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US stock markets tumbled on Easter Monday, helping support the USD. This week brings the PMI surveys in the UK and Eurozone, with US payrolls on Friday. Expect plenty of volatility.

By Nick Parsons

The British Pound had a poor week pre-Easter which started pretty well but then turned sour after a series of soft economic data. From a high of 1.4240 on Tuesday, it fell to a low on Good Friday morning of 1.4015; its lowest since March 21st and the GBP finished as the worst performer on the week, falling against every one of the major currencies we follow closely here. On Easter Monday, the pound recovered all of Friday’s losses on its crosses, and though GBP/USD fell a quarter of a cent from its intra-day high above 1.4070, the GBP still managed – just – to finish at the top of our one-day leaderboard. Overnight in Asia, GBP/USD has rallied back to within 10 pips of yesterday’s high, but is showing some signs of slipping back against many of its other cross pairs.

The second revision to the UK’s Q4 GDP numbers last week didn’t contain any surprises, with quarterly growth unchanged at +0.4% and the annual rate at just 1.4% after 1.8% in Q3. Even with the significant depreciation of the GBP after the EU referendum back in June 2016, net trade was still estimated to have subtracted around 0.4% from GBP; a worse performance than after all other big depreciations of sterling in the post-war period. The Easter weekend was a complete washout for most of the country and will have been especially tough for a retail sector which has already seen a number of high-profile casualties this year. Expect to hear more pain here.

The economic data highlights for the week ahead will be the various PMI surveys (manufacturing, construction and services) released between today and Thursday. The GBP/USD opens in Europe this morning in the mid-1.40’s with GBP/EUR in the low-1.14’s.

The pre-Easter week was a positive one for the US Dollar which just beat its Canadian cousin into top spot overall, rising against all the major currencies we follow here and reaching a near-10 day high on Thursday just above 89.75. With part of Asia and the whole of Europe away for holidays on Monday, the USD was initially quite subdued, slipping a little after an early rally in both EUR and GBP. As equity markets turned a sea of red, however, and both the DJIA and S&P 500 indices fell around 2¾ per cent at one point, so the USD index regained all its early losses to be within just a few pips of Thursday’s high. Overnight in Asia, the GBP and EUR have rallied very slightly which has knocked the Dollar index around one-tenth lower to 89.55.

Both the Dow Jones Industrial Average and the S&P 500 index ended lower in Q1, with their first quarterly losses since Q3 2015. As we began the second quarter on Easter Monday, both markets broke below their 200-day moving averages which had offered support during the early-February sell-off. The indices were almost 3% lower at one point yesterday but rallied to be around 2% lower at the close. The big level to watch now is 2550 on the S&P 500. This marked the low on Tuesday February 6th and was broken on an intra-day basis yesterday. As long as this level holds, the ‘dip-buyers’ will take some comfort from the price action. If it fails, then the market will already be down 11% from its end-January peak and the ‘healthy correction’ could turn into something much less benign.

Once all last week’s incoming economic numbers were crunched, the Atlanta Fed revised upwards its forecast of Q1 GDP from an annualized pace of 1.8% to 2.4%. Yesterday we had both versions of the March manufacturing surveys (PMI and ISM) as well as the February construction spending numbers and the Atlanta Fed will update its model estimate later this afternoon. We mention this because it has over the last few years been one of the most accurate forecasters of the official GDP number and the model has the advantage of being updated in real-time as new information is received. The USD index opens in Europe this morning at 89.55.

In the week before Easter, the EUR traced out a similar pattern to most of the non-USD currencies, rallying on Monday but then giving back all its gains, and more, in the latter part of the week. It opened around USD1.2355 and went on to hit a best level just under 1.2475. From then on, however, the euro lost almost 2 cents to a low on Thursday afternoon just below 1.2290; its lowest since March 21st. A late session rally saw it back on to a 1.23 ‘big figure’ and it ended the week around USD1.2320. Yesterday morning in holiday-thinned conditions, EUR/USD traded sideways before then tumbling to re-test Thursday’s low as the US stock market fell sharply. Overnight in Asia, it has recovered around half of yesterday’s losses and is back at 1.23.

Preliminary estimates of inflation in the Eurozone last week showed German HICP (the measure which is a harmonized calculation across all EU Member States) was 1.5% y/y whilst in France it jumped from 1.3% to 1.7%; well above most estimates of a 1.5% annual increase. Away from the headline measures of orders and activity, the main interest in this week’s manufacturing and service sector PMI data will be on whether there are growing signs of price pressure which might help move the official measures of inflation nearer towards the ECB’s target of “close to but just below 2%.”

The head of the Dutch Central Bank, Klaas Knot, said in an interview last week that the Bank was at risk of normalizing policy too slowly. Considered a hawk on the ECB’s Governing Council, Knot said he was comfortable with market expectations for an end to bond buys in the fourth quarter and a first interest rate hike since mid-2011 in the second quarter of next year. For all the tough talk, however, the latest figures show the ECB actually stepped up its buying of government and corporate bonds in the week ended March 23rd. According to calculations by Goldman Sachs, after averaging €1.4 billion in weekly corporate bond purchases year-to-date, the ECB purchased €2.2 billion - 55% above their 2018 average and nearly double the €1.26BN in purchases from the prior week - in an effort to calm the market just as yields blew out. The EUR opens in London this morning at USD1.2310 with GBP/EUR in the low-1.14’s.

