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GBP is the worst performing major currency this week. US employment data and trade worries could bring more volatility today

By Nick Parsons

As the wild ride continues in global equity markets, the pound is so far this week the worst performer of all the major currencies we follow closely here. Its losses yesterday ranged from -0.1% against the NZD and EUR to almost 0.6% against the US Dollar. GBP/USD had hit 1.4090 during the Asian session but was hit by poor UK economic data during the course of the London morning and a further wave of selling once the technical support level from last Friday’s low at 1.4015 was broken. By the end of the day it was below 1.40 for the first time in over 2 weeks with GBP/AUD testing a 2-week low around 1.82. Overnight, it managed a rally to 1.4020 but as European trading begins, it is once more on a 1.39 ‘big figure’.

The IHS Markit/CIPS UK Services PMI dropped from 54.5 in February to 51.7 in March, to signal the weakest service sector performance since July 2016. Survey respondents noted that snow disruption and unusually bad weather conditions in March had been a key factor holding back business activity growth but there were also reports that heightened economic uncertainty continued to act as a brake on growth during the latest survey period. Markit said that, “Mirroring the trend for business activity, latest data revealed a slower upturn in new work received by service sector companies. The latest rise in new business volumes was the weakest seen for 20 months. In addition to bad weather, survey respondents often cited subdued consumer demand, while there were also some reports that Brexit-related uncertainty had led to delayed decision-making and risk aversion among clients.”

Commenting on what the PMI survey might mean for the Bank of England, CIPS said, “A strong rebound is nevertheless likely to be needed to ensure the majority of policymakers feel the economy is ready for another hike in interest rates. Encouragingly, in January 2010 and December 2010, the PMI fell sharply due to heavy snow but in both cases the decline was more than reversed in the following month. Some caution is warranted this year, however, as a drop in business expectations about the year ahead during March suggests the underlying trend remains one of weaker economic growth compared to that seen late last year.” The GBP/USD opens in Europe this morning in the high-1.39’s with GBP/EUR in the low-1.14’s.

The US stock market continues to trade more like a cryptocurrency, with the Dow Jones Industrial Average up another 300 points at one point on Thursday to add to its 800-point rally off the lows on Wednesday. Unusually – certainly over the past couple of months - the higher equity market was accompanied by a higher US Dollar whose index against a basket of major currencies rose to a 5-week high of 90.15 as the EUR and GBP were both hit by softer economic data. By the end of the day, the USD just beat the CAD into top spot on our one-day performance table. As President Trump is reported this morning to be looking at an additional $100bn of tariffs on Chinese goods, futures markets are signalling a loss of around 300-points for the DJIA, though the USD index is steady at 90.05.

With all the focus on tariffs and trade over the past few weeks, Thursday brought a timely reminder of why President Trump is so agitated about the subject. The US trade deficit grew by 1.6% in February from $56.7bn to $57.6bn and was the highest monthly trade deficit in ten years, going back to the GFC in 2008. Exports of goods and services increased $3.5bn, or 1.7% , in February to $204.4bn. Exports of goods increased $3.0bn and exports of services increased $0.5bn. On the other side of the ledger, imports of goods and services increased slightly more in absolute dollar terms, by $4.4bn, or also 1.7% of total, in February to $262.0bn. Imports of goods increased $3.3bn and imports of services increased $1.1bn. When analysed by trading partner, the figures show surpluses, in billions of dollars, with South and Central America ($3.4), Hong Kong ($3.1), Brazil ($0.9), United Kingdom ($0.6), and Singapore ($0.5). Meanwhile, the countries with whom the US runs the largest trade deficit are China ($34.7), European Union ($15.3), Germany ($6.7), Mexico ($6.6), Japan ($6.0), Italy ($2.8), OPEC ($2.3), India ($1.9), Taiwan ($1.5), France ($1.4), South Korea ($1.1), Saudi Arabia ($0.4), and Canada ($0.4).

