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After some wild swings on Wednesday, GBP/USD is back at 1.40 and AUD/USD at 79 cents. Stock markets are up again despite higher US bond yields.

By Nick Parsons

Wednesday was a day of some stunning reversals in global equity and foreign exchange markets. Immediately prior to the US CPI release, the Dow Jones Industrial Average was up 150 points at 24,810. Less than 10 minutes later, it had fallen almost 500 points to 24,350. Barely ninety minutes after that, the index had rallied 370 points off its low and added a further 100 points before the close. It was a similar tale of extreme swings in FX. The British Pound spent most of Wednesday morning steadily falling and by lunchtime in Europe was by some distance the worst-performing of all the major currencies. GBP/USD stood just below 1.39 immediately before the US CPI numbers then dropped to a low just a few pips above 1.3800. It was then the quickest of all the major currencies to reverse its losses and went on to a day’s high just below 1.4000; more than a full cent above where it had been prior to the US data release. Overnight in Asia, it has regained a 1.40 ‘big figure’ for the first time in a week.

UK Foreign Secretary Boris Johnson gave what was billed as a major set-piece speech on Brexit yesterday. He said there are three main branches to the opposition to Brexit: A geo-strategic concern that Britain is a relatively small nation that has made a mistake in choosing to leave such a major international alliance, a spiritual and aesthetic concern - that people feel we have pulled up a drawbridge - and an economic fear that Britain will be worse off outside the EU. The Foreign Secretary said Brexit “need not be nationalist, but can be internationalist” and sought to allay those three concerns, acknowledging that he “runs the risk of causing further irritation” in making such an argument. More practically, Mr Johnson warned against a second referendum, telling his audience, “I say in all candour that if there were to be a second vote I believe that we would simply have another year of wrangling and turmoil and feuding in which the whole country would lose. So let’s not go there.”

In its annual review of the UK economy, the IMF noted, “Economic growth has moderated since the beginning of 2017, reflecting weakening domestic demand. The sharp depreciation of sterling following the referendum has raised consumer price inflation, squeezing household real income and consumption. Business investment has been constrained. In the medium term, growth is projected to remain at around 1.5 percent under the baseline assumption of continued progress in Brexit negotiations that lead to an understanding on a broad free trade agreement and on the transition process.” Executive Directors noted that “output growth remains positive and labor market performance strong, notwithstanding the moderation in economic activity that reflects the impact of the exchange rate depreciation on consumption and the heightened uncertainty following the decision to leave the European Union (EU). This uncertainty will continue to weigh on growth, and the outlook depends crucially on the outcome of the negotiations with the EU”. We have seen already this year that the GBP can rally on the prospect of positive Brexit outcomes, but the price action during the Foreign Secretary’s speech is a timely reminder of what can happen in the opposite case.

It’s hard to know where to begin with today’s US Dollar commentary so let’s stick initially to the facts and figures. The USD index peaked last Thursday around 90.25; a level it almost, but not quite, regained on Friday afternoon. From then on, as stock markets recovered, its index against a basket of major currencies fell over a full point to a low during Sydney time yesterday around 89.05. When January CPI came in above consensus expectations (see below) the index jumped to a high of 89.60 as 10-year bond yields hit 2.89%, the DJIA fell 460 points and the USD strengthened against all the currencies we follow here. Within 2 hours, however, the stock market was back in positive territory on the day and the USD had a stunning turnaround; losing almost a full point by the time London traders headed for home and hitting the lowest level in 10 days.

The much-hyped January CPI figures came in higher than consensus expectations which were for a m/m gain of +0.3% which would have taken the annual rate down from 2.1% to 1.9%. Instead, CPI rose 0.5% m/m and the annual rate was unchanged at 2.1%. The so-called ‘core’ rate of inflation which excludes food & energy prices and is seen as a better measure of underlying inflation trends, was one-tenth higher than expected at +0.3% m/m (the biggest monthly increase since last January) which lifted the annual rate from 1.7% to 1.8%. Indeed, the actual unrounded figure for core inflation was just 1/1000th of a point from being revised up to 0.4% m/m. For all the angst over CPI, we should remember that – unlike the RBA, RBNZ or BoE – the Fed does not target this measure of inflation. It tracks a different index, the personal consumption expenditures price index excluding food and energy, which has consistently undershot the central bank’s 2 percent target since mid-2012 and tends to run around 0.3% below core CPI. In this sense, the panic over higher than expected CPI looks a little overdone, even if there’s no denying an upward trend.

