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USD lower after DJIA falls 400 points. GBP up on BoE Carney hints about an update to UK growth forecasts.

By Nick Parsons

Volatility has certainly picked up in global foreign exchange markets and nowhere more than the British Pound. After Monday saw the first ‘down day’ for GBP/USD in 11 trading days, at one stage early in the morning on Tuesday, the pair dipped below 1.40 for the first time in a week. On a day which saw some large intra-day swings in both directions for all the major currencies, the GBP was the most volatile of all. GBP/USD fell 85 pips then surged over 1½ cents to end the day around 1.4160 and finish at the top of our one-day performance table. Overnight, it has extended these gains to 1.4190 and has fully unwound all the losses made since Friday’s close.

Bank of England Governor Mark Carney appeared Tuesday afternoon before the House of Lords Select Committee on the economy. He refused to comment on the confidential government analysis of the economic impact of Brexit which was reported to have been shown to Cabinet Ministers over the weekend. These had suggested growth would be between 2-8 percent lower over the next 15 years. Instead, he repeated his view that the 2016 Brexit vote had, so far, effectively knocked 1 per cent of GDP off the UK, relative to where it would otherwise have been, through weaker corporate investment and damage to household consumption due to higher inflation. He also hinted that the Bank is actually preparing to upgrade its forecasts at its Inflation Report next month. “I would expect that in 2019 we will see a pick-up in this economy all things being equal – strong global growth, greater certainty... A disorderly Brexit, not a likely scenario at all, is less likely than at the time we did the assessment in the fall.”

With no top-tier UK economic statistics on Wednesday and the Prime Minister out of the country for a three-day trade mission to China, the GBP opens this morning in Europe at USD1.4190, GBP/AUD1.7550 and GBP/NZD1.9210.

After a rare top spot on our one-day performance table on Monday, the USD very marginally extended its gains early in Europe on Tuesday with its index reaching a high of 89.28; its best level since last Wednesday. As the EUR found bids after some solid Q4 growth numbers, and the GBP rallied post-Carney, however, the USD index quickly shed nearly three-quarters of a point to 88.60 and has struggled to gain any upside traction overnight in the Asian trading day.

Treasury Secretary Mnuchin told the Senate Banking Committee that he "absolutely supports a strong dollar over the long term… I strongly support we have a free currency market that we don’t intervene in." He also said also said that his comments on the dollar in Davos "were blown out of proportion by the media and were in no way intended to talk down dollar." It’s fair to say that investors globally were far from convinced by these words, feeling instead that they were an attempt to head-off international criticism rather than turn the dollar around in any meaningful way.

Overnight, the main focus has been on President Trump’s State of the Union address which was delivered in Washington at 2am London time. Instead of the bleak vision of his inaugural speech, which warned of “American carnage”, Trump boasted of the extraordinary success of his first year in office and offered a more optimistic vision. “This is our new American moment… There has never been a better time to start living the American dream… Tonight, I call upon all of us to set aside our differences, to seek out common ground, and to summon the unity we need to deliver for the people we were elected to serve.” We’ll have all day to listen to the verdict of the political experts, but after a session in which the Dow Jones Industrial Average lost over 400 points, the USD index opens in Europe today at 88.60.

The EUR did not escape the volatility which was the feature of all the major currencies on Tuesday in the Northern Hemisphere, though its swings were less dramatic than the GBP. Early in the European morning, it very briefly broke below Monday’s 1.2345 low and just as it looked as though the market was set for a technically-driven drop, the pair reversed to be 110 pips higher at 1.2450 by lunchtime. During the NY session and overnight in Asia its has been down then up once more in a series of reversals which have been very frustrating even for the most experienced foreign exchange traders.

In economic news, real GDP in the Eurozone rose 0.6% q/q in Q4, slowing slightly from an upwardly-revised 0.7% in Q3, in line with the consensus. As it’s the preliminary report, there was no detailed breakdown of the various components: consumption, investment, government spending and net trade. It was the 19th consecutive quarter of growth in GDP and put the euro region’s 2017 expansion at 2.5%. That’s better than had been anticipated by the European Central Bank, and it’s a pace the region hasn’t seen since before the financial crisis in 2008.