The President’s chief economic advisor did what he’s known best for and toured the TV studios to talk up the markets and produce some wildly optimistic US growth forecasts. He said on Fox Business that the US will get a trade deal with China "over a period of time" as the latest measures are "just proposals right now" and that barriers will come down on both sides. He also said that China's "unfair and illegal" actions that are "damaging to economic growth for the US, for China and for the rest of the world." Kudlow, who said the focus of his job is "growth", then added that the US economy might expand between 3% and 4% this year and that 5% growth is possible, but likely won't be sustained for long.” As far as Q1 is concerned, that’s not quite how things are shaping up. After the news on the trade deficit, the Atlanta Fed yesterday revised down is GDP forecast from 2.8% to 2.3%. Ahead of the March labour report later today, the USD index opens in Europe this morning at 90.05.

The euro had a poor day on Wednesday, up against a very weak GBP, little changed against the AUD and NZD, but down against the US and Canadian Dollars. EUR/USD had printed just under 1.2290 in Asia but this proved to be the high of the day. It was knocked down around a quarter of a cent in the European morning by weak economic data and after a very feeble rally then fell another half a cent to 1.2225; its weakest in more than a month. Overnight in Asia, the EUR managed to reach almost 1.2260 before again turning lower but is little changed against the GBP in the low-1.14’s.

Eurozone economic activity expand at the weakest pace since the start of 2017 in March, as rates of increase moderated in both the manufacturing and service sectors. The final Markit PMI Composite Index posted 55.2, down from 57.1 in February and below the earlier flash estimate of 55.3. The headline index has nonetheless signaled expansion in each of the past 57 months. Manufacturing production rose to the lowest extent since November 2016, whereas service sector business activity increased at the weakest pace since August last year. Markit noted that, “National PMI data indicated that the upturn remained broad-based in nature, with output expanding in all of the countries covered. However, signs of a growth slowdown were also widespread, with the ‘big-four’ nations and Ireland all seeing moderations during the latest survey month. March saw the level of incoming new business rise at the weakest pace for 14 months, with slower increases signaled in Germany, France, Italy and Ireland. The pace of expansion held steady in Spain. Growth in new orders remained sufficient to test capacity, however, as indicated by a further solid increase in backlogs of work.”

As for signs of progress towards the ECB’s inflation target, the survey noted, “Price pressures moderated in March, with rates of increase in output charges and input costs both slowing. That said, almost all of the nations reported higher input and output prices during the month, the sole exception being a slight decrease in output charges at Italian service providers… Output charge inflation eased to a three-month low, while costs increased at the slowest pace since last September.” The EUR opens in London this morning at USD1.2235 with GBP/EUR in the low-1.14’s.

The Aussie Dollar’s price action was a bit of a puzzle on Thursday as it slid lower against the US and Canadian Dollars despite some decent local economic data and a US stock market which was more than 1% higher by the end of the London afternoon. From a one-week high in Asia of 0.7725, AUD/USD moved steadily lower throughout the day. It broke down on to US 76 cents before the European open and hit a low just above 0.7675 during the New York morning. By the end of the day, it was up against the GBP, little changed against the EUR and NZD but down against USD and CAD. Overnight in Asia, AUD/USD has printed a low of 0.7660 with GBP/AUD at 1.82.

After a run of decent data this week – overseas trade, retail sales and the performance of services – there were no fresh official statistics published today. Research released yesterday by Digital Finance Analytics (DFA) shows that across Australia, around 956,000 households were estimated to now face ‘mortgage stress’ – the circumstances homeowners face when their income struggles to cover ongoing living costs. As reported on 9News, 'Mortgage stress' is defined as having more money being spent on a monthly basis than income being earned. In many cases, families dip into savings or increase loan borrowings to fund their lifestyle and overcome the 'stress'. The data shows that more than 21,000 households are in ‘severe stress’, or being unable to make repayments at all, and more than 55,000 households risk 30-day bank defaults over the coming year. Household debt is something which the RBA is monitoring closely and helps explain why this week it left interest rates unchanged for an 18th consecutive meeting.

