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End-month and end-quarter come just before a long weekend. Be sure to check FX exposures carefully and have orders in place

By Nick Parsons

After its decent start to the week on Monday, the British Pound spent nearly all of Tuesday firmly at the bottom of our one-day performance table and it wasn’t until the New York afternoon that it managed finally to climb above the Australian Dollar. There was no single specific catalyst for the downward pressure on GBP, but there’s always talk as we approach quarter-end of significant selling interest in GBP/EUR from an official European institution which may well cop some of the blame this time around too. Whatever the case, the pound has had a decent recovery overnight, with GBP/USD up from yesterday’s lows below 1.41 to just a few pips under 1.42 this morning and is up against every one of the major currencies we follow closely here. As the long weekend nears and volatility picks up, it would be prudent to leave orders in case target FX levels are reached.

An interim report commissioned by the British government from the Migration Advisory Council warned that firms were not prepared for a tightening labour market. The review - commissioned by Home Secretary Amber Rudd - took views from more than 400 businesses, industry bodies, government departments and other organisations. UK employers see EU workers as "more reliable" and eager than their British counterparts and the MAC said businesses are concerned about their ability to recruit workers from the EU after Britain leaves the European Union. “Lower migration would very likely lead to lower growth in total employment, and lower output growth.”

Wednesday is another day without any incoming economic data and as the Easter weekend looms large, we only have the second revisions to Q4 GDP and mortgage lending figures on Thursday. Sadly, the weather forecast for the holiday in the UK looks pretty poor, with the only demand at DIY stores likely to be for materials to build an Ark! The Bank of England has already lowered its forecast for Q1 GDP as a result of the two bouts of extreme weather in February and March and it seems that Q2 will get off to a very soft start also. The GBP/USD opens in Europe this morning at 1.42 with GBP/EUR back in the mid-1.14’s.

After its bad start to the week, falling against every one of the major currencies we follow closely here on Monday, yesterday was a much better day for the US Dollar which went from bottom to top spot. Its net gains didn’t quite make up all of Monday’s losses even though at one point early in the European afternoon its index against a basket of major currencies had risen to 89.15 compared to its opening level in Asia on Monday morning of 89.00. By the end of the day, the USD index had slipped a quarter of a point from its intra-day high to 88.90 which is where it has remained throughout the overnight session in Asia.

Federal Reserve Bank of Cleveland President Loretta Mester gave a very thorough speech on at Princeton University in which she touched on the very topical issue of trade policy. She said, “for the first time in many years, economic activity around the world is picking up and forecasts for global growth are being revised up. This should have a positive feedback effect on the U.S. economy via exports. However, the tariffs on steel and aluminum imports and the recent announcement of planned tariffs on certain goods imported from China, as well as the ongoing renegotiations of the North American Free Trade Agreement (NAFTA), add uncertainty to the trade picture. This uncertainty may not be resolved quickly. Assessing the impact on the U.S. macroeconomy will ultimately depend on how other countries react, including whether they impose their own tariffs or other trade barriers in response. I am monitoring trade developments, and while I see them as a risk to the forecast, at this point they have not led me to change my outlook for the overall economy.”

As for incoming economic data, the Conference Board said yesterday its consumer confidence index dropped 2.3 points to a reading of 127.7 this month from a slightly downwardly revised 130.0 in February, which was the highest level since November 2000. Interestingly, the details of the report showed that consumers’ confidence in continued stock market gains has fallen to its lowest since President Trump’s election and showed the biggest two-month drop in the survey's 30-year history. After tweeting on Monday evening after the stock market rally, yesterday’s 400 point drop for the DJIA has seen the POTUS Twitter feed very quiet on the subject. The USD index opens in Europe this morning at 88.90.

On Tuesday’s Asian session, the euro initially extended early gains into the European morning, reaching a best level just above USD1.2470. By lunchtime, however, it had fallen almost a full cent from its earlier high after yet another weaker than expected piece of incoming economic data. By the end of the day, the EUR was up against the GBP and AUD, little changed against the NZD but lower against both the USD and CAD. Overnight in Asia, the euro has been stuck in a relatively tight range from 1.2400 to 1.2420 though it has slipped around two-tenths against a recovering GBP.

There’s a clear public split becoming visible on the ECB. Speaking at the Austrian Central Bank on Monday, Bundesbank President and ECB Council member Jens Weidmann had 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…”. Yesterday morning, however, Governing Council member Erkki Liikanen said that exiting from unprecedented stimulus can be more safely done once expectations for inflation exceed policy makers’ goal. “A gradual tightening of monetary policy will rest on a more solid basis when indications of inflation rates to potentially temporarily exceed 2 percent become more prominent in inflation expectations,” the Finnish central bank governor said.

Away from monetary policy, ECB officials may face pressure from a wholly different source. After the UK exits the European Union, so the EU will face a shortfall in its funding. The EU Commission’s ruling college will today discuss ways to find new sources of revenue including proposals for a plastics tax and a €50 billion raid on European Central Bank profits. One of the measures under discussion is a plan to divert profits made by the euro zone’s 19 national central banks from printing banknotes straight into EU coffers. The commission estimates the revenue stream could generate €56 billion during the seven-year span of the next EU budget. More than 90 per cent of the so-called seigniorage profits are distributed by the ECB to the euro zone’s 19 central banks that often then pass a portion on to their national treasuries. ECB officials are said to believe the proposals from Brussels are a threat to their much-cherished independence. The EUR opens in London this morning at USD1.2410 with GBP/EUR in the mid-1.14’s.

