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Chancellor’s Spring Statement is at 12.30pm. UK economic forecasts could be upgraded. Watch also US CPI for clues on interest rates.

By Nick Parsons

The British Pound finished on Monday as the top performer of the day, just edging the Australian Dollar into second place on our one-day table. GBP/USD was initially knocked lower by a pretty downbeat set of UK credit card numbers from Visa which warned that the first quarter of 2018 was on track to be the “worst on record” and that spending by consumers had fallen in nine out the past 10 months. From a low just above USD 1.3840, however, the GBP was then boosted by talk of an agreement on a post-Brexit transition deal and GBP/USD hit 1.39 at the end of the London afternoon. Overnight in Asia it has slipped back a little and though trading ranges remain tight, the pound is actually lower against all the major currencies we follow closely here.

Speaking at the Institute of Directors in London, junior Brexit minister Robin Walker said, “We recognise how important it is to secure the deal on the implementation period as soon as possible. I want to stress that we are very close to a deal at this time.” Britain has said it will adhere to EU regulations for a time-limited period after it leaves the European Union in March 2019, and hopes the details of this transition, or implementation, period, will be finalised at a summit with the EU on March 22-24. Britain has said it expects the transition period to last around two years after its departure date, although the European Union has said it should end earlier, on December 31st 2020.

Thoughts turn today to the Chancellor of the Exchequer’s Spring Statement. 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. There are no longer any changes to taxes announced in March as the UK tax year begins on April 6th and the Chancellor has said he prefers to make these announcements in the Autumn to give time for consultation on detailed implementation. The OBR’s numbers, then, will likely take centre-stage in this new set-piece event which, according the BBC will comprise just a brief 15-minute statement to MP’s at 12.30GMT.

The US Dollar fell modestly on Monday; a day which brought no fresh incoming economic news and few further developments in the trade tariff saga. Its index against a basket of major currencies had ended last week around 89.70 and by close of business in New York it had slipped just a couple of tenths to 89.50. The USD was down against the GBP and EUR, as well as the Antipodeans, but finished up against the CAD. In stock markets, meantime, the DJIA managed to turn a 150-point gain into a 100-point loss by late afternoon in New York.

Even after last week’s employment report, Chicago Federal Reserve Bank President Charles Evans said he wanted the US central bank to keep interest-rate increases on hold until after March to allow inflation a chance to rise and even exceed the Fed’s 2-percent target. “My own preference would be to wait a little bit longer… We could go midyear and all of a sudden see, ‘wow, inflation continues to move up towards 2 percent, I’m much more confident’ and we continue an upward gradual adjustment of the funds rate.” Evans told both CNBC and Bloomberg that the February jobs report was good news in that it showed more people entering the labor force, with the participation rate rising to a five-month high of 63 percent. But, with strong hiring and an unemployment rate of 4.1 percent, he had hoped that wage growth would be stronger. He also said he would rather wait at least until inflation data for March had been released before raising rates. The market doesn’t share Mr. Evans’ view on the timing of a rate hike. A 25bp move next Wednesday is priced at an 89% probability with a 73% chance of at least a further 2 more hikes by the end of December.

For today, the main economic focus will be the 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 89.55.

EUR/USD spent most – but not all – of Monday on a 1.23 ‘big figure’ with its best level just under 1.2340 coming early in the European morning. Having dipped to a low just above 1.2290 by lunchtime, the EUR then clawed its way back on to 1.23 to finish mid-table on our one-day performance chart in what was in truth a pretty lacklustre session for most of the major currencies. In Asia overnight, less than 20 pips separated the high and low for EUR/USD and with the exception of the NZD, no currency is more than one-tenth of a point from where it closed yesterday evening.

US President Trump tweeted on Monday that, “Secretary of Commerce Wilbur Ross will be speaking with representatives of the European Union about eliminating the large Tariffs and Barriers they use against the U.S.A. Not fair to our farmers and manufacturers.” According to Bloomberg, a meeting in Brussels between EU Trade Commissioner Cecilia Malmstrom and her U.S. counterpart Robert Lighthizer on Saturday ended without a breakthrough, as the EU didn’t receive assurances that it will be exempted from the metal tariffs. “If anyone starts throwing stones, it’s better first to make sure he’s not living in a glass house,” European Commission spokesman Enrico Brivio said. Asked to respond to Trump’s accusations that the EU is imposing barriers to U.S. automakers, Malmstrom said that “it’s hard to argue on Twitter over these issues, but the European Union is a very open market.”

Tuesday looks a pretty quiet day in terms of scheduled economic data in the Eurozone, as indeed does much of the rest of the week. The highlight will be 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 Constancio 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. The EUR opens in London this morning in the low-USD1.23’s with GBP/EUR at 1.12.

