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After a stunning rally yesterday, stock markets are higher again. US trade data will be a major focus this afternoon. The GBP will be driven by service sector PMI survey.

By Nick Parsons

The British Pound had a very mixed and choppy day on Wednesday, finishing in the middle of the FX pack. GBP/USD reached a high just under 1.41 in Asia but then a combination of yet more poor UK economic data and a plunging US stock market sent the pair down to 1.4020 before a 60-pip rally as equity markets recovered all – and more - of their earlier losses. The GBP finished the day net higher against the USD and CAD, little changed against the EUR and AUD but more than a cent lower against a buoyant NZD. Overnight in Asia, GBP/USD initially tested Wednesday’s high but has subsequently slipped back to 1.4070.

The IHS Markit/CIPS UK Construction PMI fell sharply from 51.4 in February to 47.0 in March, to register below the 50.0 no-change threshold for the first time in six months. Moreover, the latest reading signaled the fastest overall decline in construction output since July 2016. The detailed release noted, “The overall reduction in construction output was driven by the sharpest drop in civil engineering work for five years in March. Commercial activity also decreased during the latest survey period, with the rate of decline the most marked since September 2017. Housing bucked the wider trend for construction activity in March, although the latest upturn in residential building was only marginal. Construction companies indicated a decline in new business volumes during March, which continued the downward trend seen so far in 2018. The latest deterioration in new order books was the sharpest since July 2016. Survey respondents noted that subdued underlying demand and, in some cases, weather-related disruption had weighed on sales in March.”

We’ve been warning here about weather disruptions and the knock-on effect on retail sales and GDP. Commenting on its’ survey, CIPS said, “It’s a few years since the UK experienced such bad weather in March and it’s obvious that supply chains were woefully unprepared to deal with the disruption. So though March’s figures could be viewed as a temporary blip, without a strong pipeline of work, and strong risk strategies in place, the sector’s health remains in question as we’re still a long way off seeing it operate the way it has over the last year.” This morning we’ll get to see whether the service sector PMI was similarly weather-affected last month. The GBP/USD opens in Europe this morning in the high-1.40’s with GBP/EUR in the mid-1.14’s.

The US stock market is making Bitcoin look stable by comparison! After a 600-point plunge on Monday, the Dow Jones Industrial Average rose 400 points on Tuesday. Yesterday morning, it fell 600 points once again but then rallied almost 800 points off its earlier lows to end the day up more than 200 points. Throughout this period of extreme volatility, the US Dollar index against a basket of major currencies has remained remarkably steady; moving only within a half-point range from 89.40 to 89.90 and last night closed almost exactly at the mid-point of this band.

As the US stock market dived yesterday – dragging all global equity indices lower in its wake – the President’s new economic advisor, Larry Kudlow, duly popped up on 24-hour financial TV. Speaking on CNBC he said, "Don't overreact, we'll see how this works out... At the end of this whole process, the end of the rainbow, there's a pot of gold." Asked on Fox News if there is a trade war, he replied, “Absolutely not. Absolutely not. And let me just say right at the top, number one, blame China, not President Trump.” Continuing the media blitz, US Trade Secretary Wilbur Ross then told CNBC that threats from the United States to impose tariffs on goods worth $50 billion could pave the way for talks between Washington and Beijing, but it was unclear whether discussions could take place before the proposed extra duties were introduced. “President Trump is a “lifelong dealmaker… the dispute with China is not the first controversy he’s gone into. It wouldn’t be surprising at all if the net outcome of all this is some sort of a negotiation… It’s very difficult to put a specific time denomination on negotiations that are as complex as these.”

Away from trade, there was plenty of incoming US economic data too. The ADP Survey of private sector payrolls showed an increase of 241k on the month whilst factory orders rose 1.2%. The ISM non-manufacturing index printed at 58.8, which was 0.7 percentage point lower than the February reading of 59.5. Today’s February trade balance numbers will be more important than ever given the new focus on tariffs. The consensus expectation is for a deficit of -$55.7bn after -$56.6bn in January. The USD index opens in Europe this morning at 89.75.

The Single European Currency had mixed day on Wednesday, up against the USD, CAD and GBP, little changed against the AUD but down against the NZD. In early European trade as stock markets tanked, EUR/USD fell to test Tuesday’s low just below 1.2260 but then rallied as stocks recovered, even though it was ultimately unable to hold on to a 1.23 ‘big figure’. Overnight in Asia, the pair is little changed from last night’s close against either the USD or GBP.

In economic news, headline annual inflation in the Eurozone rose to 1.4% in March from a downwardly-revised 1.1% in February, in line with the consensus. The core rate was unchanged at 1.0%, below the consensus, 1.1%. Looking at the main components of euro area inflation in this ‘flash estimate’, food, alcohol & tobacco is expected to have the highest annual rate in March (2.2%, compared with 1.0% in February), followed by energy (2.0%, compared with 2.1% in February), services (1.5%, compared with 1.3% in February) and non-energy industrial goods (0.2%, compared with 0.6% in February).

