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A very quiet start to the week. UK Spring Statement and US CPI are highlights on Tuesday. GBP opens steady at USD1.38 and EUR1.12

By Nick Parsons

As of Friday morning in London, GBP/USD was exactly unchanged on the week around 1.38 though by 3pm it had rallied almost three quarters of a cent to USD1.3875. The sole reason for this came from across the Atlantic; the latest US labour market report showed that 312,000 jobs had been created in February but the pace of average earnings had slipped back from 2.9% to 2.6%. Stock markets loved this combination and as the DJIA surged more than 300 points, so the US Dollar slipped back against all the major currencies. Whilst the GBP finished the week higher against the USD, it was down against the Australian and Kiwi Dollars at 1.7650 and 1.9015 respectively.

In economic news this Monday morning, credit card company Visa says spending on cards fell again in February, dropping 1.1%, and that the first quarter of 2018 was on track to be the “worst on record”. It said spending by consumers had fallen in nine out the past 10 months. The detailed Visa figures show the amount spent on the physical high street fell 2.6% while households also cut back spending on recreation and culture by 6.1%. The firm noted, “Britons have been in belt-tightening mode since last summer. February’s cold snap certainly didn’t alleviate this situation, particularly when we shine a spotlight on high street spending, and recreation and culture in particular, which saw its biggest decline since April 2010. As we look ahead into March, consumer spending is at risk of posting one of the worst Q1 results on record.”

Investors’ thoughts now turn to Tuesday’s Spring Statement from the Chancellor of the Exchequer (the traditional Budget has now been moved to Autumn). There is the chance of a rare upgrade to UK economic forecasts after the incoming data over the past few months have shown the Office for Budget Responsibility was too pessimistic in its assumptions on UK productivity. Speaking on TV on Sunday, the Chancellor said Britain's debt mountain was still too high and had to be brought down. "There is light at the end of the tunnel because what we are about to see is debt starting to fall after it has been growing for 17 continuous years. That is a very important moment for us but we are still in the tunnel at the moment… We have a debt of £1.8 trillion - 86.5% of our GDP. All the international organisations recognise that is higher than the safe level." The pound opens in Europe around USD1.3860, GBP/AUD1.7605 and GBP/NZD1.8950.

The US Dollar fell, rallied, then fell again last week and on a trade-weighted basis finished pretty much where it had begun. Its index against a basket of major currencies opened in Sydney last Monday around 89.60. It hit a low on Wednesday morning in London at 89.05 but immediately prior to the latest US employment report had rallied to a best level just above 89.90. The combination of a 312,000 increase in non-farm payrolls but a softening in average earnings to 2.6% from the 2.9% which had spooked equity markets a month ago, was deemed to be ‘risk-positive’ and pushed up equity markets whilst weighing down on the US currency.

The softening of President Trump’s initially very hard line on tariffs was seen as a modest positive for the currency, not least because it might reduce the threat of retaliatory action from other countries. An offer of talks from North Korean leader Kim Jong-Un was also interpreted in some quarters as a diplomatic victory for Mr. Trump which also helped boost the US Dollar and by Friday lunchtime the USD index stood at an 8-day high of 89.90. The February labour market report, as noted above, helped allay some of the recent concerns about a sharp increase in wage pressures and inflation as the US economy approaches full employment. The DJIA once again advanced more than 300 points on Friday.

For the week ahead, the main focus on economic data will be Tuesday’s CPI data. The headline inflation rate is expected to tick up to 2.2% y/y from 2.1% although the core rate excluding food & energy costs is expected to remain unchanged at 1.8%. Bear in mind that unlike the RBA, RBNZ or BoE, the Federal Reserve doesn’t have a CPI target. Instead, it looks at the core PCE deflator which is still some way below its preferred 2.0% level. After the inflation numbers, on Wednesday we have retail sales and then towards the end of the week it’s housing and industrial production data. The US Dollar index opens in Europe this morning around 89.60.

The EUR had a week which can best be described as “buy the rumour, sell the fact” or, as your author more rhythmically prefers it, “buy the mystery, sell the history”. The mystery, of course, was the second ECB Council Meeting of 2018 on Thursday, and whether President Draghi would be changing the language around QE and the withdrawal of some degree of monetary stimulus. The EUR had a two-stage reaction to the ECB Council meeting. Initially, EUR/USD spiked almost half a cent higher but by the end of Thursday afternoon it had fallen more than a full cent from the high to just 1.2320 and by Friday morning it was back down on a 1.22 big figure before more general USD weakness helped it climb back on to 1.23.

Draghi can certainly look back at the Press Conference as a job very well done: changing the communication around monetary policy in a slightly more hawkish direction yet pushing the EUR simultaneously lower. As well as a change to the language, we also saw new staff economic projections. Inflation forecasts have been revised down one-tenth to 1.4% for 2018 and two-tenths for 2019 to 1.5%. GDP was moved up one tenth for 2018 to 2.4% though unchanged for 2019 and 2020 at 1.9% and 1.7% respectively.

For the week ahead, a central bank which claims only to be driven by the inflation outlook will be watching carefully the final German CPI numbers on Wednesday and those for the wider Eurozone on Friday. There are plenty of Central Bank speakers, too, with President Draghi, Vice President Constanciao and Chief Economist Peter Praet all on Wednesday. Often, the week after an ECB Council meeting is one where monetary officials try to recalibrate any unwelcome market movements or policy expectations but this time around there’s no need at all for that. They’ll all be very happy with currency and interest rate movements since last Thursday’s Press Conference. The EUR opens in London this morning in the low-USD1.23’s with GBP/EUR at 1.12.

