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US stocks fully reverse Wednesday’s plunge. EUR stays soft ahead of CPI figures, GBP remains below USD1.40.

By Nick Parsons

Intra-day movements across asset classes are becoming more volatile, less predictable, and often occurring with few obvious catalysts. Did Wednesday evening’s FOMC Minutes really warrant a 400 point drop in the Dow Jones Industrial Average? And if the answer is ‘yes’, then why did the same index rally 300 points the very next day on absolutely no fresh news or information? We may have to live with such swings for some time to come, and factor them into our decisions on when and how to execute our currency transactions; whether they be for hedging, investment or simply recreational cross-border expenditure such as holidays. The GBP has recovered almost three-quarters of a cent from Thursday’s low but is still down two cents from this time a week ago and hasn’t been above USD1.40 for more than 48 hours.

In economic news, UK growth in the fourth quarter of last year has been revised down to 0.4%, from an initial estimate of 0.5% whilst annual growth for 2017 as a whole has also been revised down a little, from 1.8% to 1.7%. details showed that business investment was flat in Q4 and household spending rose by just 0.3% during the quarter, which means it only grew by 1.8% last year. A tenth or so off the GDP numbers doesn’t sound much but in terms of presentation it is very important. It means the UK is at the bottom of the G7 pack with average growth in 2017 back below Japan and Italy (Canada doesn’t report Q4 figures until March 2nd).

UK Government Ministers headed away on Thursday for a Cabinet ‘offsite’ meeting on Brexit, to discuss the ‘position paper’ which had been widely leaked. In what is understood to be the Prime Minister’s preferred model, the UK would be in regulatory alignment with the EU in some areas while finding different ways to achieve the same outcomes in other sectors. In the so-called ‘third basket of sectors’, the UK would in time diverge from the EU and go its own way under the model. If that sounds an elaborate fudge, that’s because it is! The EU have spotted it too and a European Commission document timed to coincide with the meeting says, “The UK views on regulatory issues in the future relationship including the ‘three basket approach’ are not compatible with the principles in the [European council] guidelines.” Back to the drawing board…

We warned earlier in the week that whilst we couldn’t be sure of the direction of causality between stocks and the US Dollar, the correlation was pretty strong. 700 points off the DJIA from last Friday’s high added a little over 2 points to the dollar’s index against a basket of major currencies, which yesterday morning traded up to 89.85; its highest in almost 10 days. As the Dow Jones then added 350 points by the time London traders left for home, so the USD index gave back around half a point of its recent gains. All that currency traders have to do is to figure out where stock markets are going!

St. Louis Federal Reserve President James Bullard cautioned that investors may be "getting ahead of themselves" in anticipating four rate hikes from the central bank this year. Speaking with CNBC Television, Bullard said he doesn't see the case for a 1.2% increase in the Fed Funds rate this year, adding that "one hundred basis points in 2018 seems a lot to me." He also said there was a "ways to go" with respect to sustainable upward move on inflation and reiterated the view that US GDP will likely grow between 2.4% and 2.5% this year. Fed Governor Randal Quarles, meantime, gave a speech in Tokyo saying, “The U.S. economy appears to be performing very well and, certainly, is in the best shape that it has been in since the crisis and, by many metrics, since well before the crisis… With a strong labor market and likely only temporary softness in inflation, I view it as appropriate that monetary policy should continue to be gradually normalized."

The US economic calendar is empty on Friday which might not be a bad thing given the volatility seen already in this holiday-shortened week. The USD index opens this morning in Europe around 89.45; down almost half a point from Thursday’s high but still 1½ points up on where it was this time last week.

The euro has had a pretty lively couple of days. It jumped to 1.2355 on Wednesday’s Fed Minutes before plunging to a low early in Thursday’s European morning around 1.2260. As stock markets recovered and the USD gave back some of its recent gains, so the EUR first stabilised then jumped around three-quarters of a cent as the daily gains for the DJIA exceeded 300 points. Overnight is Asia it has eased back once more and is just holding on to a USD 1.23 ‘big figure’.

Investors have grown used to a steady stream of good and better than expected economic data in the Eurozone. There were the first cracks in this narrative with Wednesday’s ZEW Survey and yesterday morning’s ifo survey was a genuine disappointment. The institute noted, “Germany’s very favourable business climate cooled down considerably this month. The ifo Business Climate Index fell to 115.4 points in February from 117.6 points in January. Companies were less satisfied with their current business situation, but the indicator was at its second highest level since 1991. This signals economic growth of 0.7 percent in the first quarter. After the euphoria of recent months, companies’ assessments of the business outlook for the months ahead were also far less optimistic. In manufacturing the index fell considerably from last month’s record high. Assessments of the current business situation were slightly less favourable, although they remained at a high level. Manufacturers also downwardly revised their business expectations. They reported a marginal slow-down in demand and slightly lower order levels.”

