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Foreign exchange markets are pretty quiet. USD steadies after Monday’s drop. No official UK economic data released today.

By Nick Parsons

The British Pound had a decent start to the week, even if its performance against the US Dollar gives a much-exaggerated picture of its overall strength. GBP/USD opened around 1.4135 and, along with most other currencies, rose steadily and without interruption through the day. By lunchtime in New York, the pair had reached a best level around 1.4245; its highest since the day of the US non-farm payroll figures back on February 2nd. The seven-tenths of a percent increase for GBP/USD compares with 0.5% for GBP/CAD and 0.3% for GBP/AUD, whilst GBP/EUR and GBP/NZD were little changed on the day. The overnight session in Asia has been very quiet indeed: just 15 pips separated the high and low of GBP/USD and no currency pair is more than 0.2% away from last night’s close.

Latest figures show that mortgage approvals fell 11% m/m in February to 38,120, well below consensus expectations for around 39k. UK Finance who compile the data said more home-owners were seeking remortgaging deals ahead of expected further interest rate rises by the Bank of England later this year. “We are also seeing a continuing rise in credit card spending, reflecting the growing number of transactions carried out using cards, while other forms of borrowing such as overdrafts continue to fall.” Net credit card lending amounted to 309 million pounds last month, down slightly from a net increase of 325 million pounds in January. As for house prices, Hometrack today reports price growth in London has hit a seven-year low with prices falling in almost half of all London postcodes, while the market in cities further north is “powering ahead”. The average price of a home in London is £487,900. Edinburgh is enjoying the fastest growth at 8 per cent in the year to February to £277,300. This is followed by 7.8 per cent in Liverpool to £115,700 and 7.7 per cent in Birmingham to £155,600.

On Brexit, a new report from credit ratings agency Moody’s says the UK-EU agreement “provides clarity that is credit positive for a broad range of UK issuers because it extends the narrow time frame that is available to shape and implement a new trade agreement and regulatory regimes with the EU until existing common rules cease to apply. It also buys the UK limited time to negotiate free trade agreements (FTAs) with other countries. However, the agreement remains conditional on the UK and the EU overcoming other challenges, such as the need to find a solution that prevents the creation of a hard border between Ireland and Northern Ireland. Until a conclusive final agreement is reached, uncertainty over the terms of the UK’s future long-term relationship with the EU will persist, weighing on the operating environment for UK issuers and hampering corporate investment.” GBP/USD opens in Europe this morning in the low-1.42’s with GBP/EUR in the mid-1.14’s.

The US Dollar had a bad start to the week, falling against every one of the major currencies we follow closely here. Its index against a basket of major currencies tumbled from 89.05 to 88.55; its lowest level since February 16th. The Dollar’s smallest loss (-0.2%) came against the CAD but mostly it was down between seven and nine-tenths of a percent as the stock market rallied sharply and fears of a ‘Black Monday’ for global equities proved both alarmist and misplaced. Indeed, a 670 point rally for the DJIA was its best day since August 2015 whilst for the S&P 500 index, 20 stocks rose for every one which fell. Overnight in Asia, FX markets have been very quiet, and the USD has stabilised around Monday’s closing level.

US Treasury Secretary Steven Mnuchin told Fox News that he’s “cautiously hopeful” that China will reach a deal to avoid tariffs on $50 billion of U.S. exports, and investors are coming round to the view that President Trump’s opening gambits on tariffs are merely the headline starting point for a series of concessions. Over the weekend, the US Administration reportedly sent a letter from US Treasury Secretary Mnuchin and Trade Representative Lighthizer to China seeking reductions of Chinese tariffs on US autos, more access to China's financial sector and more purchases of US semiconductors but there were also reports that that South Korea would be exempt from US steel tariffs in a revision of the bilateral trade pact between the two countries.