Separate figures from Eurostat showed the Eurozone unemployment rate was 8.5% in February 2018, down from 8.6% in January 2018 and from 9.5% in February 2017. This is the lowest rate recorded in the euro area since December 2008. The broader EU28 unemployment rate was 7.1% in February 2018, down from 7.2% in January 2018 and from 8.0% in February 2017. This is the lowest rate recorded in the EU28 since September 2008. Among the Member States, the lowest unemployment rates in February 2018 were recorded in the Czech Republic (2.4%), Germany and Malta (both 3.5%) as well as Hungary (3.7% in January 2018). The highest unemployment rates were observed in Greece (20.8% in December 2017) and Spain (16.1%). This morning we’ll get to see the service sector PMI survey. The EUR opens in London this morning at USD1.2275 with GBP/EUR in the mid-1.14’s.

Wednesday saw very different price action across the three major time ones for the Australian Dollar. In the Asia session, AUD/USD was supported by some slightly better than expected economic numbers, rising from 0.7680 all the way up to 0.7715. As stock markets plunged in the European morning, AUD/USD lost almost exactly half a cent to 0.7665 before the stunning rally in equities lifted AUD/USD back up to close at its highs around 0.7715. Overnight in Asia, the Aussie extended gains to a one-week high of 0.7725 before then losing just over a quarter of a cent to the high-0.76’s.

Economic data released earlier this morning showed Australia recorded another large trade surplus in February, continuing the solid run of results seen since late 2016. According to the Australian Bureau of Statistics a surplus of $825 million was reported in seasonally adjusted terms, topping forecasts for a smaller figure of $725 million. January’s trade surplus, originally reported at $1.055 billion, was revised down to show a surplus of $952 million. Over the month, exports rose very slightly to $34.23 billion whilst imports were $33.4bn. If the performance over the last two months continues into March, then external trade could make a positive contribution to Q1 GDP, having subtracted around 0.5% in Q4 2017.

In separate data, the Australian Performance of Services Index rose by 2.9 points to 56.9 in March. This was the highest monthly result in the PSI since December 2016 and marks thirteen months of positive results. All five of the activity sub-indexes expanded. Deliveries were robust over the month rising to 61.3 points, as were new orders at 59.0. Stocks (55.0) lifted over the month while Sales (55.0) also edged higher. Employment continued to grow rising one point to 54.9 in March, marking ten months of growing employment. 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 very choppy but ultimately pretty good day on Wednesday. During the Asian session, USD/CAD moved down to 1.2775; its lowest level since February 28th, whilst GBP/CAD was below 1.80 for the first time in three weeks. As the China news on tariffs was announced, USD/CAD rallied more than half a cent to a high just above 1.2840 but then retraced all of these gains and more to finish around 1.2770 which is where it has remained through the overnight session in Asia.

Speaking to reporters outside the White House, Larry Kudlow suggested Trump’s proposed steel and aluminum tariffs could be little more than a move to get China to the negotiating table over its trade practices. And he hinted a U.S.-Canada-Mexico trade deal could be near. “Everybody wants to solve this the best way they can… We don’t want to hurt businesses. We don’t want to hurt districts. We don’t want to hurt congressmen. And I think, at the end … of my mythical rainbow, they’re all going to come out ahead.” Calling Trump a “free-trader,” Kudlow said the President “wants to solve this with the least amount of pain… Here’s a key point: Both sides benefit by positive solutions that lower barriers and open markets. This is a growth action. … Sometimes the path to this kind of growth is a little rocky. That’s the way the world works.” On ongoing talks to negotiate the North American Free Trade Agreement, Kudlow said the three countries are “moving in the direction of a NAFTA deal… I think we’re going to see some very positive news on NAFTA, and maintaining NAFTA, and reforming NAFTA. And, heck, the stock market is going to love that.”

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.

Normal service was resumed in the New Zealand Dollar on Wednesday. It seems that almost every day this most volatile of the major currencies is either top or bottom of our one-day performance table. Yesterday it was in top spot, falling less than the Aussie Dollar in the equity-driven sell-off and almost keeping up with it during the astonishing subsequent rally. NZD/USD rallied from 0.7260 to 0.7310 which at one point pushed the AUD/NZD cross down to a 9-month low of 1.0530 before the pair rallied around a quarter of a cent later in the New York day. Having reached a best level in Asia around 0.7320, NZD/USD opens this morning in the high 0.72’s.

The latest monthly QV House Price Index released this morning shows nationwide residential property values for March increased 7.3% over the past year which is the fastest rate since June 2017. Values rose 1.2% over the past three months. The nationwide average value is now $677,618. QV said that, “Residential property value growth remains subdued compared to recent years but March has seen the usual seasonal pick-up in sales volumes and activity. With restrictions on finance being eased by the retail banks it’s been a little easier for some investors and home buyers to gain finance to purchase. First home buyers appear to be capitalising on subdued investor activity and some are finding they can purchase more easily without the same level of competition from multiple property owners if they are not already priced out of the market.”

In separate figures also released today, ANZ’s index of job advertisements increased 0.9% m/m in March, after falling 1.2% in February. The annual growth rate increased to 6.1%, but remains well below the strong rates seen during 2016. The ANZ analysts said, “We are not surprised to see job ads growing at a modest pace. It reflects the maturity of the economic cycle, with the labour market tight and skilled labour difficult to come by. The current pace of growth is consistent with our forecast for moderating employment growth.” The Kiwi Dollar opens in London this morning in the high-USD 72’s with GBP/NZD in the low-1.93’s.