The Australian Dollar finished on Friday on a high note against a USD whose trade weighted index was little changed over the course of the week. On Thursday it had made a marginal fresh high for the week around 0.7835 but then joined in the ‘risk-on’ party after Friday’s US employment report to end the week at a 10-day high around 0.7850. A very quiet overnight session in Asia has seen the AUD trade a little higher to USD0.7875 as equities globally extend Friday’s gains.

After an unchanged RBA and a lower-than-expected Q4 GDP print, the only positives for the AUD at present are a continued recovery in global asset prices and a reduction in asset market volatility, most generally measured by the VIX index. Absent either of these two, the case for long or overweight positions in the AUD looks pretty thin. In their latest update, the analysts at Westpac are particularly negative on the Australian housing market. They note, “Dwelling investment contracted in 2017 by 5.8%. Based on the downturn in the trend in high rise approvals and a flat outlook for detached housing, we expect this downturn has further to run with the contraction accelerating into 2019. Oversupply and a marked slowdown in sales to foreigners are weighing on the outlook for residential building. House price inflation is disappearing. On a six month annualised basis, prices are now falling in Sydney and Perth and slowing in Melbourne and Brisbane… We expect a long, extended period of flat house prices on a national basis with weakness particularly centred on the Sydney and Melbourne markets. This will represent a considerable change in the “atmospherics” around housing wealth and may weigh further on prospects for consumer spending.”

For the week ahead, NAB’s monthly business survey is out on Tuesday and on Wednesday we have the consumer confidence numbers. Three RBA speeches are also scheduled. The first is from Michele Bullock, Assistant Governor (Financial System), at the Seamless Australia Payments Conference in Sydney on Tuesday, followed by Christopher Kent, Assistant Governor (Financial Markets) speaking at the KangaNews DCM Summit on Wednesday. Deputy Governor Guy Debelle ends the week with a speech on “Risk and return in a low rate environment.” The Australian Dollar opens this morning in the high-USD77’s with GBP/AUD at 1.76. .

The Canadian Dollar had quietly been the worst performing major currency of 2018 but it seems the whole world finally noticed the fact early last week and decided to become very bearish. By the end of the week, many of those investors who sold the currency would have been licking their wounds as it rallied sharply on Thursday and Friday. USD/CAD opened last week at 1.2880 and went on to hit a high on Monday of 1.2995; its highest since early July whilst GBP/CAD at 1.78 was the highest since late-June. The Canadian Dollar had a good day on Thursday after the US specifically excluded Canada and Mexico from the initial impact of tariffs on steel and aluminium. USD/CAD fell from the mid-1.29’s back on to a 1.28 big figure and the CAD gained more than a cent against both the GBP and AUD. We warned on Friday that, “it’s not clear that all the ‘short’ positions in the CAD have yet been unwound. Its recent rally may have a little further to go if this afternoon’s jobs data don’t hold any nasty surprises.” That is exactly how things turned out, with USD/CAD ending at the week’s low around 1.2815.

The Canadian labour market report was released at the same time as its US counterpart and was therefore mostly overlooked. Statistics Canada said the Canadian economy added 15,400 jobs in February after a big loss in January but full-time positions shrank and wage growth decelerated as the unemployment rate dipped to 5.8% from 5.9% in January. Analysts in a Reuters poll had forecast employment would increase by 20,000 after Canada shed 88,000 positions in January, the most in nine years. February’s gains were all in the part-time sector, which added 54,700 positions, while the full-time sector shed 39,300 jobs. Average hourly wages for permanent employees rose by 3.1% y/y, down from the 3.3% y/y increase in January.

For the week ahead, BoC Governor Stephen Poloz is due to make a speech on Tuesday evening which will be closely analysed for further clues on monetary policy. The Canadian Dollar opens in Europe this morning with USD/CAD in the low-1.28’s and GBP/CAD at 1.7750.

The New Zealand Dollar had by its recent standards a pretty quiet week, with NZD/USD spending all but a few minutes on the same ‘big figure’ of 72 US cents. A ‘risk-friendly’ US labour market report on Friday helped lift the NZD back up to a close around 0.7285 and overnight in Asia, the Kiwi has climbed back on to 73 cents. With the AUD/NZD cross around 15 pips lower at 1.0760, this leaves the NZD at the top of the charts after the first of this week’s 15 trading sessions in Asia, Europe and North America.

A spokesman for Trade and Export Growth Minister David Parker said today that New Zealand has formally sought an exemption from the tariffs announced by President Trump, and while the details are still to be clarified, New Zealand may fall within the flexibility offered to close security partners. In an emailed statement to the Press, he said, "I am also concerned about the secondary impacts of these tariffs in terms of the knock-on effects on prices of steel and aluminium products around the world, including in New Zealand… A tit-for-tat escalation benefits no-one and hurts everyone." Prime Minister Jacinda Ardern also said ministers were working to get an exemption for New Zealand.

In economic data, three of the ‘partial data’ which feed in to the calculation of the GDP numbers which are out this coming week have already been released. The total sales value for wholesale trade rose 3.0% in the December 2017 quarter. Building Work Put in Place, total building activity volume was up 1.4% in the quarter whist the total volume of manufacturing sales rose 1.0% in Q4. Analysts have now firmed up their forecasts for the Q4 GDP estimate due on Thursday. ANZ, BNZ and Westpac all pick +0.7% q/q and 3.1% y/y whilst ASB Bank go for +0.8% and 3.2%. The Kiwi Dollar opens in London this morning in the low-USD 73’s with GBP/NZD in the mid-1.89’s. .