. “The UK agrees this points to a period of around two years, but wishes to discuss with the EU the assessment that supports its proposed end date”. According to the Financial Times, “The paper contradicts some key EU negotiating principles and raises the risk of failing to reach a transition deal before a March summit of EU leaders… As the fortunes of the GBP are just as closely linked to Brexit as to incoming economic data, the intra-day swings in the British Pound look set to continue for some time to come.
Key MoversThe US Dollar continues to trade pretty much inversely to stock markets and has now extended its winning streak into a fourth day. Back on Friday, the Dollar’s index against a basket of major currencies stood at a 3-year low of 87.95. It closed last night at 89.75 and overnight in Asia has traded up to 89.00; its highest in almost 10 days. The DJIA is down almost 700 points over the same period, whilst US 10-year bond yields have risen to a fresh 4-year high of 2.94%.
There had been some talk that the Minutes might be used to steer the market towards expecting four rate hikes this year, rather than the median of three which had been signaled in the December ‘dot-points’ and the 2.82 hikes which were reflected in interest rate pricing. This didn’t really happen. For sure, “A majority of participants noted that a stronger outlook for economic growth raised the likelihood that further gradual policy firming would be appropriate" and FOMC voters agreed to add word "further'' in front of gradual increases because of the stronger economic outlook. A number of FOMC participants indicated that they had raised their forecasts for economic growth in the near-term vs their December estimates and the impact of recent tax cuts "might be somewhat larger in the near term than previously thought''. Nevertheless, "Participants generally noted few signs of a broad-based pickup in wage growth in available data" and some participants saw “an appreciable risk that inflation would continue to fall short of the committee's objective'' and judged the FOMC "could afford to be patient".
Having spent three days eagerly awaiting the Minutes, the reaction in equity markets suggests they were quickly dismissed as ‘out of date’ and didn’t properly reflect subsequent incoming data on wages and inflation. Indeed, Goldman Sachs senior US economist recorded a podcast last night saying, “let me consider our four-hike scenario as the baseline here: I would say that I see risks around our forecast as two-sided... I doubt that they would hike at a non-press conference meeting in the first half of this year; it just doesn’t seem necessary yet. But by later in the year, it's certainly possible that they wind up adding another one and do five hikes for the year.” Yesterday afternoon, the market was pricing 2.8 rate hikes for 2018. If it now has to consider 5, then it’s little wonder that stocks are lower and the USD is firmer this morning; almost 2 points above its recent 3-year low of 87.95.
Having been bottom of our one-day performance table on Tuesday, the EUR edged further lower on Wednesday with EUR/USD falling to a one-week low just a few pips above 1.2300 ahead of the release of the FOMC Minutes. The EUR was unchanged against the CAD and GBP, fell against the USD and NZD but rose against the AUD. Overnight the EUR has moved lower still and has broken down through an area of technical support from the spike low after US CPI last week around 1.2285.
In economic data, Eurozone business activity continued to rise at a decent pace in February, albeit with the rate of expansion cooling from the near 12-year high recorded in January. Price pressures and employment growth also remained elevated, though likewise saw rates of increase ease slightly. Business optimism about the coming year meanwhile ticked higher. The headline Markit Eurozone PMI fell from 58.8 in January to 57.5 in February, according to the flash estimate, which is based on approximately 85% of usual final replies. Markit noted that, “By country, growth in Germany came in at a three-month low, while in France the composite PMI moderated to the weakest for four months. However, in both cases the PMI readings remained at levels indicative of strong growth, close to recent seven-year highs. Business activity growth meanwhile also slowed across the rest of the eurozone, though still registered the second-largest expansion in nearly 12 years… At the eurozone level, the goods-producing sector continued to record a faster pace of expansion than the service sector, though growth of output and new orders slowed in both cases. However, both sectors continued to enjoy the best periods of expansion seen for seven years.”
Currency markets have historically never really been bothered with Minutes of the ECB Council Meetings but it was the last set of Minutes published on January 11th which dropped the bombshell about the need to change the language around monetary policy. EUR/USD was trading down at 1.1950 at the time and it was this – rather than anything Mr. Mnuchin said at Davos – which really sent the euro soaring. Today’s Minutes of the January24-25th meeting will be very closely watched ahead of Friday’s Eurozone CPI numbers. The EUR opens in London this morning in the high USD1.22’s and GBP/EUR1.13.
Lower stock markets, a lower gold price, higher volatility and a dovish set of RBA Minutes have pulled the rug from under the Aussie Dollar. AUD/USD has been below 0.7900 ever since lunchtime in New York on Tuesday and by the close of business in the Northern Hemisphere yesterday, the AUD was the worst performer of all the major currencies we follow here. Overnight in Asia it has traded briefly on to a US 78 cents ‘big figure’, and is looking at support from the US CPI low around 0.7890.
