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Friday the Thirteenth: what could possibly go wrong ?

By Nick Parsons

The British Pound had a pretty mixed morning on Thursday but as the euro came under heavy selling pressure in the afternoon, GBP/EUR broke out of its 2018 range from roughly 1.1200-1.1475 and moved on to a 1.15 ‘big figure’ for the first time since June last year. This pushed the GBP higher across the board, despite some generally soft UK economic data. Gains ranged between three and eight-tenths of a point and with GBP/USD almost hitting its 2018 high of 1.4270, the Pound ended the day clearly at the top of the FX leaderboard. Overnight in Asia, however, it is struggling to hold on to these gains and though trading ranges have been quite narrow, it begins the day slightly weaker against all the major currencies we follow closely here.

In economic news, the UK’s property surveyors issued the most downbeat assessment of the housing market for five years. The well-respected Royal Institution of Chartered Surveyors survey said that in March demand from buyers fell for the 12th month in a row, new instructions from sellers declined for the seventh consecutive month, and prices were flat nationally. RICS measures confidence in the property market by balancing surveyors seeing price rises against those seeing price falls. It said the figures were the lowest since 2013 with declines in London and the southeast being offset by gains in the East Midlands, Northern Ireland and Wales. The RICS Chief Economist said, “The findings provide little encouragement that the drop in housing-market activity is likely to be reversed anytime soon… Apart from the implications this has for the market itself, it also has the potential to impact the wider economy contributing to a softer trend in household spending.”

The British Chambers of Commerce published what it claims to be the UK’s largest and most authoritative private-sector business survey. Based on the responses of over 7,100 businesses, the survey shows that UK economic growth remained subdued in the first quarter of 2018, despite a strong export performance. It reported that fewer firms in the manufacturing sector saw an increase in domestic orders, and the balance of firms reporting an increase in domestic sales is now at its lowest level since Q4 2016. ““What growth we see in the UK economy is due principally to strong global trading conditions, rather than domestic demand, which remains muted. Uncertainty, recruitment difficulties and price pressures remain persistent concerns for businesses of every shape and size, even if short-term confidence levels remain resilient. Even with a standout performance from manufacturing exporters able to reap the benefits of lower Sterling, the UK economy as a whole is treading water, rather than powering ahead.” The Pound opens in Europe this morning with GBP/USD in the low-1.42’s with GBP/EUR in the low-1.15’s.

We noted here yesterday that for the S&P 500 Index, there had already been 27 1% moves in the first 67 trading days of 2018. After Thursday’s price action, it’s now 28 from 68 as the index had another 30-point high-low trading range. It was also a pretty good day for the US Dollar which responded positively to the higher US CPI figures (albeit in line with consensus forecasts) and a slightly more ‘hawkish’ tone from the FOMC Minutes. The USD index opened around 89.10 but moved steadily higher to a best level in the European afternoon of 89.55 before giving back a little of these gains into the New York close. After a fairly subdued session in Asia overnight the USD index opens at 89.35.

Early in the North American morning, President Trump tweeted, “Never said when an attack on Syria would take place. Could be very soon or not so soon at all! In any event, the United States, under my Administration, has done a great job of ridding the region of ISIS. Where is our “Thank you America?” Just before lunchtime locally, US Defence Secretary Jim Mattis told a hearing of the House Armed Services Committee that the White House is still yet to make any decision on potential military attacks in Syria. We have not yet made any decision to launch military attacks into Syria… When I leave here, I go to a meeting where the National Security Council will be meeting on this and we will take forward various options to the President.”

On trade, during a meeting with Republican senators on Thursday, President Trump is said to have asked Larry Kudlow, his national economic council chairman, and the US trade representative Robert Lighthizer to take another look at the Trans-Pacific Partnership – a deal he once called Republicans “stupid” for endorsing. Back in April 2015, he tweeted, “The Trans-Pacific Partnership is an attack on America's business. It does not stop Japan's currency manipulation. This is a bad deal.” In the current mood of increasing tensions over trade between the US and China, however, it is thought this may offer the US greater leverage in negotiations with Beijing. Yesterday, Trump tweeted, “Would only join TPP if the deal were substantially better than the deal offered to Pres. Obama. We already have BILATERAL deals with six of the eleven nations in TPP, and are working to make a deal with the biggest of those nations, Japan, who has hit us hard on trade for years!” There are no US economic statistics released today so the Presidents Twitter feed could again be the main source of market-moving news. The USD index opens in Europe this morning at 89.35.