The global ‘risk-on’ mood definitely helped the Australian Dollar in the Asian session on Monday and AUD/USD marginally extended last week’s rally to reach a best level just under 0.7880. After an early mark-up, however, stocks found little fresh buying interest and as US index futures began to give back their gains, so too the AUD slipped back a little. In Asia overnight, the AUD has been fractionally higher but the trading ranges were not wide and it would be unwise to read too much into the price action. It does seem that the near-term fortunes of the Aussie Dollar are once again closely aligned to those of the equity market.

The highlight in Australian economic news today is the well-respected NAB monthly business survey. The business conditions index moved 3 points higher to +21. This is a record high since the monthly survey commenced in March 1997, although the same measure in NAB’s quarterly survey reached this level in 1994. In contrast, the business confidence index declined by 2 points to +9. According to NAB, “The fall in confidence may reflect the turbulence seen in international financial markets in early February, but confidence remains above average suggesting that the impact was relatively limited”. The strength in business conditions wass broad-based with all major industry groups reporting above-average conditions. NAB noted, “The gap between the best and the softest performing industries is at a relatively low level with even the underperforming retail sector recording its highest reading in eight months. That said, the trend down in personal & recreational services over the past four months needs to be watched closely as it could indicate that softness in consumer spending is broadening beyond retail.”

It is striking that even a record high for NAB’s business conditions sees the bank hedging its bets on the interest rate outlook. It recently removed one of the two hikes in its 2018 forecast profile and now says, “We expect by late 2018 the RBA will feel relaxed enough about the domestic fundamentals to cautiously start withdrawing the stimulatory policy stance it is currently running. However, it will depend heavily on the data flow and the risk is that the RBA will delay rate rises until early 2019.” The Australian Dollar opens this morning in the high-USD78’s with GBP/AUD at 1.76. .

After the sharp rally seen on Thursday and Friday, the Canadian Dollar was back at the bottom of the table on Monday, though we’d repeat our warning not to read too much into currency movements on what was actually a fairly quiet day in the Northern Hemisphere. USD/CAD hit a low of 1.2805 in Asia yesterday and only moved around a quarter of a cent higher over the next 12-15 hours. Overnight in Asia, the pair has been steady in a very narrow range around 1.2840.

Canadian Finance Minister Bill Morneau said during a visit to London on Monday that there are parallels between the way companies in North America and Britain are holding back on investment as they respectively wait for clarity on the re-negotiation of NAFTA and the outcome of talks on a Brexit deal. “There are some businesses that are being cautious in investments because there is an expectation that NAFTA could be slightly different tomorrow than it was yesterday… What’s been clear from the American standpoint is they are anxious to have a conclusion to Nafta as near term as possible - we’re trying to work constructively towards that goal.” On Canada’s future trading partnership with the UK -which is currently under the Comprehensive Economic and Trade Agreement - Morneau said any post-Brexit arrangement would have at least as much trade as the two countries enjoy currently. “To the extent that we can get a better arrangement with the UK in the future, that’s positive.”

BoC Governor Stephen Poloz is due to make a speech later today which will be closely analysed for further clues on monetary policy. Deputy Governor Tim Lane last week said, “We’ve been balancing the risk of undermining the economic expansion by moving too quickly with the risk of delaying too long and needing to raise rates sharply later to rein in inflation.” The market isn’t fully pricing in the next rate increase - which would be the fourth in the cycle - until July, according to calculations on overnight index swaps. The market expects two to three more hikes during the course of this year. The Canadian Dollar opens in Europe this morning with USD/CAD in the low-1.28’s and GBP/CAD at 1.7840.

Volatility has resumed in the New Zealand Dollar which once again tops the chart after the Asian trading session. NZD/USD is back on a 73 cents handle and the overnight high around 0.7325 is the best level in more than two weeks. AUD/NZD is down more than a quarter of a cent to the mid-1.07’s whilst GBP/NZD is down almost a full big figure from Monday’s close.

The Reserve Bank of New Zealand’s (RBNZ) outgoing governor said today that the bank’s use of macroprudential tools had successfully insulated the financial sector from the risks of a hot housing market and that its policy toolkit should be expanded. Governor Grant Spencer said that a planned review of the bank’s use of macroprudential policy in 2018, five years after it was first adopted, should consider the ways in which the success of the tools could be built on. “While we stated at the outset in 2013 that LVRs (loan to value restrictions) would be temporary, I believe there is a case to consider maintaining a policy infrastructure of this sort, with policies being adjusted through time between binding and non-binding settings.” Mr. Spencer also recommended the introduction of a new committee to make decisions around macroprudential policy, which would sit alongside the bank’s monetary policy committee, with some overlap in members.

The RBNZ slightly eased back some of its LVR restrictions in January after a sharp slow-down in house price inflation towards the end of 2017. House prices have since recovered, growing at an annual rate of around 6.5 percent for the past three months. The timing of Mr. Spencer’s speech is very interesting, coming on the day before the always-fascinating REINZ house price report is released and should keep the topic very much a live one for debate. The Kiwi Dollar opens in London this morning in the low-USD 73’s with GBP/NZD in the mid-1.89’s. .