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No surprises in RBA Minutes. GBP/USD lower overnight as USD extends gains. UK Brexit speech awaited.

By Nick Parsons

The GBP had a bit of a wobble on Monday and ended up sharing bottom spot in our one-day performance table with the NZD, having at one point been on its own way below the rest of the pack, before a rally during the North American morning. GBP/USD stood around 1.4030 at lunchtime in Europe but then took a dive to the low 1.3960’s as the initial 100-point gain for DJIA futures turned into a near 100-point loss. As stocks recovered, so too did the ‘cable’ rate, even though it struggled to hold on to a USD 1.40 handle and overnight it is lower once more, with Asian investors selling GBP against all the major currencies.

We said in our Sydney commentary last night that, “UK Ministers David Davis and Liam Fox are said to be preparing speeches for delivery this week but no amount of internet searches actually throws up any details of where and when these might be.” Our frustration has eased on leaks of the speech that Mr Davis is set to deliver today to Austrian business leaders in Vienna. According to reports, Davis will say, “We will continue our track record of meeting high standards after we leave the European Union. Now, I know that for one reason or another there are some people who have sought to question that our intentions. They fear that Brexit could lead to an Anglo-Saxon race to the bottom, with Britain plunged into a Mad Max-style world borrowed from dystopian fiction. … these fears about a race to the bottom are based on nothing – not history, not intention nor interest.” For all his soothing words, Mr Davis retains the image of someone who would cross the street to start a fight about Brexit and traders are wary that any unscripted remarks could once again raise tensions between him and negotiators in Brussels.

Away from Brexit, a fascinating analysis by The Guardian newspaper claims that Britain will move beyond “peak cash” this year, with debit cards set to overtake cash as the most frequently used payment method in the UK later this year. In 2006, 62% of all payments in the UK were made using cash; in 2016 the proportion had fallen to 40%. By 2026, it is predicted cash will be used for just 21%, according to figures from UK Finance. ATM data show that in 2016, there were 2.7bn withdrawals from the country’s 70,000 cash machines; the lowest number of transactions since 2010. The total amount of money withdrawn at ATMs has fallen steeply in the last few years; in 2016, people withdrew more than £6bn less than they did in 2015. Bank of England figures meanwhile show that while the volume of cash in the economy typically increases every year, it is now doing so at the slowest rate since 1972. It is not just the world of cross-border currency transactions which is being transformed by new technology and smarter companies!

The US Dollar had another good day on Monday, albeit closing below its best levels seen during the European afternoon. Its index against a basket of major currencies rose on Friday from a low of 87.95 to close around 88.75. Yesterday, it extended these gains up to 89.10 before slipping back to 88.85 as stock index futures lost 100 points then rallied back to flat at the end of the European day. It’s not clear what is the direction of causality here: whether the currency is driving stocks or vice-versa. If the causality isn’t clear, though, the correlation most definitely is and will be something to watch closely as the US returns today from the Presidents’ Day holiday and Chinese investors come back to the market later in the week.

Though US stocks and the currency seem well-correlated (negatively) the USD still isn’t getting any support from higher bond yields or the expectation of much higher short-term interest rates over the course of this year. Fed funds futures are fully pricing three 25bp rate hikes and put the probability of the Fed raising rates four times this year at 25 percent versus just 17 percent immediately before last week’s US CPI release. The overwhelming narrative amongst bank strategists is that the US Dollar is headed lower, if for no better reason than that is the prevailing trend.

The highlight of the week ahead will probably be Wednesday’s release of the Minutes of the January 31st FOMC; just two days before the 666-point drop for the Dow Jones Industrial Average and the subsequent surge in volatility. Of course, the further 2,000-point drop and similar-scale rally seen over the last two weeks should make any conclusions from the Minutes even more conditional and unreliable as policy signals than they usually are. But, as we’ve said before, there’s a whole army of Fed-watchers who have to earn their living trying to sort the wheat from the chaff on every sackful of words from the Eccles Building. The USD index opens this morning around 89.00; more than a full point above its recent 3-year low of 87.95.

The euro had a pretty quiet Monday. Although EUR/USD fell more than half a point either side of lunchtime in Europe, moving from 1.2425 to 1.2370, it then rebounded back on to a 1.24 ‘big figure’ as US stock index futures recovered their losses. Overnight in Asia it has again slipped somewhat on some renewed concerns about what may be happening in German politics.

Two German developments are worth noting. The first is that the 463,723 Social Democratic party members still have to decide whether to enter another grand coalition under Chancellor Angela Merkel. They have until March 2 to submit their votes, and the result is expected to be announced the following day. At a special SPD conference in January, only 60 percent of delegates voted to authorize their leaders to hold coalition talks with the conservatives. “I am convinced we will get a majority,” Andrea Nahles, who senior SPD officials this week endorsed as the party’s future leader, told Der Spiegel magazine at the weekend. “I don’t have a Plan B.” The second concern is that even if a coalition is approved, a poll published yesterday by the newspaper Bild put the Alternative for Germany (AfD) on 16 percent, showing that they are currently more popular than the Social Democrats (SPD). They entered the Bundestag for the first time in September after winning 12.6 percent of the vote. The party was set up in 2013 and fought the election of that year on an anti-Euro platform. They are now the second most popular party in the country so don’t be surprised to hear much more from AfD over the coming months.

