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‘Commonwealth currencies’ extend Tuesday’s gains. GBP mixed ahead of construction data, EUR awaits CPI numbers.

By Nick Parsons

The British Pound had a pretty mixed performance on Tuesday, down against all three of the major ‘Commonwealth currencies’ but up against both the euro and US Dollar. The GBP/USD pair struggled to get traction in either direction. Having been up to a high around 1.4085 early in the European morning, it then quickly lost half a cent and had three further reversals of at least a quarter of a cent all within a range from 1.4025 to 1.4085 before ending almost exactly at the mid-point. Overnight in Asia, the pound is again testing the top of its range against the USD but has lost further ground against both the AUD and NZD.

In economic news, the UK manufacturing sector maintained a steady pace of expansion during March. The IHS Markit/CIPS PMI (to give the index its’ full name) posted 55.1 in March, little-changed from 55.0 in February. The average reading over the opening quarter as a whole (55.1) was the weakest in a year, suggesting that the underlying pace of expansion has been generally slower since the start 2018. IHS Markit, which compiles the report said, “The latest PMI survey provided further evidence that UK manufacturing has entered a softer growth phase so far this year. Although the pace of output expansion ticked higher in March, which is especially encouraging given the heavy snowfall during the month, this was offset by slower increases in new orders and employment. Average rates of increase over the opening quarter as a whole are also down noticeably from the growth spurt seen at the end of 2017. Compared to official data, the performance through quarter one is consistent with only a 0.4-0.5% gain in production volumes, a considerable slide from the fourth quarter’s 1.3% increase.”

Today we’ll get to see the UK construction sector PMI survey and on Thursday we have the service sector report. The GBP/USD opens in Europe this morning in the high-1.40’s with GBP/EUR in the mid-1.14’s.

After the dramas in the US stock market on Easter Monday, Tuesday saw a sharp recovery with futures on the DJIA rallying 400 points from their opening level and the VIX index easing back a full point from 21.4 to 20.4. The US Dollar had a good day despite the rally in equity markets, though this was more a reflection of a sharp fall in the EUR/USD exchange rate than a more broadly-based USD rally. Its index against a basket of major currencies rose from a morning low in London of 89.45 to a best level of 89.85 before slipping back a little into the New York close. Overnight in Asia, the USD has edged slightly lower to 89.70.

The Trump administration has raised the stakes in a growing trade showdown with China by placing 25% tariffs on some 1,300 industrial technology, transport and medical products to try to force changes in Beijing’s intellectual property practices. “This level is appropriate both in light of the estimated harm to the U.S. economy, and to obtain elimination of China’s harmful acts, policies, and practices,” the U.S. Trade Representative’s office said in a report on Tuesday. In addition to advanced technologies such as communication satellites, the list includes products ranging from various types of steel to television components, medical devices, dishwashers, snow blowers and flame throwers. China’s ministry of commerce condemned the US decision. “Disregarding strong representations by China, the United States announced the tariff proposals that are completely unfounded, a typical unilateralist and protectionist practice that China strongly condemns and firmly opposes,” the ministry said in a statement overnight. “We have the confidence and ability to respond to any US trade protectionist measures… As the Chinese saying goes, it is only polite to reciprocate.”

After a lull in the US economic data calendar yesterday, it’s a pretty packed programme today. First up is the ADP employment survey for which consensus looks for a 200k monthly gain after a 235k increase in February which will surely be revised higher to bring it more into line with the actual outturn last month of 313k. later in the afternoon we have both versions of the non-manufacturing activity survey (PMI and ISM) and the February durable goods report. As we digest all that lot, the St. Louis Fed’s President James Bullard – one of the main doves on the FOMC - is scheduled to give a speech on the US economy and monetary policy whilst Cleveland Fed’s Loretta Mester will also be on the newswires. The Atlanta Fed yesterday upgraded its forecast for Q1 GDP from 2.4% to 2.8% after the ISM manufacturing and constructions spending numbers were released. The non-manufacturing ISM report isn’t an input to its GDP calculation and the next update will come on Thursday after the international trade data is published. The USD index opens in Europe this morning at 89.70.

The Single European Currency had a bad day on Tuesday, falling against every one of the major currencies we follow closely here and in bottom spot by quite a clear margin. Early in the European morning, EUR/USD had reached a high just above 1.2330 but it was then hit by softer than expected economic data and fell almost three-quarters of a cent to a low just below 1.2260; its lowest level in almost a week. Overall, its losses ranged from 0.3% against the USD to 0.6% against the AUD and 1.2% versus the Canadian Dollar. Overnight in Asia, trading has been pretty subdued and the EUR has managed only a very slight recovery, failing once more to get back on to a 1.23 ‘big figure’.

In economic data, the final Eurozone Manufacturing PMI posted 56.6 in March, unchanged from the earlier flash estimate and down further from December’s series-record high. Markit noted, “The further easing in the headline PMI mainly reflected slower growth of manufacturing production and incoming new business, both of which rose to the lowest extents since November 2016. Growth in new export business (which is not a component of the headline PMI) slipped to a 15-month low.” Rates of expansion eased across all of the nations covered by the latest PMI surveys and across the consumer, intermediate and investment goods industries. The Netherlands, Germany and Austria were the strongest performers overall. All of the other nations covered by the survey also saw solid rates of growth in March. The weakest increases were signaled in France and Ireland.

As for any clues on prices and inflation from the PMI report, “recent lengthening in suppliers’ delivery times has been among the greatest in the survey history, leading to widespread reports of raw material shortages and supply delays. This trend was especially noticeable in the Netherlands and Germany, both of which saw record lengthening in vendor lead times. Average selling prices also continued to rise at a solid clip, albeit the slowest in the year so far, as companies passed on the rise in purchasing costs. There were also reports that the ongoing upturn in demand was leading to improved pricing power.” Today we’ll get to see the Eurozone CPI numbers, where consensus looks for a pick-up from 1.2% to 1.4%. The EUR opens in London this morning at USD1.2275 with GBP/EUR in the mid-1.14’s.

