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A very busy week ahead with Trump’s “State of the Union” speech Tuesday, AUD CPI Wednesday and US payrolls Friday.

By Nick Parsons

Up until last Friday, the British Pound had a remarkable 11-day sequence in which it never tested the previous day’s low against the US Dollar. In doing so, it rose more than 7 cents and at one point was almost 9 cents higher having reached a best level on Thursday around 1.4330. Friday’s low was 1.4145 and overnight in Asia, the GBP has traded down to just below 1.4115 bringing that impressive run to an end. There’s still a very long time until close of business this evening but if it stays at current levels then we’ll be writing about a ‘down day’ for the first time in 2 ½ weeks.

None of the blame for the Pound’s somewhat lower opening can be pinned on incoming data. Friday’s Q4 GDP numbers were a touch stronger than consensus forecasts but exactly in line with the +0.5% rise which the Bank of England expected in its November Quarterly Bulletin. The weekend Press in the UK has focused on what the GDP numbers might mean for monetary policy, with some analysts now bringing forward their forecasts for the next hike in interest rates. HSBC, for example, said that along with increasing numbers of people in work, the figures “support our view that the Monetary Policy Committee will raise Bank Rate again in May.”

In what will be a relatively quiet week for UK economic data – with Thursday’s manufacturing PMI probably the highlight – there’ll be plenty of time to focus instead on politics and Brexit. Most newspapers report that Prime Minister Theresa May has cancelled plans to give another high-profile speech such as the one she gave in Florence last year. The reason for this is not just because, allegedly, she does not know what she wants herself, but that anything she says is likely to worsen divisions amongst her own Cabinet and backbenchers. An opinion poll by ICM in The Guardian on Saturday said that voters support the idea of holding a second EU referendum by a 16-point margin. 47% of people would favour having a final say on Brexit once the terms of the UK’s departure are known, while 34% oppose reopening the question. Amidst the political intrigue, the GBP begins the new week at USD1.4140, GBP/AUD1.7465 and GBP/NZD1.9265.

The US Dollar had a dramatic week which saw it fall a net 1.7% against a basket of major currencies. Its index opened last Monday morning around 90.25 but after the US Trade and Treasury Secretaries unleashed their own particular brand of Alpine diplomacy at the WEF in Davos, it hit at a fresh low on Thursday of 88.20; its weakest since early-December 2014. Later that evening, in an interview with CNBC, President Donald Trump said, "the dollar is going to get stronger and stronger and ultimately, I want to see a strong dollar,", further adding that Treasury Secretary Steven Mnuchin's comments were taken out of context. After he then delivered his “America First but not Alone” speech to a packed conference hall in Davos on Friday, the USD steadied somewhat to end a very dramatic week at 88.70.

The week ahead brings plenty of news on the US economy as well as Dr Janet Yellen’s last meeting as Chairman of the Federal Reserve Bank. Market-derived probability estimates show just a 3% chance of a 25bp hike in rates, with the overwhelming view being this will not come until the March 21st FOMC meeting. On Tuesday we get the latest reading on consumer confidence, Wednesday it’s the Chicago NAPM then on Thursday the ISM manufacturing survey. The first Friday of the new month, as usual, is the labour market report where consensus estimates are for non-farm payrolls to have increased about 180k with the unemployment rate steady at 4.1%.

After President Trump’s sales pitch to the world leaders in the Swiss Alps, tomorrow is his opportunity to pitch to a domestic audience. When the President delivered his first address to US Congress last year, it was technically not termed a State of the Union speech because he had only been on the job for five weeks. In a Press briefing on Sunday, a senior administration official told reporters that when Mr Trump speaks at 9pm EST on Tuesday, laying out future plans and reflecting on his first year in office, he will be “speaking from the heart” to discuss jobs and the economy, infrastructure, immigration, trade and national security. The speech is titled, “Building a safe, strong and proud America”. The US Dollar index opens ahead of this very busy week at 88.80.

All last week’s economic news in the Eurozone was without exception positive but for the foreign exchange market, none of it was really ‘new news’. The EUR was little changed for the first couple of days around USD1.2250 as investors awaited Thursday’s ECB Council Meeting. Just ahead of that, of course, came US Treasury Secretary Steve Mnuchin’s dramatic intervention which sent the EUR up a couple of cents to 1.2455.

At the ECB Press Conference on Thursday afternoon, President Draghi was clearly rattled. Even though it was the ECB’s own change of stance back on January 11th which had pushed EUR/USD up from 1.1950 to 1.2300 even before Mr Mnuchin spoke, Mr Draghi entered a war of words with unnamed (but clearly American) officials for manipulating the currency, saying “someone else’s FX talk doesn’t comply with agreed terms...” EUR/USD hit a high of 1.2530 during the ECB Press Conference before falling one and a half cents on President Trump’s comments about wanting a stronger Dollar. Thursday was a very dramatic and volatile day in the world of foreign exchange.

