NZD strengthens against AUD despite Q4 GDP miss. Manufacturing numbers due Friday
Friday 16 March, 2018
Daily Currency UpdateThe New Zealand Dollar outperformed its Aussie counterpart on Thursday with AUD/NZD falling from around 1.0775 in Asia to a low around 1.0720 late in the European afternoon. NZD/USD couldn’t hold on to a U73 cents ‘big figure’ and fell to 0.7275 which – like the AUD – takes it back to where it was just before last Friday’s US labour market report.
The long-awaited Q4 GDP figures released fell short of consensus expectations. Most of the banks locally had penciled-in growth of 0.7% but the New Zealand economy actually grew 0.6% in the final three months of 2017, the same pace as the previous quarter. Although the year-on-year rate accelerated to 2.9%, it was also below the 3.1% expansion expected by economists. For the full year 2017, the economy grew by 2.9%, down from 4% in 2016. According to the officials at StatsNZ, “Hot, dry weather appeared to have a negative impact this quarter on agriculture production, which fell 2.7%. Falling milk production was reflected in lower dairy manufacturing and dairy exports.” The statisticians said that household expenditure - the largest part of the New Zealand economy at around 60% - grew by 1.2% over the quarter. “Households ate out more and spent more on groceries and alcohol. This fueled increased retail trade activity, with food and beverage services and supermarkets experiencing growth.”
The GDP numbers effectively draw the line under 2017 and it’s now only a couple of weeks until the end of the first quarter of 2018. Today, we’ll get the performance of manufacturing numbers for February and next week there’s an RBNZ meeting. The New Zealand Dollar opens in Asia this morning at USD0.7275 and AUD/NZD1.0720.
Key MoversIt seems we’re now going to have to watch financial TV as well as the POTUS Twitter feed for clues on economic policy. In his first TV appearance since being appointed chief economic adviser to US President Donald Trump, Larry Kudlow said, “I would buy King Dollar and I would sell gold.” Someone certainly listened to that advice as less than 24 hours later, the USD is up a quarter of a point and gold is down $6; neither of which have helped the Australian Dollar. AUD/USD was trading around 0.7870 during the London morning but by the New York afternoon had fallen to a low of just 0.7795; just a few pips above where it stood just before Friday’s US labour market report.
We mentioned last week that NAB scrapped one of the two RBA rate hikes in its forecast profile for 2018. Macquarie Bank is the latest local name to push back its forecast for the RBA’s first rate increase since late 2010, now seeing this in early 2019 rather than its previous forecast for August of this year. “The primary reason for pushing back our RBA call is that the Bank can err on the side of growing the economy faster for longer to erode spare capacity and have confidence that inflation is firmly moving back into the 2-3% target… After two years of below-target inflation, and at least another one to come, there seems little danger of generating a meaningful pick-up in inflation expectations from keeping interest rates low for longer.” Looking at short-term market interest rates, the implied probability that the RBA will deliver a 25 basis point rate increase by the end of this year is roughly 45%, a view that Macquarie describes as “about right.”
In the only incoming economic data, expected inflation as represented by the Melbourne Institute Survey of Consumer Inflationary Expectations, increased by 0.1 percentage points in March to 3.7% from 3.6% in February. Total pay growth over the 12 months to March 2018 increased to 2.0% from the December quarter reading of 1.5% although respondents appear cautious about future wage growth; expectations for pay growth in the next 12 months fell to 1.8% from 2.4% in the previous quarter. The Australian Dollar opens in Asia this morning at USD0.7800, with AUD/NZD at 1.0720 and GBP/AUD1.7870.
The British Pound rose against all the major currencies apart from the US Dollar on Thursday, with gains extending to more than a full cent against both the Canadian and Australian Dollars. GBP/USD was volatile within a half cent range from 1.3930 to 1.3980 and ended the New York session pretty much near the middle of the day’s trading band.
With no fresh economic news and the UK media still totally focused on a diplomatic row between the UK and Russia, we can turn instead to a study by the Economist Intelligence Unit and reported in The Guardian which found that British cities have dropped to their cheapest levels internationally since at least the 1990s. It said the sharp fall in the pound after the EU referendum – still more than 6% lower than it was on the eve of the vote – had sent London and Manchester sharply down the rankings.
Analysing a basket of more than 150 goods in 133 cities around the world, the report found London was now almost a third cheaper than Paris to visit, and almost a 10th cheaper than Dublin. The UK capital fell six places to 30th in the rankings for the most expensive city in Europe, while Manchester dropped five places to 56. Singapore retained the title as the world’s most expensive city for a fifth year running, while Paris and Zurich topped the list in Europe.
Quite how the diplomatic crisis between the UK and Russia plays out is impossible to predict, but it serves to show how even in an age of careful news-management, unforeseen events can introduce a huge degree of political and economic uncertainty into financial markets. The GBP opens in Asia this morning at USD1.3950, GBP/AUD1.7870 and GBP/NZD1.9170.
