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Have a Happy Easter despite the weather forecast which looks set to dampen UK growth and weigh on GBP

By Nick Parsons

The British Pound had a decent recovery early on Wednesday morning and at 7am London time, it was up against every one of the major currencies we follow closely here. GBP/USD extended Tuesday’s rally from a low of 1.4080 to hit 1.4200 but this was then as good as it got. Given a nudge lower by some poor economic data, the so-called ‘cable’ rate fell a full cent, dragging the pound down against everything except the NZD and EUR. Overnight in Asia, GBP/USD has been down to almost 1.4060 before finding some support at this lower level.

The Confederation of British Industry’s distributive trades survey showed the retail sales balance fell to -8 from +8 in February, confounding a median forecast of +15 in a Reuters poll of analysts. It’s a joke often aimed at economists that they know 50 ways to make love but don’t actually know any women. It now seems they don’t even bother to look out of the window to see what the weather is doing. The CBI report says, “Against a backdrop of stagnating household incomes and weak consumer confidence, the lengthy cold snap earlier this month has heaped added pressure on retailers… Freezing conditions and transport disruption caused people to avoid the high street. With many forced to work from home, telecoms firms saw record internet traffic, yet on-line shopping slowed sharply given the potential for disrupted deliveries.”

The weather forecast for the Easter weekend is unlikely to give any lift to business or consumer confidence. With temperatures not reaching double figures until the early part of next week, any Easter Egg hunts will be especially cold and wet. Good Friday in particular looks especially grim. 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 just under 1.41 with GBP/EUR back in the low-1.14’s.

The US Dollar had a very good day on Wednesday, rising against all of the currencies we follow here. Its index against a basket of major currencies opened in Asia around 88.90 and having been little changed for the first 8 hours of the trading day, the USD began to climb in early European time and went on to reach a high of 89.75; its best level since Wednesday of last week. Overnight, it has eased back a little as EUR/USD is around 20 pips higher and opens in Europe just under 89.60; more than a full point up from Tuesday’s low.

Incoming economic data were a mix of second-tier numbers: the second revision to Q4 GDP, pending home sales and wholesale inventories. Gross domestic product expanded at a 2.9% annual rate in the final three months of 2017, up from the previously reported 2.5% and only a slight moderation from the third quarter's 3.2% pace. This meant that overall in 2017, the US economy grew 2.3% after the 1.5% seen in 2016. Growth in consumer spending, which accounts for more than two-thirds of US economic activity, was revised up to 4.0% in the fourth quarter from the 3.8% reported last month. That was the quickest pace since the fourth quarter of 2014 and followed a 2.2% rate of growth in the July-September period. Looking forward in to the first quarter of 2018, the Commerce Department reported that retail and wholesale inventories were up 0.4% and 1.1% respectively in February. Whilst rising inventories can always be interpreted in two ways (is it due to confidence in the future or a lack of current demand?) they do count as a positive in the calculation of GDP.

Today brings the personal income and expenditure numbers as well as the Fed’s preferred measure of inflation: the PCE deflator. Once all these data are released, the Atlanta Fed will also update its GDPNow forecast of GDP for Q1. This currently stands at an annualized pace of 1.8%; well down from the 5%+ readings it was indicating back in early February. The USD index opens in Europe this morning at 89.60.

The euro was only kept off bottom place in our table on Wednesday by the New Zealand Dollar. It fell against every other major currency we follow closely here. From a best level of USD1.2420, the EUR was sold heavily in the European afternoon and by the end of the day in New York had tumbled to 1.2300. Overnight in Asia, it has recovered to USD1.2330 whilst GBP/EUR at 1.1420 is almost exactly at the midpoint of its fairly narrow range over the past 48 hours.

The European Commission yesterday announced proposals to make cross-border payments in euro cheaper across the entire EU. Under current rules, there is no difference for euro area residents or businesses if they carry out euro transactions in their own country or with another euro area Member State. The new proposal aims to extend this benefit to people and businesses in non-euro countries. This will allow all consumers and businesses to fully reap the benefits of the Single Market when they send money, withdraw cash or pay abroad. All intra-EU cross-border payments in euro outside the euro area will now be priced the same – with small or zero fees - as domestic payments in the local official currency. The proposal will therefore require that consumers are fully informed of the cost of a currency conversion before they make such payment (e.g. with their card abroad, be it a cash withdrawal at an ATM or a card payment at a point of sale, or online).

The quarter ends today in the Eurozone with a first estimate of German CPI for March. Due to favourable base effects from a year ago, it looks as though the annual rate of inflation might jump from 1.2% to 1.6%; certainly a step in the right direction in terms of progress towards the ECB’s target for Inflation across the Eurozone as a whole but not really marking a real acceleration in recent months. The numbers are released at 2pm Frankfurt time but some individual states report during the course of the morning which could inject an extra element of volatility into trading. The EUR opens in London at USD1.2330 with GBP/EUR in the low-1.14’s.