The week ahead in the Eurozone brings Q4 GDP figures on Tuesday where consensus estimates are for a +0.6% quarterly increase. Also on Tuesday we’ll get German CPI figures which will then see analysts firming up their forecasts for the Eurozone CPI numbers on Wednesday. Thursday brings the final Markit PMI numbers across Europe, whilst investors need to be prepared at any time for the usual anonymous post-ECB briefings and clarifications. After a relatively quiet session in Asia overnight, the EUR begins this week at USD1.2425, AUD/EUR0.6520 and NZD/EUR0.5905.

After a slow start last week, a combination of decent local economic news and US Treasury Secretary Mnuchin’s words on the benefits of a weaker dollar helped push the AUD higher. On Friday it went on to reach a high against the USD just below 0.8135; its best level since January 2015 when it was around three-quarters of the way through its multi-year decline from the all-time high in Summer 2011 around USD1.10 to just 70 cents four years later. The first trading session of the week in Asia has seen the AUD give back around 40 pips of Friday’s gains.

As Australians head back to work at the end of the Summer holidays and a long weekend, so too economic news flow begins to pick up. On Tuesday its the monthly NAB Business Survey but more important will be Wednesday’s quarterly CPI numbers. The official statisticians don’t produce monthly inflation numbers. It means the government and central bank have to rely on private sector estimates for a timely read on price pressures, then once a quarter have a whole series of official numbers (headline, trimmed mean, weighted median etc) which can sometimes be difficult to interpret. Anyhow, the general consensus is that headline CPI will rise around 0.7% q/q to take the annual rate up to 2.%.

The RBA doesn’t have a Board meeting in January so its meeting on Tuesday February 6th will be its first chance for two months to publicly review all the incoming data. Whilst any comment they make on exchange rates will be seized on by analysts, it’s probably still the case that monetary policy in 2018 will be determined more by growth in wages than by what’s happening to the external value of the currency. The Australian Dollar starts this new week in Europe at USD0.8090, with AUD/NZD at 1.1030 and GBP/AUD1.7460.

All of the drama for the Canadian Dollar came two weeks ago as it became the first G7 Central Bank to raise rates in 2018. Last week it consolidated its gains. Monday’s opening level of USD/CAD1.2490 proved to be the high of the week and as the USD slid, WTI crude rose steadily to a high around $66.50 per barrel and negotiations around NAFTA seemed to proceeding well, it closed on Friday around 1.2315.

Speaking in Davos, Bank of Canada Governor Stephen Poloz said he did not know what potential there may be for further interest rate hikes this year, reiterating that policymakers remained both data dependent and alert to developments with NAFTA. "We've explained to people that there are a number of important issues that force us to not be mechanical or to use a rule or to plan ahead in that way. We've said we are totally data dependent." Asked if the BoC was also "NAFTA dependent," Poloz said: "Oh yes, very." But he said it was impossible to do the arithmetic ahead of time to know what policy response may be needed if the trade deal is terminated or significantly altered.

For the week ahead, we get the monthly GDP and industrial production numbers on Wednesday and the manufacturing PMI survey on Thursday. Officials from the United States, Canada and Mexico will wrap up the sixth of seven planned rounds of talks on the North American Free Trade Agreement in Montreal today, with little sign yet of agreement on US proposals to overhaul the $1.2 trillion pact. On Sunday, Mr Trudeau told a televised meeting of Liberal legislators in Ottawa that the government was working hard to get a better NAFTA deal, although it was a day of rest for the three Chief NAFTA negotiators who had the day off. Officials say that if the three decide the process should continue, an additional round of talks will start in Mexico on February 26th. The Canadian Dollar starts the week in Europe at USD/CAD1.2340, AUD/CAD0.9985 and GBP/CAD1.7435.

The New Zealand Dollar outperformed its Aussie cousin in the first part of last week before reversing all the gains and more in the final two days. On Wednesday, as the USD slide accelerated and deepened after the Mnuchin comments in Davos, NZD/USD hit a high around 0.7430; the first time it had been on a US 74 cents ‘big figure’ since early-August 2017. After a much weaker than expected set of CPI numbers, however, the NZD went into reverse. NZD/USD immediately tumbled a full cent to around 0.7325 and then on to a low Thursday around 0.7290 with AUD/NZD back up to 1.09 then 1.10.

To recap, the median published estimates were for a quarterly increase in CPI of 0.4% which would have left the annual rate at 1.9%. Instead, StatsNZ reported that prices rose just 0.1% in the December 2017 quarter to take the annual rate down to 1.6%. Local analysts pushed out their expectations for the next Reserve Bank of New Zealand rate hike to mid-2019, whilst amongst the offshore banks Morgan Stanley noted “the weakness seen in 4Q inflation should see the RBNZ on-hold over 1H18, possibly with an added emphasis on the need for a weaker currency”.

There’s plenty of data to be released locally this coming week. December trade figures on Tuesday should rebound from a very poor performance in November whilst on the housing market, Friday brings building consents. On Thursday we have the ANZ job advertising figures and at the end of the week, the always fascinating numbers on net migration and visitor arrivals. The New Zealand Dollar opens this Monday morning in Europe at USD0.7335 and GBP/NZD1.9265.