It’s been a rare event recently but the US Dollar finished the day on Thursday at the top of our one-day currency performance table. Its index against a basket of major currencies rose more than four-tenths of a point from the Asian low just below 89.20 to a best level at the end of the London afternoon around 89.62; the highest in just over 48 hours.
As Bloomberg reports the Larry Kodlow story, “Within minutes of being named as top White House economic adviser, Kudlow was on the airwaves to push a tough stance toward China and promise a new phase of tax cuts - hitting two of Trump’s favorite talking points and making clear why he was chosen for the job. The economist and CNBC contributor also demonstrated a Trump-like willingness to ignore taboos. In a rare departure for someone about to take a senior government job, he questioned Federal Reserve monetary policy and even offered a trading recommendation ‘I would buy King Dollar and I would sell gold.’” Early in the day on Thursday, President Trump tweeted, “Larry Kudlow will be my Chief Economic Advisor as Director of the National Economic Council. Our Country will have many years of Great Economic & Financial Success, with low taxes, unparalleled innovation, fair trade and an ever-expanding labor force leading the way! #MAGA”
As for Mr. Kudlow, he told CNBC that, “I must say as somebody who doesn’t like tariffs, I think China has earned a tough response not only from the United States... A thought that I have is the United States could lead a coalition of large trading partners and allies against China, or to let China know that they’re breaking the rules left and right. That’s the way I’d like to see. You call it a sort of a trade coalition of the willing.” A reference to George Bush’s 2003 Iraq War coalition is hardly the sort of talk designed to calm international tensions and the USD index opens in Asia around 89.60.
After taking bottom spot on our one-day currency performance table on Wednesday, the EUR fell further on Thursday against the GBP and USD but rose against the three ‘Commonwealth Currencies’; the Australian, New Zealand and Canadian Dollars. At the end of the Asian session yesterday, EUR/USD stood around 1.2380 but by the New York afternoon it was struggling to hold on to a 1.23 ‘big figure’.
France’s central bank revised up its 2018 growth forecast from 1.7% to 1.9% after data showed the economy grew 2.0% in 2017; its fastest growth in six years. Its updated economic outlook said that confidence indicators have held up better so far this year than it expected, joining the IMF, OECD and European Commission in raising their forecasts since the start of the year. Next year, the central bank sees growth easing to 1.7%, down from 1.8% previously, as exports are expected to offer less of a tailwind next year due to a lagged impact from the euro’s strength. It left its 2020 growth forecast unchanged at 1.6%. The economy is forecast to create 185,000-200,000 net new jobs annually through the end of the decade, cutting the unemployment rate to 7.9 percent by the end of 2020. That would be the lowest jobless rate since the end of 2008 and would also put President Emmanuel Macron within reach of a promise to cut it to 7 percent by the end of his term in 2022.
Of course, what still matters most for ECB monetary policy is the outlook for prices. The Banque de France forecasts that inflation will average 1.6% this year, then ease to 1.4% in 2019 before picking back up to 1.8% in 2020. The euro opens in Asia today at USD1.2305, AUD/EUR0.6335 and NZD/EUR0.5905.
The Canadian Dollar fell sharply on Thursday, with the whole of its decline coming during the North American time zone after a hardening of the US stance on trade and some very weak local housing market data. USD/CAD had traded pretty much sideways for 36 hours after its initial jump on the Poloz speech on Tuesday and by midday London time yesterday still stood at 1.2960. Within just a few hours it was a full cent higher, having moved on to a 1.30 ‘big figure’ for the first time since July 4th last year. Though GBP/CAD made fresh 20-month highs, neither AUD/CAD nor NZD/CAD could break their respective highs hit on Tuesday this week.
Thursday brought existing home sales data in Canada. Recall these fell 14.5% in January from December to the lowest monthly level in three years as tighter mortgage rules hit demand. New and tougher rules on mortgage lending were imposed at the start of January amid fears of a housing bubble, requiring lenders to “stress test” borrowers to ensure they could withstand higher interest rates. The changes meant fewer buyers qualify for loans. Far from rebounding in February, home sales fell another 6.5% during the month and were down 16.9% in year-on-year terms. Sales were down from the previous month in almost three-quarters of all local housing markets, with large monthly declines in and around Greater Vancouver and Greater Toronto. Despite an 8.1% monthly increase in February, new listings nationally were still lower than monthly levels recorded in every month last year except January, and came in 6.4% below the 10-year monthly average and 14.6% below the peak reached in December 2017.
After the twin hits from the Poloz speech and these very weak housing market numbers, Friday brings the manufacturing sales data. The Canadian Dollar opens in Asia this morning at USD/CAD1.3055, AUD/CAD1.0180 and NZD/CAD0.9490.
- NZD/AUD: 0.9280 - 0.9375 ▲
- GBP/NZD: 1.9110 - 1.9240 ▲
- NZD/USD: 0.7205 - 0.7350 ▼
- NZD/EUR: 0.5855 - 0.5945 ▼
- NZD/CAD: 0.9330 - 0.9520 ▼