A report from S&P Global Ratings said, “President Trump’s long-threatened package of trade sanctions on China has landed, but a trade war isn’t yet inevitable. In general, the threatened tariffs and investment restrictions on China won’t likely cause deep pain to the Chinese economy, nor will they have a material impact on corporate borrowers in either country… Preliminary analysis shows that the overall impact on Chinese corporates and banks will be contained because the US represents only about 15% of China’s exports, and China’s domestic activity now drives its economic growth rather than exports. The $50 billion-$60 billion targeted by potential tariffs could affect up to 10%-12% of Chinese imports to the US.” Later today we’ll see the extent to which recent sharp declines in the equity market have impacted consumer confidence and we’ll also get the Richmond Fed’s manufacturing index. The USD index opens in Europe this morning at 88.60.

The EUR had a good day on Monday although – as with the British Pound – a focus just on its exchange rate with the US Dollar gives a misleading appearance of its overall strength. EUR/USD opened in Sydney around 1.2355 and made a series of intra-day highs as it moved to a best level in the New York afternoon around 1.2460; its highest since Friday, February 16th. Its 0.7% daily increase compares to more modest gains of 0.3% against the AUD, 0.65% against the CAD and virtually no change versus the GBP and NZD. Overnight in Asia the EUR/USD pair has not moved as much as 10 pips either side of 1.2450 whilst GBP/EUR has been stuck firmly at 1.1430.

Speaking at the Austrian Central Bank on Monday, Bundesbank President and ECB Council member Jens Weidmann said, “The markets see a first rate hike around the middle of the year 2019, which is probably not entirely unrealistic. However, the end of net purchases is only the beginning of a multi-year process of monetary normalization. That's why it's so important to actually start soon… ECB economists expect the inflation rate to be 1.4 percent each in 2018 and 2019, and to rise to 1.7 percent in 2020, a level that is broadly consistent with our medium-term definition of price stability. Against this background, it is not surprising that the financial markets have been expecting net bond purchases to end in 2018.”

Of course, Mr. Weidmann’s views are nothing new and don’t differ in any material respect from comments he has previously made. But, repetition can lead to attrition, and his comments will over time add to the pressure for some clearer QE exit strategy to be communicated by the Governing Council. His ECB colleague Ewald Nowotny is head of the Austrian Central Bank and he will on Tuesday present its annual report. Mindful of Austria’s position as the gateway to the EU accession countries and always very aware of spillover effects of monetary policy, he is often seen as more ‘dovish’ on ECB monetary policy. We’ll see what he has to say later this morning. The EUR opens in London this morning at USD1.2450 with GBP/EUR in the low-1.14’s.

The Aussie Dollar spent almost all of Monday tracking the US stock market. As the UK and US have now both moved the clocks on to daylight saving time, equity index futures close around 9pm UK time and re-open at 11pm. As stocks opened higher and built steadily on their gains throughout the Asian and European time zones, so the AUD rallied; moving from an opening level of USD0.7700 to a best level of 0.7745. This morning in Asia, AUD/USD extended its gains to a high of 0.7755 but has subsequently given back around a quarter of a cent

There’s so much going on simultaneously that it is very difficult from one minute to the next to determine what is the key driver of the AUD. There’s a menu of influences which includes China trade, US tariffs, precious and industrial metals’ prices, the level of global asset markets, the volatility of stock markets and, of course, interest rate differentials and incoming local economic data. At any given moment there are three or four different menu items which can be ticked off, and different weights then ascribed to each of these. Sometimes, it’s hard even to explain a movement which has just happened, let alone to be brave enough to have a firm view on what the next move might be.

The analysts over at Bank of America Merril Lynch have ticked three of the boxes above. “The deceleration in iron ore shipment growth warrants caution against buying AUD until the data distortions dissipate. Moreover, a stronger USD, firmly neutral RBA and rising trade tensions at a global level are unlikely to present a constructive backdrop for the currency.” They say, “It is clear the downtrend in iron ore shipments began well before the Lunar New Year distortions, coinciding with the broader slowdown in fixed-asset investment. The smoothed growth rate (3m% y/y) of iron ore shipments in value terms is now at its weakest since February 2016, falling 23.7% y/y. This is partly related to high inventory at Chinese ports, but at least partly symptomatic of a weaker demand trend [which] bodes poorly for Australia's exports to China. The Australian Dollar opens this morning in Europe in the low-USD 77’s with GBP/AUD at 1.84.