The euro had a pretty poor day on Thursday. Its best level of the day came early in the Asian session just below 1.2380 and this, in turn, was lower than the high of the previous day. During the European morning a soft set of economic numbers knocked EUR/USD a quarter of a cent lower whilst the European Central Bank’s account of the March monetary policy meeting took it down a further 20 pips to an intra-day low just above 1.2300; matching its lowest level on Tuesday. Overnight in Asia, trading has been extremely quiet and with EUR/USD barely moved from 1.2325.

Eurozone industrial production was much weaker than expected in February, as a jump in energy output failed to offset a slump in the production of capital goods and consumer goods. The European Union’s statistics office Eurostat said industrial production in the 19 countries sharing the euro fell 0.8% m/m for a 2.9% y/y rise, much weaker than the +0.1% m/m increase which had generally been expected. The softness in February was due to falling production in all categories — intermediate goods, capital goods and durable and non-durable consumer goods — except energy, the output of which surged 6.8% on the month after a 1.1% monthly drop in January. By country, weakness in Italy and Germany offset strength in Spain and France. Elsewhere, big declines in Portugal and Ireland were the main constraints, while production rose solidly in the Netherlands.

Whereas the US FOMC was unanimous in its view on the economy and inflation, the ECB is still deeply split. Its account of the March Council Meeting said, “The view was put forward that the Governing Council’s criteria for a sustained adjustment in the path of inflation could be assessed as close to being satisfied over a medium-term horizon. However, the broadly agreed conclusion was that the evidence for a sustained rise in inflation towards levels consistent with the Governing Council’s inflation aim was still not sufficient.” As for the exchange rate, “Some caution was voiced, as the more recent developments in the euro exchange rate and in financial conditions in part reflected changing perceptions about monetary and fiscal policies, domestically and globally, as well as rising risks of protectionism and heightened market sensitivity to communication, rather than further improvements in domestic economic fundamentals." Today brings only the final German CPI figures for March and February’s EU trade balance data and the EUR opens in London this morning at USD1.2365 with GBP/EUR in the high-1.14’s.

Thursday was another day of very tight ranges for the AUD/USD pair, though the feeling persists that with a near 400-point rally in the DJIA, it really should have done somewhat better. Having opened around 0.7755, only 25 pips separated the high and low of the day and by the close of business the AUD finished marginally down against the USD, a little more against the CAD, GBP and NZD but up against a very weak EUR. Overnight in Asia, the Aussie Dollar has rallied up to USD0.7775 and so far is the best performing currency on the day.

Overnight we have seen the latest monthly figures from Australia’s largest trading partner. China reported a surprise monthly trade deficit in March, the first time in 13 months, as exports dropped while import growth accelerated due to robust domestic demand. China's trade balance swung to a deficit of $4.98 billion from a $33.7 billion surplus in the previous month. The country last reported a monthly deficit, of $11 billion, in February 2017. Exports declined 2.7% in March from a year earlier, following a 44.5% surge in February, the General Administration of Customs said. Imports in March expanded 14.4% from a year earlier, compared with a 6.8% increase in February. The monthly numbers in the first quarter of any year should always be treated with some caution as they can be distorted by the timing on the Lunar New Year holidays. Taking the quarter as a whole, exports rose 14.1% from a year earlier, while imports climbed 18.9%, resulting in a surplus of $48.39 billion,

In its latest Financial Stability Review released this morning, the RBA says strong global economic conditions over the past six months suggests asset prices have surged because investors "see little chance of adverse outcomes". It warns that "Investors have also taken on more risk in recent years, making them more susceptible to large losses if there were a generalised fall in asset prices… The falls in global equity prices in recent months have provided a timely reminder that asset prices can fall quickly with price movements exacerbated by pro-cyclical investor behavior.” Although the review says Australia's financial system remains ‘resilient’ in its ability to withstand shocks, it does raise concerns about high levels of household debt. "The high level of household indebtedness increases the risk of a rise in household financial stress amplifying a shock to the economy… The higher debt levels raise concerns about the resilience of a range of borrowers to any adverse shocks, particularly as global monetary policy accommodation starts to be unwound." The Australian Dollar opens this morning in Europe in the high-USD 77’s with GBP/AUD just under 1.83.