A Reuters survey of 44 analysts plots a very uneventful future for the Australian dollar, which is seen at $0.77 in one-month, $0.78 in three months, $0.77 in six months and $0.79 over a one-year horizon. These median point forecasts disguise a pretty wide spread of views, with analysts’ estimates from as low as $0.70 and as high as $0.86 on a one-year horizon. The Australian Dollar opens this morning in Europe in the high-USD 76’s with GBP/AUD in the low-1.82’s.

The Canadian Dollar had another good day on Thursday, not quite keeping up with the USD but gaining against every other major currency we follow closely here. USD/CAD edged marginally higher from 1.2765 to 1.2770 but on its crosses, GBP/CAD fell below 1.80 for the first time in 3 weeks whilst AUD/CAD fell towards 0.9800 and NZD/CAD fell back on to 92 cents.

Speaking in Quebec City, Canadian Prime Minister Justin Trudeau said NAFTA talks have picked up momentum. “We are in a moment where we are moving forward in a significant way, hopefully there will be some good news coming… Right now, we are having a very productive moment.” Trudeau said his officials are willing to meet as frequently as the U.S. wants to work toward getting a deal, though his country’s ambassador to Washington said on Wednesday there are “still lots of issues” to settle. U.S. Trade Representative Robert Lighthizer said last week he was hopeful they can soon reach a deal “in principle.”

Racking up the air miles, Mr Trudeau’s office announced he will travel to Lima, Peru, Paris and London in an eight-day whirlwind trip later this month. He will be in Lima, April 12-14, Paris, April 15-17 and London, April 17-20 for the Commonwealth heads of government meeting. The theme of the Commonwealth summit is "Towards a Common Future" and the Prime Minister's Office says Trudeau plans to emphasize the need for action on climate change and ocean protection and the need to create economic growth that benefits everyone. The immediate focus for financial markets, however, is today’s Canadian employment report, 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-1.78’s.

By its recent standards, the Kiwi Dollar had a pretty ordinary day on Thursday. As with its Aussie cousin, it fell against the USD and CAD, was little changed against the AUD and EUR but rose against a weaker GBP. NZD/USD peaked during the Asian time zone just above 0.7320 and by late morning in London it had lost almost half a cent. The pair very briefly rallied back up to US 73 cents but couldn’t hold it for more than a few minutes and fell back to a low of 0.7265. The AUD/NZD made a marginal fresh 9-month low just below 1.0530 but then rebounded around a quarter of a point during the New York afternoon.

With no official economic statistics scheduled today, we’ll draw instead on Bloomberg’s annual Global Vice index which compares the costs of a weekly basket of six so-called vice goods including cigarettes, alcohol, marijuana, amphetamines, cocaine and opioids across more than 100 countries. New Zealand is the second most expensive country in the world to buy this basket of vice goods and is one of only three countries where the gross weekly cost exceeded US$1,000. At US$1,366, Japan came in as the most expensive, followed by New Zealand at US$1,241 and Australia in third at US$1,028. New Zealand saw the biggest year-on-year increase with Kiwis having to fork out US$261.10 more for a basket of vice goods last year compared to 2016. By comparison, the same basket cost less than $100 in 21 mostly tropical countries, including the Dominican Republic, Congo, Colombia, and South Africa. The Congo was the cheapest of all at just $18 though a quick look at the WHO website shows it has life expectancy of just 57 years… The data in the Bloomberg index was sourced from the UN, World Health Organization, World Bank and International Monetary Fund.

In a Reuters survey of 37 analysts out today, the median forecast put the currency at $0.72 for one month, three months and six months, ticking up to $0.74 in one year. While the median forecasts were narrowly spread, there was far more variety at the extremes, with the highest prediction for 12-months out at $0.8000 and the lowest at $0.6500. The Kiwi Dollar opens in London this morning in the mid-USD 72’s with GBP/NZD in the high-1.92’s.