Despite a strong correlation between US stocks and the AUD/USD exchange rate throughout Monday, the relationship completely broke down yesterday. The high around 0.7755 came at lunchtime in Sydney and from that point onwards it was steadily lower for the pair, even as the futures market signaled another triple-digit gain for the Dow Jones Industrial Average before a late plunge into the close. The Aussie Dollar fell on every one of its crosses and was the worst performer of all the major currencies we follow here. AUD/NZD is back on a 1.05 handle whilst AUD/CAD fell to 98 cents for the first time in almost six weeks.

As for incoming economic data, the weekly consumer confidence numbers were no help to the AUD with the headline index slipping 0.9% last week following a 2.2% bounce previously. Views towards current economic conditions deteriorated sharply by 6.8% to 101.9, its lowest value in 18 weeks. Future economic conditions were also hit, falling 3.6% to 108.7, a five-week low. The team at ANZ who produce the data noted, “Last week’s back-and-forth on import tariffs between the US and China roiled global and domestic equity markets, fuelling fears of retaliatory measures by governments worldwide. This is likely responsible for the sharp deterioration in households’ views around the economic outlook. Additionally, the unexpected tick up in the unemployment and underemployment rate in February may also have impacted. Stepping away from the week-to-week volatility, views around economic conditions (four-week average) have fallen by about a third from their February peak. However, they remain above their long-term average and consistent with our expectations of solid economic growth in 2018.”

As the end of the month and quarter approaches, there are only a couple more bits of economic data due for release Down Under: the housing credit and job vacancy numbers on Thursday. So far this week, the AUD has been the worst performer of the major currencies we follow here and it’s hard to see the local data coming to its rescue before the close of business tomorrow. The Australian Dollar opens this morning in Europe in the high-USD 76’s with GBP/AUD at 1.85.

Traders in the Canadian Dollar market are struggling to get traction in either direction. On Tuesday, USD/CAD fell from an opening level around 1.2850 to a low just below 1.2820 at the start of the European day but just a few hours later it was up above 1.2890. This proved to be the high of the day, however, and after what was ultimately a pretty directionless North American session, it finished in the top half of the range at 1.2870 and has stayed within a few pips of this level throughout the whole of the Asia time zone.

In a move clearly aimed at keeping the NAFTA renegotiations on track, Canadian Prime Minister Justin Trudeau said earlier this month he was aware of concerns that countries facing US tariffs could try to ship supplies through Canada and pretend the metals had been produced in Canadian facilities. Under new measures unveiled by Trudeau’s office yesterday, the Canada Border Services Agency (CBSA) will gain new powers to stop companies that try to dodge duties. The CBSA will also have greater flexibility in determining whether prices charged in the exporter’s domestic market are reliable or distorted. “We will not allow North American industries to be hurt or threatened by unfair trade practices, like the diversion of steel and aluminum ... Canada will not be used as a backdoor into other North American markets,” Trudeau said in a statement. According to a separate statement issued by the Canadian Prime Minister’s office, Mr. Trudeau also spoke to President Donald Trump on Monday and “raised the strong measures Canada is taking to address unfair trade in steel and aluminum.”

The main economic data to be published this week come tomorrow when we have the monthly GDP data as well as industrial raw materials prices. RBC is predicting 1.9% annualized GDP growth for the first quarter of 2018, while TD is predicting an even smaller 1.4% rise. That’s in comparison to the 4% increase recorded in the first quarter of 2017. As for the January numbers (Canada is to be congratulated for being the only country in G7 to produce official monthly GDP statistics), the consensus is a rise of just 0.1% m/m. 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.

After Monday’s decent rally, the New Zealand Dollar couldn’t quite keep up the same run rate on Tuesday, rising against the AUD and GBP, unchanged against the EUR but down against the USD and CAD. Just as with its Aussie cousin, the Kiwi Dollar peaked against the USD around lunchtime locally in Asia but spent barely half an hour on a 73 cents ‘big figure’. The steady decline afterwards was a bit less marked than for AUD/USD (which is why the AUD/NZD cross fell) and it extended less than half a cent to a low around 0.7260 into the New York close which is pretty much where it has remained throughout the Asian session overnight.

Earlier this morning saw the monthly business confidence numbers published by ANZ bank. Confidence had been picking up after the sharp post-Election drop but the analysts report this month that, “Headline business confidence is treading water. A net 20% of businesses are pessimistic about the year ahead, down 1%pt versus February. A marked divergence was evident across sectors: retail and agriculture sank significantly, manufacturing and services floated higher, and construction was little changed. In level terms services are most optimistic and agriculture the least. Activity indicators increased pretty much across the board but remain below the levels of six months ago. A net 12% of firms are expecting to lift investment, up 5 points. Employment intentions lifted from +5% to +10%, making a comeback whilst profit expectations increased from -1% to +6%, back in the black.”

Putting all the survey components together, ANZ reckon their composite growth indicator, which combines business and consumer confidence, continues to suggest growth around 2-3% y/y. “The economy is caught in cross-currents, some helpful (terms of trade) and some not (capacity constraints and credit availability). But it’s keeping its head above water and still making steady progress.” The Kiwi Dollar opens in London this morning in the high USD 72’s with GBP/NZD at 1.95.