The Canadian Dollar has had a pretty good run recently and on Wednesday again finished top of our one-day performance table. On Thursday, however, it gave back a small portion of its gains. USD/CAD moved up from an opening level of 1.2580 to a high in the European afternoon of 1.2620 and the CAD lost ground against the GBP, AUD and NZD; finishing second from bottom on our one-day chart. Overnight in Asia, USD/CAD is back below 1.26 and despite its strong performance yesterday, the British Pound is still below GBP/CAD1.80.

In an interview with The Times newspaper, Canadian Prime Minister Justin Trudeau said there is “no way” the White House will extend steep tariffs on American imports of steel and aluminium to include countries like Britain and Canada and said Canada was confident that its exemption will be extended as it renegotiates the North American Free Trade Agreement with the US and Mexico. “The other story in this is the number of governors, industry leaders and business people and congress members in the United States who have assured me that there’s no way that this will move forward because it would be so detrimental to the exact families and workers that the president so relied upon for his electoral success… “So we take seriously the deadlines and the positioning of the American administration, but we are confident that the Canadian exemption to steel and aluminium tariffs is secure.” Asked about the present dispute between the US and China, he said that Canada would continue to sign more trade agreements “even as the world is perhaps going through questions about globalisation”.

The Canadian leader is due to attend the Summit of the Americas in Peru over the coming days before flying to London for the Commonwealth heads of government meeting next week. The Canadian Dollar opens in Europe this morning with USD/CAD in the high-1.25’s and GBP/CAD in the low-1.79’s.

Unlike its Aussie cousin, the New Zealand Dollar did make a fresh high against the USD on Thursday, extending its gains to a high around 0.7385. This outperformance saw the AUD/NZD cross trade down on to a 1.04 ‘big figure’ for the first time since July last year although GBP/NZD moved up more than a cent from its intra-day low around 1.9190. Overnight in Asia, less than 20 pips have separated the high and low in NZD/USD and it opens little changed around 0.7375.

Amidst all the negative stories globally about trade and tariffs, there’s a rare bit of good news overnight from New Zealand as Prime Minister Jacinda Ardern heads off on her first official trip to Europe. Former Trade Minister Todd McClay said he'd heard from some ‘pretty good contacts’ that the European Council was likely to meet at the end of May. "It's my expectation that unless something disastrous happens they are likely to give the European Commission permission to formally start the negotiations for New Zealand." The Prime Minister is to meet her French counterpart Emmanuel Macron in Paris on Monday and the German chancellor Angela Merkel in Berlin on Tuesday. Ms Ardern said she would be strongly making New Zealand's case for an EU trade deal in both those meetings. "We're one of just a handful of [World Trade Organisation] members who do not have either the beginning of a negotiation or an agreement… There's a real opportunity there to try and move these things along."

In economic news this morning, the manufacturing PMI for March was 52.2. This was 1.1 points lower than February, and the second consecutive decrease in overall expansion levels for 2018. The analysts at BNZ who co-produce the index noted, “The new-orders index was also a tad below normal although, at 53.8, was still clearly expansive. The PMI employment index, however, at 53.5, was ahead of its long-term average… The weak spot in March’s PMI was its production index. With a seasonally adjusted outcome of 50.8 this was close to stalling. Compare this to February’s 53.7 and the exceptionally high reading of 61.0 back in November and a sense of sharp deceleration arises… we expect manufacturing to be flat in Q1 GDP and pick up in Q2.” The Kiwi Dollar opens in London this morning at USD.7375, with GBP/NZD around 1.9265.