The Aussie Dollar had a more mixed performance on Thursday – rising against the NZD, EUR and GBP but down against the Canadian and US Dollars. AUD/USD reached a high just above 0.7700 in the Asia session but couldn’t sustain its hold on a 77 cents ‘big figure’ for more than an hour. During the European morning, the pair fell below 0.7660 for the first time since December 20th before yo-yoing up and down throughout the North American session to end near the lows of the day. Overnight in Asia, AUD/USD printed a fresh low for 2018 of 0.7643 before rallying more than a quarter of a cent. This has pushed GBP/AUD down from Wednesdays high of 1.85 down to the mid-1.83’s.

In economic data overnight, job vacancies in Australia climbed to a record high of 220,900 in the three months to February, up from 211,700 in the previous quarter and up 19.3 percent year-on-year. This was the seventh straight quarter of solid gains. Vacancies in the private sector rose 4.2 percent to 201,500, again the highest on record. That was up 20.7 percent on the previous year. Separate figures from the RBA showed private sector credit rose a seasonally adjusted 0.4 percent m/m in February, faster than the 0.2 percent rise in January. Consensus expectations had been for a 0.3 percent rise for the month. On an annual basis, credit advanced 4.9 percent in February.

There’s still quite a split of opinion on the outlook for the Australian Dollar. Most of the local banks retain a bearish stance – largely based on interest differentials and the lack of any urgency on the part of the RBA to raise rates – but there are still a few offshore institutions who have a less negative forecast profile. UOB Bank in Singapore, for example, reckon, “the sluggish local economy, coupled with benign inflationary outlook and slow wage growth does justify the RBA’s decision to stay on hold. Despite a reluctant RBA, we continue to maintain a positive outlook for the AUD/USD. This is mainly driven by support from commodities… We believe that after the recent pullback, further weakness may be limited. Despite recent consolidation, key industrial metals and energy commodities remain supported due to on-going strong synchronized growth recovery. As such, we see mild AUD/USD strength ahead.” UOB’s analysts forecast the AUD/USD rate will rise to 0.79 before the end of June and that it will finish the year back at 0.83. The Australian Dollar opens this morning in Europe in the high-USD 76’s with GBP/AUD in the mid-1.83’s.

We mentioned here yesterday that, “traders in the Canadian Dollar market are struggling to get traction in either direction.” Over the past 24 hours, the USD/CAD pair has had five moves of more than a quarter of a cent yet is net little changed during the period. Three times it has moved back on to a 1.29 ‘big figure’ but twice has fallen back below 1.2875. It really is a frustrating time for traders and it would be unwise to draw any directional conclusions from the price action. Overall, however, the Canadian Dollar has held in pretty well and GBP/CAD, for example, is now down more than a cent from Wednesday’s high just below 1.83.

According to a Reuters report yesterday, U.S. Trade Representative Robert Lighthizer on Wednesday expressed optimism that talks to modify NAFTA could be wrapped up quickly but a top Canadian official was more downbeat, saying much work remained. Lighthizer told CNBC television, “I’d say I’m hopeful — I think we are making progress. I think that all three parties want to move forward, we have a short window, because of elections and things beyond our control… But if there’s a real effort made to try to close out and to compromise and do some of the things we all know we should do ... I’m optimistic that we can get something done in principle in the next little bit.” Chief Canadian negotiator Steve Verheul, asked by reporters whether a deal was close, replied: “No, we’ve got quite a bit of work do yet”. Asked whether a deal could be done in April, he replied “That would be a bit of a challenge.”

In economic data, today 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 at 1.29 and GBP/CAD in the high-1.81’s.

We warn persistently here that volatility is a near-permanent feature of the Kiwi Dollar and on Wednesday it was back at the bottom of our one-day performance table having topped the chart earlier in the week. NZD/USD hit a low during the European afternoon around 0.7220; its weakest point since last Friday before then falling further in North America to a low just under 0.7210. Overnight in Asia it has fallen on to a 71 cents ‘big figure’ for the first time in more than a week and is once more lower against all the major currencies.

Earlier this morning, Stats NZ reported building consents for new townhouses, flats, and units were at a 23-year high, and apartments rose significantly in the year ended February 2018. Apartment numbers rose 29% to 3,166, compared with the February 2017 year. In addition, 5,077 townhouses, flats, and units were consented, up 12% over the same period. In contrast, new stand-alone house numbers were down 1.3% to 21,052 in the latest year, although they still accounted for two-thirds of all new homes. In the year ended February 2018, the total number of new homes consented rose 3.6%, compared with the February 2017 year.

As well as official economic statistics, never underestimate anecdotal evidence and what you see with your own eyes. Consultants and quantity surveyors Rider Levell Bucknall today supplied their half yearly update for the number of construction cranes in operation. Nationally, there are 125 tower cranes in operation at the end of March 2018, up only marginally from the 123 at the end of September 2017, but down from the 132 counted at March 2017. The Auckland crane tally rose by +10 to 83 with installations in the period of 33 replacing 23 that were removed. Most cranes are in large residential projects with 48 of the 83 units installed on these. But that is two less than six months ago whilst Christchurch and Wellington lost 4 cranes each in the period. The Kiwi Dollar opens in London this morning at USD0.7200 with GBP/NZD at 1.9560.