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Political drama on both sides of the Atlantic but currency markets are very calm

By Nick Parsons

The British Pound couldn’t quite make two consecutive days at the top of the table but still had a pretty good day. GBP/USD had actually spent most of the Asian session and European morning in a fairly tight range, unchanged from the previous New York close at 1.3900 until the moment UK Chancellor Phillip Hammond stood up to present the inaugural Spring Statement to the House of Commons. By the time he had finished, ‘cable’ stood at 1.3965 and went on to a day’s best of 1.3985. Overnight, it has given back around 20 pips of these gains.

We wrote here yesterday that, “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.” That is exactly what happened, albeit the upward revisions were only very small and from an exceptionally weak starting point. What really grabbed the attention was how upbeat the Chancellor was; as if he had been practicing really hard for quite some time. Often accused of being an Eeyore (the pessimistic, gloomy, depressed, old grey donkey who is the friend of Winnie-the-Pooh in the childrens’ books by A.A. Milne), Mr. Hammond began by insisting, “I am at my positively Tigger-like best” (As this character says, bouncing is what Tigger does best). He proceeding to read a series of five-year economic growth forecasts which should reduce any adult to tears of sadness, not joy: 1.5%, 1.3%, 1.3%, 1.4% and 1.5%. This will be the first time in 70 years of five consecutive years of growth below 2%, but the Chancellor made it sound like the winning lottery numbers; hailing a 0.1% upward revision to the 2018 number.

The Chancellor promised Britain that, “our best days lie ahead of us” and said he would use the budget this autumn to set out his expenditure expectations for 2020 and beyond, with a full spending review next year, after Brexit. If the public finances continued to reflect the improvements outlined in his Statement, he said the government would “have capacity to enable further increases in public spending and investment in the years ahead.” Rarely has such poor news been so well received; both by backbench MP’s and a usually more skeptical foreign exchange market. There are no UK economic statistics today, so we’ll have to see if investors have any second thoughts on GBP or whether it can hold on to Tuesday’s gains.

The US Dollar fell even as stocks turned sharply lower on Tuesday, on news that President Trump had fired his Secretary of State, Rex Tillerson. The Dollar’s index against a basket of major currencies had risen a couple of tenths in Asia to 89.65 and held that level until lunchtime in Europe. By noon in New York, however, it had fallen almost half a point to a 6-day low of 89.20 and the DJIA had tumbled 250 points from earlier levels. Overnight in Asia the USD has steadied somewhat, but failed to make any progress to the upside and investors will be nervously eyeing a level of technical support around 89.05 which, if broken, could signal further losses.

It wasn’t just the fact of Mr Tillerson’s departure, but the way it had been announced with the Secretary of State learning of his fate from the POTUS Twitter feed. President Trump subsequently told reporters that he and Tillerson disagreed on Iran, that he made the North Korea decision himself and thinks Tillerson will be "much happier now." Trump said "I wish Rex Tillerson well… I very much appreciate his commitment and his service and I wish him well. He’s a good man… We got along actually quite well but we disagreed on things.” The Trump White House has seen 24 departures in its first 417 days - a rate of around one senior position every 17 days (and more first-year departures than any other president in at least 40 years). A chief of staff, press secretary, three communications directors, a chief strategist, a health secretary, and now a Secretary of State and Personal Assistant are among those who have left the Trump administration.

Amidst all the political dramas, the economic numbers seem like something of an after-thought. The Labor Department said its Consumer Price Index rose 0.2% last month after jumping 0.5% in January, taking the annual rate to 2.2%, up from 2.1% as the weak reading from last year dropped from the calculation. Excluding the volatile food and energy components, the CPI rose 0.2% after increasing 0.3% last month to leave the annual rate unchanged at 1.8%. After the inflation numbers, today we have retail sales and PPI 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 89.15.

The euro was very much out of the spotlight for most of Tuesday though a late rally as the US Dollar struggled took EUR/USD back on to a 1.24 handle for the first time since last Thursday’s ECB Council meeting. By the close of business in New York, the EUR was challenging the GBP for second place on our one-day performance table. Overnight in Asia, EUR/USD has traded in a tight range either side of EUR/USD1.2400 ahead of a busy day in Europe of economic data and central bank speakers.

The leader of Italy’s far-right League, which emerged the largest conservative party in national elections on March 4, said on Tuesday that he did not see the country suddenly leaving the euro. “The euro is and remains a flawed currency,” League leader Matteo Salvini told reporters in Strasbourg, repeating his common line but, “There is no unilateral and improvised exit on the horizon,” he added. Salvini campaigned on rewriting European Union budget rules in order to make drastic tax cuts, and on mass deportations of irregular migrants but has not yet been invited by Italian President, Sergio Mattarella, to try to form the next Government.