Today we’ll see the CPI figures for the whole Eurozone area. These come after Tuesday’s surprisingly soft German numbers where a -1.0% m/m fall in January took the annual rate down from 1.6% to just 1.4%. Lower energy inflation made the largest contribution to the weaker headline figure while food inflation picked up. Expectations for Eurozone CPI are for the annual rate to dip to 1.3% from 1.4%. The EUR opens in Europe this morning at USD1.2445 and GBP/EUR1.1405.

In the 24-hour period from lunchtime in Sydney on Monday to the same time on Tuesday, AUD/USD was trapped in just a quarter-cent range from 0.8078 to 0.8103. Over the past 24 hours, though, it has been much livelier; the high-low range has widened to nearly three-quarters of a cent (0.8045 to 0.8110) and there have been several reversals within this range as traders shift their focus from the US Dollar to domestic economic news in Australia.

Overnight, the big news in Australia was the quarterly inflation numbers. To an outsider it always seems a very strange use of professional resources to not produce monthly data but then to produce three different quarterly measures all calculated to three decimal places: headline CPI, the core trimmed mean and the core weighted mean. Without getting too bogged down in the detail, all three measures were a bit softer than consensus expectations; albeit not as big a ‘miss’ as we saw in New Zealand last week.

In terms of what the CPI data mean for RBA monetary policy, there’s still a split of views amongst the Australian banks. CBA say, “We expect the RBA will be comfortable with today's outcome as it broadly lines up with their projections for both headline and underlying inflation. All in all, there is nothing in today's outcome or the recent economic data to change our view that the cash rate is on hold until late this year”. ANZ are a bit more hawkish, saying “We continue to look for the first of two rate hikes in May, although this is based on our forecast that the wage price index prints a 0.5% quarterly rise for Q4 [when released in late February].” The Australian Dollar opens in Europe at USD0.8085, with AUD/NZD at 1.0950 and GBP/AUD1.7550.

Although still in the 1.2280-1.2390 range where it has been for almost a week, USD/CAD has dipped overnight back on to a 1.22 ‘big figure’. There had been little incentive or desire to push the Canadian Dollar one way or another until investors saw what tone President Trump would strike in his State of The Union address, but the absence of anything inflammatory on trade in general or NAFTA in particular has helped the CAD overnight.

President Trump’s speech didn’t once mention Canada directly. The passage on trade said, “America has also finally turned the page on decades of unfair trade deals that sacrificed our prosperity and shipped away our companies, our jobs, and our Nation’s wealth. The era of economic surrender is over. From now on, we expect trading relationships to be fair and to be reciprocal. We will work to fix bad trade deals and negotiate new ones. And we will protect American workers and American intellectual property, through strong enforcement of our trade rules.”

Currency traders and investors can now turn to domestic economic data in Canada. We have the monthly GDP and industrial production numbers later today and the manufacturing PMI survey on Thursday. The Canadian Dollar opens this morning in Europe at USD/CAD1.2295 and GBP/CAD1.7460.

Having fallen after last week’s very soft CPI figures, the New Zealand Dollar has staged a comeback; not just against a generally weak US Dollar but also against its Aussie cousin. NZD/USD is up more than a full cent from a low yesterday morning of 0.7285 to 0.7395 whilst the AUDNZD cross (which on Monday hit a 7-week high of 110.70) is down at 1.0945.

After a boost from overseas trade figures on Tuesday, the latest news to help the NZD is an update from credit ratings agency Standard and Poors, which reaffirmed its existing high-level sovereign rating for New Zealand, which is AA when borrowing in foreign currency, and AA+ in local currency. S&P said, "The economy is wealthy and resilient, reflecting decades of structural reforms” and that it had incorporated the new Government's ‘more expansionary’ plans into its forecasts, which now have New Zealand growing at an average rate of 2.8 per cent each year over the next three years. "Our ratings reflect solid fiscal performance and our expectation that higher government spending will not materially weaken the country's fiscal profile," S&P said. "New spending measures, including more generous welfare, education, and housing policies, are partly funded through the cancellation of the previous Government's proposed personal income tax cuts… As such, we do not expect the measures to materially affect the Government's fiscal position”

Unsurprisingly, NZ Finance Minister Grant Robertson welcomed the S&P statement. "This decision effectively gives a tick to the policy agenda outlined in the Government's Budget policy statement in December, which confirmed our commitment to the budget responsibility rules, together with the fiscal forecasts presented in the half year economic and fiscal update." The New Zealand Dollar opens this morning in Europe at USD0.7380 and GBP/NZD1.9215.