The Canadian Dollar was unable to extend its recent very positive momentum which had twice seen it at the top of our one-day performance table and left it as the best performing currency last week. USD/CAD moved only very slightly lower on Monday to 1.2870, having been up and down in a 70 pip range from 1.2845 to 1.2915. After the US dollar, it was the second-weakest currency on the day, with GBP/CAD moving up more than a full cent at one point to 1.8370. Overnight in Asia, the CAD has recovered a large part of yesterday’s losses and GBP/CAD, for example, is down in the mid-1.82’s.

Stepping back from the minute-by-minute twists and turns of financial markets, Canadian Trade Minister Francois-Philippe Champagne spoke in Singapore at the weekend after several days of meetings to strengthen ties with the Association of Southeast Asian Nations, whose 10 members represent Canada’s sixth-largest trading partner with annual merchandise trade worth about $17 billion. He said plans by President Trump to impose tariffs on a wide array of Chinese imports threatened the stability of the international trading order. “We have all benefited from the world trade order that was put in place after the Second World War, including the US… All of us need to take a step back and take a look at what we’ve achieved over the last few decades.”

Speculators have raised bullish bets on the Canadian dollar for the first time in six weeks, according to data from the US Commodity Futures Trading Commission. As of March 20, net long positions had increased to 24,560 contracts from 19,420 a week earlier as incoming news on US tariffs and stronger domestic economic data helped improve sentiment after the CAD’s recent slide. For the rest of this holiday-shortened week we have the monthly GDP data as well as industrial raw materials prices on Thursday. There’s nothing from the Bank of Canada until well after the Easter break but looking at interest rate markets, the probability of a hike in May rose to 82 percent after last Friday’s CPI release, from 74 percent before the data were published. The Canadian Dollar opens in Europe this morning with USD/CAD in the mid-1.28’s and GBP/CAD in the high-1.82’s.

The New Zealand Dollar was one of three currencies which pretty much tied for top spot on our one-day performance table on Monday; the other two being the GBP and EUR. NZD/USD opened the week around 0.7240 and it was onwards and upwards throughout the Asian and European sessions, with a high just under 0.7300 late in the North American afternoon. The Kiwi’s most notable performance came on the AUD/NZD cross which moved on to a 1.05 ‘big figure’ for the first time since mid-July last year.

Back in early December, the NZD got a lift when it was announced that Adrian Orr would become the next Governor of the RBNZ effective March 27th. The flightless bird got a further lift when the date finally arrived and the new Policy Targets Agreement was unveiled yesterday. There wasn’t a great deal of surprise in the announcements, but the tone appeared to be one of mutual understanding and agreement between the Bank and Treasury which certainly helped create a favourable first impression. Along with a goal of maintaining price stability, the RBNZ will have a goal of "supporting maximum sustainable employment within the economy." The PTA also shifts responsibility for interest rates away from the Governor himself to a newly-formed Monetary Policy Committee. The MPC will have seven members: four internal at the bank and three external, along with a non-voting observer from the Treasury. On the inclusion of external, expert, members on the Monetary Policy Committee, Mr. Robertson said this would help ensure a "diversity of perspectives is harnessed in the decision making" whilst the presence of the Treasury official "was the subject of significant discussion during the first phase of the review."

Amidst all the understandable focus on the changes at the RBNZ, we still have the regular incoming economic data. Statistics New Zealand reported that the monthly trade balance in February 2018 was a surplus of $217 million but had a fascinating explanation for the lowest monthly value of imported cars since March 2013. “The delay in final unloading of four vehicle carriers at New Zealand ports had an impact on the total value of vehicle imports in February. The discovery of stink bugs on these vessels meant that around 8,000 cars could not enter New Zealand as scheduled. The goods on these vehicle carriers would normally have been included in February’s import statistics, but will now be included in the statistics of the month when the respective shipments are unloaded.” The Kiwi Dollar opens in London this morning just under USD 73 cents with GBP/NZD at 1.95.