The week’s main events economic in the Eurozone come today with the Eurozone industrial production and unemployment figures as well as final German CPI numbers ahead of those for the wider Eurozone on Friday. There are plenty of Central Bank speakers too, with ECB President Draghi, Vice President Constancio and Chief Economist Peter Praet all scheduled to talk. The EUR opens in London this morning at USD1.24 with GBP/EUR in the high-1.12’s.

On a day of political drama in the United States, the opening of the cash equity market in the United States on Tuesday coincided with the peak in the AUD/USD exchange rate just under 0.7895. The DJIA had rallied almost 650 points from last Thursday’s intra-day low; at which point AUD/USD stood around 0.7775. As the stock market yesterday suffered a 250 point drop in the space of just a few hours on news that Secretary of State Rex Tillerson had been fired, so the AUD/USD slipped back to 0.7850. Overnight in Asia, the AUD has clawed back around half of yesterday’s losses.

RBA Assistant Governor (Financial Markets) Christopher Kent gave a speech earlier today on developments in the Australian corporate bond market. He noted that, “accommodative monetary policies have encouraged greater risk-taking by both lenders and borrowers. This is one of the important ways in which the monetary transmission mechanism works. It has supported the decline in spreads and other positive developments I've just discussed. At the same time, however, the combination of low interest rates and low volatility in financial markets is of concern to the extent that it can lead to excessive risk-taking via a search for yield. This is something that the Reserve Bank has been noting for a time.” He wasn’t ringing any bells at all, but if credit spreads do widen or volatility picks up again, then the RBA has shown that it is on the case.

As for incoming economic data, Westpac’s Index of Consumer Sentiment rose 0.2% to 103.0 in March from 102.7 in February. Their analysts noted, “Sentiment continues to hold in slightly optimistic territory with March marking the fourth consecutive monthly reading above the 100 level. That followed a year in which pessimism dominated. However, the Index is still well below levels typically associated with a robust consumer.” The Australian Dollar opens this morning in the high-USD78’s with GBP/AUD at 1.77. .

The Canadian Dollar began the week with back-to-back appearances at the bottom of our one-day performance table. USD/CAD edged gradually higher in Asia and the European morning then jumped from 1.2840 to 1.2925 as headlines from Bank of Canada Governor Stephen Poloz’s speech began to hit the newswires. By the end of the day, USD/CAD was in the high-1.29’s and GBP/CAD hit 1.80 for the first time since the day after the UK referendum on Brexit back in June 2016.

In a speech which focused on labour market slack, the Governor said Canada is at the “sweet spot” of the business cycle where growing demand is actually generating new capacity as companies invest to meet sales, a process he said the Bank of Canada has an “obligation” to nurture. The increased investment, meanwhile, will help bring more people into the work force - such as women, youth and the long-term unemployed. “Put it all together, and it is not much of a stretch to imagine that Canada’s labour force could expand by another half a million workers. To put this thought experiment into perspective, this could increase Canada’s potential output by as much as 1.5 per cent, or about $30 billion per year. That’s equal to a permanent increase in output of almost $1,000 per Canadian every year, even before you factor in the possible investment and productivity gains that would come with such an increase in labour supply. Clearly, that is a prize worth pursuing.”

On monetary policy, Poloz said, “It should be clear that there are likely to be significant economic benefits associated with allowing the economy to find its way to a higher, more productive economic equilibrium, if this can happen within our inflation-targeting regime… “We cannot know in advance how far the capacity-building process can go, but we have an obligation to allow it to occur.” This doesn’t sound like a man in any hurry to raise interest rates, hence the slump in the Canadian Dollar which opens in Europe this morning with USD/CAD in the mid-1.29’s and GBP/CAD at 1.80.

The New Zealand Dollar has been back on a US 73 cents handle for more than 24 hours and hit a high in the Asian session overnight just above USD0.7350; its best level in just over three weeks. Its cross rate with the Australian Dollar is down from a high just under 1.08 on Monday to 1.0740 this morning, whilst the Kiwi is steady against the GBP at 1.90.

After the Governor of the Reserve Bank of New Zealand’s speech on macroprudential policy on Tuesday, there was always going to be plenty of interest in the REINZ survey of house prices released less than 24 hours later. The median house price for New Zealand rose 6.9% in February to $530,000 up from $496,000 in February 2017 according to the latest data from the Real Estate Institute of New Zealand. The median house price for New Zealand excluding Auckland rose even higher, seeing an 8.4% increase to $450,000 from the same time last year. Prices in Auckland increased at a more moderate 3.7% to $858,000 from the same time last year (up from $827,000) and were up 4.6% month-on-month. REINZ said, ““Median house prices increased in 14 out of 16 regions across New Zealand during February 2018 compared to February 2017, including a record high in the Hawke’s Bay. The only regions not to experience an increase were the West Coast and Gisborne which saw decreases of 10.7% and 3.1% respectively.”

With a very solid start to 2018 for the housing market, the statisticians still have to release one more missing piece of the 2017 economic jigsaw. This comes on Thursday with the Q4 GDP numbers. 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 mid-USD 73’s with GBP/NZD at 1.90. .