As well as inflation numbers, the January retail sales data were also released. These were quite a bit softer than consensus forecasts with the headline number falling -0.3% m/m versus expectations of a +0.2% m/m increase. The ‘core’ number excluding auto sales was unchanged on the month compared to forecasts of a +0.4% increase. This was the first monthly drop in retail sales since last August and was accompanied by downward revisions to some of the back data. Details showed a significant decline in building materials & furniture while online sales and restaurant spending was unchanged. After the data release, analysts rushed to revise down their Q1 GDP estimates. JP Morgan moved from 3.0% to 2.5%, BAML from 2.3% to 2.0% and Morgan Stanley from 3.3% to 2.9%. The Atlanta Fed which just a few weeks ago was up at 5.2% and was 4.0% at the beginning of this week is now down much closer to the pack at 3.2%. The USD index opens in Europe this morning around 88.60.

The calm which had engulfed the euro is now decisively over. EUR/USD traded on three different ‘big figures’ on Wednesday, tracing out a very similar pattern to that described above for the GBP. The pair edged lower throughout the Asian day and European morning, falling from a high just below 1.24 to the mid 1.23’s immediately prior to the US CPI and retail sales numbers. The EUR then dropped over half a cent but within ninety minutes had completely unwound its losses and went on to a best level in the mid-1.24’s; its strongest in 10 days.

Figures released by Eurostat confirmed the January 30th preliminary estimate that GDP in the Eurozone rose 0.6% in Q4 last year. Growth slowed a little in Germany and Italy, while the pace of expansion accelerated in the Netherlands and Portugal. Germany’s upswing - despite a slowdown in quarterly output - continues to be a key ingredient for growth in the euro area. Momentum at the end of last year was driven by a strong increase in exports, according to a national report. Government consumption and equipment investment increased, while private spending remained largely unchanged and construction slipped. The Dutch economy also benefited from buoyant global trade. GDP increased 0.8% in the fourth quarter, exceeding consensus estimates. Italian growth slowed to 0.3%, leaving it lagging behind France and Germany and providing a note of caution ahead of general elections next month. GDP increased 0.7% in Portugal.

A fascinating Bundesbank study published yesterday shows that cash no longer makes up most of the money spent in Germany. Cash accounted for 47.6% of German transactions by volume last year, down from 53.2% three years earlier and below the 50% mark for the first time since polling started in 2008. Cards grabbed a 39.4% market share last year compared to 33.4% in 2014, mirroring a global trend that has long taken hold in many other countries including Sweden and Britain. ECB Board member Yves Mersch is speaking at a conference in Paris today along with Chief Economist Peter Praet but the only economic statistics are the December trade balance which is rarely a market-mover. The EUR opens at USD1.24 and GBP/EUR1.12.

The Australian Dollar swung just as wildly as most of the world’s major currencies yesterday. AUD/USD stood at 0.7860 just before the inflation numbers and, as stocks tumbled, it fell almost a full cent. Two hours later, the pair had regained all its losses and more and by the close of business in New York it was back on a 79 cents big figure for the first time since February 5th.

The latest Labour Force figures were released overnight. Employment increased 16,000 to 12,453,500. Full-time employment decreased 49,800 to 8,460,900 and part-time employment increased 65,900 to 3,992,600. Since January 2017, full-time employment has increased by 293,200 persons, while part-time employment has increased by 110,100 persons. Seasonally adjusted monthly hours worked in all jobs decreased by 24.1 million hours (or 1.4%) between December 2017 and January 2018 to 1,708.2 million hours. This follows a decrease of 8.6 million hours (or 0.5%) from November to December 2017, and four consecutive increases up to November. The average number of hours worked per employee per week fell to a new record low of 31.7. Employees are on average working 2.7% fewer hours than a year ago and that will limit the boost to household incomes from rising employment.