The Australian Dollar had a fairly good day on Tuesday, not all of which was solely down to a recovery in US equity markets. AUD/USD opened around 0.7660 but a glimmer of hope for the rate bulls in the RBA Statement helped begin a short squeeze which took the pair all the way up to a high in the London morning of 0.7705. It couldn’t sustain this level even as US stock index futures moved higher into the opening of the cash market and the DJIA at one stage almost points higher, AUD/USD still slipped back to the 0.7685 area. Overnight in Asia, the Aussie Dollar popped to a high of 0.7715 but as we write this commentary, it is once again slipping back on to 76 cents.

Incoming economic data this morning were a touch stronger than had been expected. Retail sales rose 0.6% during the month of February after an upwardly-revised +0.2% gain in January. Household Goods and Clothing & Footwear both rose 1.1% in the month, Cafes, Restaurants and Takeaway Food rose 0.7%, while Food Retailing and the catch-all Other Retailing rose 0.3% and 0.2% in the month. A strong increase in the number of people in employment over the last year will have helped boost spending levels though what matters more for the RBA is growth in wages and prices rather than employment and output.

In separate data, building permits fell by 6.2% to 18,700 in February though much of the decline came in the highly volatile apartment sector where permits were down more than 16% over the month following a more than 40% surge in January. In more stable trend terms that smooth out the monthly volatility, apartment approvals have been heading lower for the past five months. The value of all building approved in February rose 4.3%, with a surge in non-residential building (+22.6%) more than outweighing the decline in value of residential construction (-4.3%). The Australian Dollar opens this morning in Europe in the high-USD 76’s with GBP/AUD in the high-1.82’s.

The Canadian Dollar had a very good day on Tuesday. It was steady against the well-bid Antipodean currencies and up against both the EUR and GBP even before the story broke about a possible NAFTA deal. By the North American afternoon, USD/CAD was on a 1.27 handle for the first time in almost a week and the CAD had gained 0.8% against the GBP and 1.2% against a very soft EUR to be at the top of our one-day performance table. Overnight in Asia, USD/CAD has moved down to 1.2775; its lowest level since February 28th, whilst GBP/CAD is below 1.80 for the first time in three weeks.

A report on the Bloomberg news service yesterday claimed, “The Trump administration is pushing for a preliminary NAFTA deal to announce at a summit in Peru next week, and will host cabinet ministers in Washington to try to achieve a breakthrough, according to three people familiar with the talks. The White House wants leaders from Canada and Mexico to join in unveiling the broad outlines of an updated pact at the Summit of the Americas that begins April 13, while technical talks to hammer out the finer details and legal text could continue, according to the people. They asked not to be identified because the talks are private.” Mexican Economy Minister Ildefonso Guajardo will travel to Washington for meetings with U.S. Trade Representative Robert Lighthizer on Wednesday while Canadian Foreign Minister Chrystia Freeland will arrive Thursday for her own meetings with Lighthizer, and meetings on Friday may include all three countries, the people said.

Away from NAFTA and back on the economy, we should note the Canadian manufacturing PMI index earlier this week rose slightly to 55.7; its 25th consecutive month above 50. Markit said, “The headline PMI reading in March was supported by a robust and accelerated rise in production volumes across the manufacturing sector… with sustained pressure on operating capacity as highlighted by another solid rise in backlogs of work. A number of survey respondents noted that sales growth had outstripped production capacity at their plants in recent months.” The next focus on data will be 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-1.27’s and GBP/CAD in the high-1.79’s.

Yesterday in Asia, NZD/USD briefly dipped below 72 cents before snapping back sharply to a best level of 0.7260 in the London morning; its highest since last Wednesday. It extended its gains to 0.7270 and as North American traders arrived at work, it was up against all the major currencies we follow closely here. By the end of the day, the Kiwi had been pushed into second place by a buoyant Canadian Dollar but had still registered solid gains around 0.4% versus both the AUD and GBP, with NZD/EUR more than 0.9% higher. Overnight in Asia, the NZD has had another push higher with NZD/USD reaching a best level of 0.7295 and GBP/NZD falling to a 2-week low of 1.9320.

There were no official economic statistics on Tuesday, but New Zealand’s Fonterra Co-operative Group said that milk production in its home market fell 2% in February due to “difficult weather conditions.” Last month, the firm had reported a 5% fall in January’s milk production on account of dry weather. Indeed, the weather in New Zealand at the moment seems as volatile as the currency itself! In the auction on March 21st, prices dropped for the third consecutive time, as production continued its slow pickup from weaker levels earlier in the season. The run extended to a fourth decline yesterday when the GDT auction saw a slight fall of -0.6% for the overall index.

Figures out this morning showed New Zealand consumer confidence lifted slightly in March, continuing to recover from last year's weakness as house price growth expectations rose. The ANZ Roy Morgan consumer confidence index rose to 128 in March from 127.7 in February. The current conditions index rose 0.4 points to 127.7 while the future conditions index gained 0.2 points to 128.2. The analysts at ANZ noted, "Consumer confidence remains high. And why not? Jobs are plentiful, there’s talk of higher wages, and the Auckland housing market has found a floor… The strong labour market is supporting household incomes and various government policies are intended to provide a further boost, while at the same time strong commodity prices are boosting exporter incomes. With household debt already at a record high as a proportion of incomes, a steady-as-she-goes housing market is just the ticket.” The Kiwi Dollar opens in London this morning in the high-USD 72’s with GBP/NZD in the low-1.93’s.