The Australian Dollar lost ground last week, though not as much as at one point seemed likely. It tumbled to a fresh 2018 low of USD0.7645 early on Thursday but a combination of decent economic data locally and a rally in global stock markets helped lift AUD/USD briefly on to a 77 cents ‘big figure’ on Good Friday. The Aussie was unable to sustain this level, however, and slipped back to end the week around 0.7680. Yesterday’s European session was pretty quiet but a brutal start to Q2 for US equity markets - with the DJIA and S&P 500 indices both down 2¾ per cent and a 2-point jump in the VIX index - saw AUD/USD down around a quarter of a cent to USD0.7655..

This being the first Tuesday of the month, the Reserve Bank of Australia this morning held a Board meeting to discuss monetary policy. To no-one’s surprise whatsoever, it left official rates unchanged at 1.5%. It was the 18th consecutive board meeting where the RBA has kept rates on hold and equals the previous longest stint without rates changing since the RBA became independent from Federal Treasury, set between January 1995 and July 1996. Indeed, the Cash Rate has been steady for the entirety of governor Philip Lowe’s term in office, having been cut from 1.75 to 1.5 per cent in September 2016 at the final meeting chaired by his predecessor, Glenn Stevens. The key passage for markets in the RBA Statement was, “Notwithstanding the improving labour market, wages growth remains low. This is likely to continue for a while yet, although the stronger economy should see some lift in wages growth over time. Consistent with this, the rate of wages growth appears to have troughed and there are reports that some employers are finding it more difficult to hire workers with the necessary skills.”

Just as last month we saw some analysts clutching at straws in the RBA Statement, so too this throwaway anecdotal line about hiring difficulties might offer some encouragement to those still looking for a rate hike this year. The rest of the Statement, however, did little to encourage such hopes and it finished by noting that, “Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual.” The February retail sales data released tomorrow will now be watched closely to see whether the continued rise in employment has led consumers to open their wallets. The Australian Dollar opens this morning in Europe in the high-USD 76’s with GBP/AUD at 1.83.

The Canadian Dollar had a pretty good week before Easter, only kept off top spot by the strength of the US Dollar. USD/CAD opened at 1.2890 and by Tuesday morning in Europe it had fallen 70 pips to what proved to be the low of the week around 1.2820. The next few days saw very whippy price action, albeit within a relatively narrow range from USD/CAD1.2820 to 1.2930. It had many intra-day swings and reversals without really gaining traction in either direction, though this allowed the CAD to strengthen on all of its major crosses as it ended the week around USD/CAD1.2895. As the USD strengthened during yesterday’s sharp equity market sell-off, USD/CAD moved back up to 1.2935 whilst GBP/CAD added almost a full cent to 1.8175 before then easing back to 1.8125.

Although President Trump’s Easter Monday ‘Tweetstorm’ was aimed directly at Mexico (and separately again at Amazon), there was also a renewed threat to kill-off the NAFTA accord. Trump said: “Mexico is doing very little, if not NOTHING, at stopping people from flowing into Mexico through their Southern Border, and then into the U.S. They laugh at our dumb immigration laws. They must stop the big drug and people flows, or I will stop their cash cow, NAFTA.” Behind the President’s headlines, however, politicians from the U.S., Canada and Mexico are showing increasing optimism they can reach a deal as negotiators prepare for what would be the eighth round of talks. The U.S. Trade Representative Robert Lighthizer said last week, “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 we can get something done in principle in the next little bit.” Canada’s chief negotiator, Steve Verheul, said he didn’t know what an “in principle’’ deal would look like and “significant gaps” remain. The desire for faster talks hasn’t yet been followed up with Canada and Mexico being given a firm date or an invitation to attend the next round of talks expected in April in Washington.

Away from NAFTA and back on the economy, the week ahead brings the Canadian employment report on Friday, published at the same time as the US jobs report. The Canadian Dollar opens in Europe this morning with USD/CAD in the high-1.28’s and GBP/CAD in the low-1.81’s.

The volatility which has been a feature of the flightless bird ever since Christmas showed no sign of easing last week. The New Zealand Dollar topped our one-day performance chart on Thursday for the second time, having on Wednesday been in bottom place. On Tuesday, the NZD spent a few minutes on a US 73 cents ‘big figure’ but then fell to a low on Thursday morning around 0.7190 before rallying almost half a cent into Friday’s close. On Easter Monday, the pair was unusually steady in the European session but then fell a quarter of a cent amidst the sharp drop in US equity markets. Overnight in Asia, NZD/USD briefly dipped below 72 cents before snapping back higher to 0.7240 which dragged GBP/NZD down around three-quarters of a cent to 1.9440.

In their latest economic review, the analysts at ANZ Bank say that NZ economy is likely to grow broadly around trend for the next couple of years, with the unemployment rate set to remain low. “It is hardly a negative story. We see wage growth gradually lifting off lows, corresponding with a modest broadening in domestic inflation pressures in time. That lift should eventually see the RBNZ join other central banks in removing monetary policy stimulus. However, we feel strongly that it will be late to that party, with the first hike not until the second half of 2019… While funding market pressures both here and abroad are creating some angst, we don’t believe local pressures will escalate. We see scope for local short-end rates to fall modestly in the near term, but NZ-US 10-year spreads to push more clearly negative. We expect downward pressure on the NZD over the course of 2018, especially against G4 currencies. NZD/AUD has threatened to break higher, but we see it remaining range-bound.”

There are no top-tier economic numbers scheduled for release in New Zealand this week, but as we’ve often noted here, the Kiwi Dollar is quite volatile enough even without the distractions of incoming data! The Kiwi Dollar opens in London this morning in the low-USD 72’s with GBP/NZD in the low-1.94’s.