The Minutes of the ECB Council Meeting said, “Some members expressed a preference for dropping the easing bias regarding the APP from the Governing Council’s communication as a tangible reflection of reinforced confidence in a sustained adjustment of the path of inflation… However, it was concluded that such an adjustment was premature and not yet justified.” Mr Draghi’s views on FX at the Press Conference were widely shared among Council members. “Concerns were expressed about recent statements in the international arena about exchange rate developments and, more broadly, the overall state of international relations…The importance of adhering to agreed statements on the exchange rate was emphasised.” An unusually extensive discussion of FX said, “It was also pointed out that the bilateral exchange rate of the euro against the US dollar had changed more than the euro's nominal effective exchange rate... However, explaining the US dollar weakness was not straightforward, given the strength of recent data releases and the fiscal and monetary policy outlook in the United States”. Friday’s Eurozone CPI numbers might show the extent to which a stronger euro is still weighing on prices. The EUR opens in London this morning at USD1.23 and GBP/EUR1.13.

At the beginning of today’s commentary, we mentioned the volatility across asset classes; something which is clearly shown by the Australian Dollar. On Wednesday it was the worst performing currency but yesterday it was at the top of the pile as US stock markets rallied sharply and market-based measures of risk such as the VIX index eased back further. Overnight in Asia, the AUD has consolidated on a US 78 cents handle, but has gained against the Kiwi Dollar with AUD/NZD now back on 1.07.

Prime Minister Turnbull is on an official visit to the United States. This will be his fourth meeting with Mr Trump and he will be accompanied on this trip by accompanied by four of Australia's six state premiers, other local leaders and 20 CEOs of the nation's largest companies. Briefing journalists ahead of the trip, an unnamed Australian official said, “The prime minister is travelling with a large delegation of business leaders and he is very keen to talk trade opportunities, while China will obviously be an important element of the talks". Mr. Turnbull is still keen to promote the Trans-Pacific Partnership, the official said, even though it is likely to receive a lukewarm reception from Trump who last year withdrew the United States to concentrate on protecting US jobs.

After a scandal which has dominated Australian media for almost two weeks, Deputy Prime Minister Barnaby Joyce says he will resign following a politically damaging saga that began with his affair with a former staffer. Mr Joyce said he would step down on Monday as leader of the Nationals, the junior government partner. He had previously resisted calls to quit amid intense scrutiny over his ministerial conduct. There will now be a ballot to determine the Nationals leader and deputy prime minister although Joyce has no clear successor and refused to endorse anyone. The Australian Dollar opens this morning in the low USD78’s with GBP/AUD just over 1.78. .

The Canadian Dollar has slipped steadily over the past week, not just against a rebounding US Dollar. On Thursday morning, USD/CAD moved on to 1.27 ‘big figure’; a fresh high for 2018 and the best level since December 26th last year. After the latest retail sales numbers were released, the CAD fell further, lifting USD/CAD to a high of 1.2740.

Stats Canada reported that after three consecutive monthly increases, retail sales decreased 0.8% in December. Sales fell in 6 of 11 subsectors, representing 42% of retail trade. Lower sales at general merchandise; health and personal care; and electronics and appliance stores more than offset gains at motor vehicle and parts dealers and food and beverage stores. Excluding motor vehicle and parts dealers, retail sales fell an even bigger -1.8%m/m. There’s no doubting that these numbers were considerably worse than the +0.2% m/m consensus, but retail sales were up 1.5% in the fourth quarter and up 6.7% for the year. Local analysts said the disappointing reading put the economy on track for growth of about 2 percent in the fourth quarter, below the Bank of Canada’s 2.5 percent forecast. Statistics Canada will release fourth-quarter growth figures next week. The market-derived probability that the BoC will remain on hold at its March 7th meeting rose to 96% , though another rate hike is still fully priced in by July. There’s more economic data today with earnings, hours worked and the CPI numbers. The Canadian Dollar opens in Europe this morning with USD/CAD at 1.27 and GBP/CAD in the low 1.77’s.

The New Zealand Dollar has enjoyed a very strong run against its Aussie cousin and has been down to 1.0660 earlier this week; the lowest since early August last year. Today the NZD has run into what seems to be a bout of profit-taking and AUD/NZD is up around 1.0720, which has pushed the Kiwi to the bottom of our one-day performance table. NZD/USD has slipped below 73 cents for the first time since the spike lower after US CPI figures 10 days ago.

Stats NZ reported today that after adjusting for price and seasonal effects, total retail sales volumes rose 1.7% in the fourth quarter last year. This followed a 0.3% increase in the September 2017 quarter. The statisticians noted, "Food and beverage services led this quarter’s retail increases, but people were not just eating out, they also spent more on groceries in the December quarter.” Shoppers bought more from 11 of the 15 retail industries. The largest rises were food and beverage services (up 3.7%), motor vehicle and parts retailing (up 2.1%), and supermarket and grocery stores (up 1.4%). Accommodation had the largest decrease (down 2.3%). The value of total retail sales was $25.2 billion in the December 2017 quarter, up 6.3% from the December 2016 quarter.

After the retail sales data, analysts at ANZ bank said, “We have lifted our estimate for Q4 GDP from +0.5% q/q to +0.7% q/q. Supportive forces for consumer spending remain. The labour market is strong, and wage growth is expected to tick higher. Interest rates remain low and competitive price pressures should persist. While we are not negative on the outlook from here, we do believe consumption growth will moderate as households rebuild saving… In addition, with visitor arrivals growth slowing and the currency likely to bite into average visitor spending, the impetus from international tourists is also likely too cool.” The Kiwi Dollar opens in London in the high-USD 72’s and GBP/NZD1.91.