Today brings Germany’s ZEW Survey of professional forecasters and the so-called ‘flash PMI’s’ are published on Wednesday. The EUR opens in London this morning in the high USD1.24’s and GBP/EUR1.12’s.

In a holiday-thinned day, it was noticeable on Monday how sensitive the AUD was to moves in US stock index futures – which were open for trading even as cash equities were closed. The high for the day for AUD/USD around 0.7935 came with the DJIA up around 100 points and when the market turned negative in the European afternoon, so too the AUD fell back to just a few pips above 0.7900. Holding on to that psychological level was a positive, and technically it was good to hold above Friday’s 0.7895 low, which has also held overnight after the release of the RBA Minutes.

After leaving interest rates unchanged for 16 consecutive months, the Minutes of the February RBA Board signaled more of the same ahead. Business conditions remained at a relatively high level and prospects for non-mining investment “were more positive than they had been for some time” but strong retail competition has exerted downward pressure on consumer goods and food for some time and was expected to persist “in the next few years”. Indeed, “members noted that food prices, excluding fruit and vegetables, had been little changed for nearly a decade”. After all the warnings from the Governor and Deputy Governor in recent speeches, the Minutes reiterated that, “There was still a risk that growth in consumption might turn out to be weaker than forecast if household income growth were to increase by less than expected. In an environment of high household indebtedness, consumption might be particularly sensitive to adverse developments in household income or wealth”

One thing is still clear after the Minutes: on current published forecasts, both CBA and NAB cannot be simultaneously correct. CBA has erased the two rate hikes it had penciled-in for 2018 whilst the NAB still has them in its forecast profile. The standout call on Australian interest rates is still the one from Westpac which notes, “Given our long-held view that rates would remain on hold in 2018, we were encouraged to note that the minutes point out financial market pricing suggested that market participants expected the cash rate to remain unchanged during 2018 but had priced in a 25bps increase by early 2019. Neither the Bank nor the markets are onside with our call for steady policy in 2019 as well, but a continuation of this benign inflation environment, weak consumer and softening housing markets could easily convince the Bank of our case.” Two years of unchanged Australian interest would surely weight down on the currency…

There’s been lots to digest in the last few weeks for the Canadian Dollar, not least because world’s second and fourth largest countries by area are facing huge uncertainty over the future of the Free Trade Agreement which has been in place for almost thirty years. With the USD on a weaker trajectory and a huge increase in stock market volatility, the CAD has not been unscathed. Over the past week it ended on net firmer against the US Dollar around 1.2550 but weaker against all the other FX majors with AUD/CAD, for example, up to a 3-week high of 0.9950 yesterday.

Canadian Finance Minister Bill Morneau met at the end of last week with private-sector economists in Toronto ahead of his upcoming February 27th budget. According to Bloomberg, he said they discussed the impact of US tax changes, as well as ongoing talks to revamp the North American Free Trade Agreement. He declined to say if corporate tax cuts were on the table on this side of the border in the wake of the Trump administration’s tax overhaul. In a letter to Morneau, the Business Council of Canada - which represents chief executives from dozens of major companies – last week said the country “must move quickly to shore up its business tax competitiveness.” They would say that, wouldn’t they… The Bank of Canada has raised rates three times since July 2017 and its next monetary policy meeting is on March 8th; two days after the RBA and the same day as the ECB. Money markets are indicating around a 70% probability of another hike by May, but it is not expected to come before then. This week brings official data on retail sales on Thursday then on Friday it’s earning, hours worked and the CPI numbers. Before then, wholesale trade numbers are released today. The Canadian Dollar opens in Europe this morning with USD/CAD in the high 1.25’s and GBP/CAD just below 1.76.

The New Zealand Dollar last week touched a fresh 2018 high of USD0.7434 before slipping back to close more than a cent higher at 0.7390, which is where it spent most on Monday before then losing almost half a cent against a generally well-bid US Dollar. Against its Aussie cousin, the AUD/NZD cross couldn’t break Friday’s 6-month low of 1.0705 and moved around a quarter of a cent higher as the day progressed.

Statistics NZ reported this morning that producer output prices rose 1.0% q/q in the fourth quarter of 2017, in line with expectations and unchanged from the previous three months. Higher output prices were up mainly due to dairy product manufacturing and higher oil prices. Producer input prices were up 0.9% q/q, shy of expectations for 1.0%, which would have been the same rate as Q3. The statisticians noted "Higher crude oil prices led to increased costs for many industries, including petroleum, forestry and logging, transport, construction, and farming." In the year to December 2017, producer output prices increased 4.7% and producer input prices 4.4%. The farm expenses price index increased 2.5%, while the capital goods price index increased 2.6%.

A separate survey from ASB bank today shows expectations that house prices will rise are at a six-and-a-half year low. Nationally, expectations that house prices would rise were a net 16% for the three months to December, down from 17% in the three months to October. Details showed expectations that house prices would rise in the South Island had lifted to a net 30% from 29%, led by Canterbury at net 11% up from 8 % previously. Price expectations continued to ease in the North Island to net 20%, down from 23% in the previous survey. The Kiwi Dollar opens in London in the high USD 73’s and just below GBP/NZD1.90.