Commonwealth Bank of Australia have already changed their interest rate forecasts to remove the two hikes they previously had penciled-in for 2018. Westpac haven’t yet done this but note, “the Bank’s forecasts are not entirely out of line with our own view and, arguably, consistent with steady rates over the next few years.” NAB, meantime, still has two 25bp hikes in its forecast profile for H2 2018. Amongst the offshore commentators, Capital Economics say, “while the continued strength of the labour market will provide at least some support to income and consumption growth this year, without much more wage inflation the RBA isn’t going to raise interest rates. We expect the RBA will keep interest rates at 1.5% until the second half of 2019.”

The Canadian Dollar had pretty much exactly the same price action as all the other major currencies on Thursday (though of course we have to invert it for comparison) but having reversed all its losses in the immediate aftermath of the US economic data, (which again took USD/CAD on to a 1.26 big figure), it took several hours to catch up with movements elsewhere. Eventually it broke down through 1.25 and this morning sits in the high 1.24’s; the CAD’s best level since Monday last week.

In economic data, January’s Teranet National Composite House Price Index rose 0.3% from the previous month, a touch higher than the historical average for January and a second consecutive monthly increase. The composite index was up 8.7% from a year earlier, the smallest 12-month rise since May 2016 and a seventh consecutive deceleration from the record 12-month gains of 14.2% last June. Moreover, only four of the 11 metropolitan markets surveyed showed gains – the first time since January 2016 that a rise in the Composite Index has had so little breadth. The rise was due mainly to a second straight monthly jump of the index for the important Vancouver market (1.2% in January on the heels of 1.3% in December). The Toronto index rose 0.2%, the Victoria index 1.0% and the Montreal index edged up 0.1%. For Vancouver, January was a ninth consecutive month without a decline. The cumulative rise over that period was 14.5%; comprised of 18.2% for condo units and 11.4% for all other housing. Vancouver and Montreal were the only markets surveyed whose index reached an all-time high in January

Today we’ll get to see the ADP payrolls report but coming almost a week after the official labour market data, it’s unlikely to have a great deal of market impact. At lunchtime locally there’s a speech from Bank of Canada Deputy Governor Lawrence Schembri.

The New Zealand Dollar traced out pretty much the same pattern as its Australian cousin in the wild period either side of the US CPI figures. The NZD/USD pair stood at 0.7325 just before the numbers then plunged around three-quarters of a cent. Two hours later it was more than a cent off the low at a 10-day high and finished the day as the top performer of all the major currencies we track here with NZD/USD in the high-73’s and the all-important AUD/NZD cross down near a 6-month low of 1.0745.

Overnight we’ve seen new figures on house sales from the Real Estate Institute of New Zealand. In a snappy Press Release they say that, “As the mercury rose during January to produce the hottest month on record, sales volumes across New Zealand rose when compared to the same time last year for the first time in 19 months”. The number of properties sold in New Zealand during January 2018 increased by 2.7% when compared to January 2017 (4,366 up from 4,251). The number of properties sold in Auckland increased 0.9% year-on-year to 1,157 up from 1,147. REINZ said, “January can often be a quiet month for the industry as people spend much of their time at the beach. However, clearly the warmer weather has helped sales, as it’s the first time we’ve seen a positive year-on-year sales increase in seven months. There were some really positive figures from around the country, with 11 out of 16 regions experiencing an increase in sales when compared to the same time last year.” The median house price for New Zealand increased by 7.1% to $520,000, up from $485,500 in January 2017. Auckland’s median price decreased by 1.2% to $820,000 down from $830,000 at the same time last year.

Tomorrow we’ll get to see New Zealand’s manufacturing PMI survey and the Kiwi Dollar opens in London at a 2-week high versus the USD and close to it strongest level in almost a month against the GBP.