National Australia Bank’s Quarterly Commercial Property Survey was out yesterday. The headlines were pretty good with sentiment around commercial property moderating a little in Q4 (down 1 to +17) but still well above the long-term average of +2. The bank said, “Positive sentiment likely reflected a steady economy, healthy employment growth and strong business conditions.” About 300 panelists participated in the Q4 2017 Survey, which showed Retail sentiment fell quite sharply fell to -7 points from 12 points and turned negative for the first time since mid-2014. This is perhaps the key metric for the RBA as it aligns most closely with their focus on household consumption and wages.
According to the Sydney Morning Herald today, “Prime Minister Malcolm Turnbull will propose using a chunk of Australia's $2.53 trillion superannuation pool to help unlock funding for Trump's infrastructure push. "There's a very bold ambition to drive US infrastructure and Australia should be front and centre in terms of project design, build, financing and management," Trade Minister Steven Ciobo said in an interview ahead of the visit. It is certainly an area in which Australia has proven expertise but if it raises concerns about capital outflows to finance overseas projects, it could end up being another short-term marginal negative for the currency. The Australian Dollar opens this morning around US 78 cents with GBP/AUD just under 1.78.
The Canadian Dollar has spent the whole of the last 24 hours on a USD/CAD1.26 ‘big figure’ on the combination of Tuesday’s disappointing wholesale trade numbers and a generally stronger US Dollar. Indeed, as it we write, it is just testing 1.27; a fresh high for 2018 and the best level since December 26th last year.
Away from the regular round of incoming economic statistics, some of which sometimes seem to generate more noise than genuine insight, Statistics Canada have released the preliminary year-end tourism figures for 2017. The results show last year was the best-ever year on record for international visitors to Canada. During the year of Canada 150 celebrations, international tourists made 20.8 million trips of one or more nights to Canada, up 4.4% from 2016 and a new annual record, surpassing the previous record of 20.1 million set in 2002. The number of US tourists rose 3.1% in 2017 to reach 14.3 million, the highest figure since 2005. There were also a record 6.5 million tourists from overseas countries, up 7.2% from 2016. Compared with the previous 2002 record, a greater share of tourists to Canada in 2017 were from countries other than the United States, the result both of declines in tourism from the United States and an increase in the number of tourists from overseas.
According to an official Press release, “The Government of Canada is committed to growing Canadian tourism. This includes making key investments through Budget 2017 and launching Canada's New Tourism Vision. The Vision aims to increase the number of international tourists to Canada by 30 percent by 2021, double the number of Chinese visitors by the same year, and position Canada to compete for a top 10 destination ranking by 2025. It also includes actions to grow culinary tourism and support Indigenous tourism.” Back to the regular round of economic data, we have official data on retail sales today then on Friday its earnings, hours worked and the CPI numbers. The Canadian Dollar opens in Europe this morning with USD/CAD at 1.27 and GBP/CAD in the low 1.76’s.
The NZD/USD pair continues to edge slightly lower and has now extended its decline from Friday’s 0.7434 high more than a full cent to 07310. However, the Kiwi’s drop against a very strong US dollar is not the main story. Instead, the big event is the continued decline in the AUD/NZD cross which has fallen below Friday’s 6-month low of 1.0705, and has been down to 1.0660; the lowest since early August last year.
Data from the Reserve Bank of New Zealand show total credit card spending in New Zealand decreased for the first time in five months in January. Credit card spending dropped 0.6% month-over-month in January, fully reversing a 0.6% rise in December. The numbers also showed that credit card balances increased at a slower pace of 0.2% in January, following a 0.4% rise in the preceding month. The good news is that credit card users are making much more of an effort to pay balances more promptly. As at December 2017, 60.4% of all balances incurred interest. That is the lowest level ever recorded since this data started in July 2000. Just one year ago it was 62.2%, and five years ago it was 64.8%. It peaked at 76.1% in January 2001.
Separate data from Stats NZ labour productivity rose 0.9 percent in the year ended March 2017. Setting aside for a moment the irony of publishing productivity figures 10 months after the quarter end, the statisticians Press release was punchily titled, “More New Zealanders working, and working smarter” and the details showed that New Zealand workers could produce 133 units of goods or services each hour in 2017, compared with 100 an hour 20 years ago. In the long run, productivity is regarded as key to increasing standards of living – as workers share the fruits of their labour. By producing more for each hour worked, their incomes may rise and the country becomes wealthier; a topic which is just as current in NZ as it is in the UK. The Kiwi Dollar opens in London in the low-USD 73’s and just under GBP/NZD1.90.
- GBP/USD: 1.3835 - 1.3950 ▼
- GBP/EUR: 1.1280 - 1.1350 ▼
- GBP/AUD: 1.7730 - 1.7845 ▼
- GBP/CAD: 1.7650 - 1.7710 ▼
- GBP/NZD: 1.8940 - 1.9040 ▼