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GBP continues to recover on crosses, though GBP/USD is stuck below 1.40.

By Nick Parsons

Looking just at the GBP/USD exchange rate, it would seem the British Pound had a terrible day on Monday. In fact, it finished in second place on our one-day performance table, rising against every currency except the buoyant US Dollar. Having finished on Friday at USD1.3995 - its first time in a fortnight below 1.40 – the GBP was steady throughout the Asian session but then succumbed to more general USD strength and traded as low as 1.3940; its lowest level since March 19th. Overnight, the so-called ‘cable’ rate hit 1.3920 but has subsequently rebounded to be back at Monday evening’s closing level.

With the Easter holidays and a parliamentary recess, we haven’t heard much on Brexit for several weeks, even as the clock ticks down to Britain’s formal withdrawal from the EU on March 29th next year. The House of Lords last week voted in favour of staying in the customs union post-Brexit though a Downing Street spokesperson yesterday morning said, “The position remains very clear: we don’t think staying in a customs union is the right thing to do and it isn’t government policy to do so.” On Thursday this week, there will be a non-binding vote in the House of Commons on a motion which urges the Government to remain in a customs union. According to a report in The Times, “Theresa May will face calls from senior Brexit-supporting ministers to ditch her favoured option for a customs deal with the EU at a meeting this week… as fears grow that she is paving the way for a compromise on the issue.”

There is a bit of a lull in the UK economic data calendar ahead of Friday’s GDP data, though there will be some interest in today’s public sector borrowing numbers for March as they will be the last monthly number of the financial year. They will be the trigger/excuse for a lot of heat, and not much light, to be generated by another unedifying debate about government finances and the relative merits of spending and further deficit reduction. The Pound opens in Europe this morning with GBP/USD at 1.3945 with GBP/EUR in the low-1.14’s.

The US Dollar was all-conquering on Monday, driven by a potent cocktail of higher bond yields, worries over inflation and near-record short positions in the currency. Its index against a basket of major currencies rose for a fifth consecutive day, rallying from an opening level in Asia of 89.95 to an intra-day high of almost 90.55; its highest since January 12th. The move has been so dramatic because it was largely unanticipated and flies in the face of many (indeed most) bank strategists who have been calling the USD relentlessly lower all year. It is doubtful that many people who bought dollars yesterday did so with a smile on their face. Instead, they were more likely closing out loss-making short positions.

US 10-year bond yields have risen 16bp over the past month to a four-year high yesterday of 2.99% with 2-year yields up 22bp to 2.47%, their highest level since September 8th 2008. Fresh worries about inflation and the outlook for Fed monetary policy have been the main driver of this move and as long as equities have not crumbled in the face of tighter financial conditions, so the move up in yields has gathered pace. Nevertheless, we’d note that the S+P 500 index is now down 50 points over the last week and the DJIA has fallen 500 points over the same period. So far, 17% of the companies in the S&P 500 index have reported their numbers but this week 179 are scheduled to give earnings releases. If equities take a sudden lurch lower, then the rally in bonds and the USD might well run into some resistance.

Markit’s version of the PMI surveys is usually ignored by investors who prefer to focus on the ISM number but the ‘flash estimate’ of the PMI on Monday was studied closely for its reading on price pressures. The composite PMI index rose from 54.2 in March to 54.8, driven by accelerated growth at both manufacturing and service sector firms. Markit noted that, “Average cost burdens continued to rise in April, with the rate of input price inflation edging up slightly... Average prices charged meanwhile increased at a pace broadly in line with that seen in March, albeit one that was weaker than seen for input costs”. The USD index opens in Europe this morning at 90.45.

The euro opened on Monday morning around USD1.2280 and was little changed in the Asia session. During the European morning, however, it began to slide and a move down through the break through last week’s low first opened up a swift move down to 1.2230 and then down further in New York to a test of its 100-day moving at 1.2206. Overnight, the pair has been on a 1.21 ‘big figure’ for the first time since March 1st though has bounced back a little without testing that day’s low of 1.2170.

In yet another relatively disappointing piece of economic news, the ‘flash estimate’ of Markit’s Composite Eurozone PMI held steady at 55.2 in April, according survey data based on approximately 80% of final responses. The unchanged reading indicated the joint-weakest expansion of business output since the start of 2017, but remained well above the average of 53.8 seen over the past five years. Manufacturing again led the upturn, albeit with the rate of factory output growth slowing to a 17-month low. Service sector activity meanwhile rose at a rate only marginally faster than March’s seven-month low. Markit’s downbeat Press Release titled “Eurozone economy stays in lower gear” noted, “Output growth across the two sectors has fallen sharply since an 11 ½ year peak at the start of the year, in line with a slowdown in order book growth. Inflows of new orders rose at the weakest rate for 15 months in April. Factories reported the smallest gains in both total goods orders and export orders for a year-and-a half during April, the latter in part dampened by the recent strength of the euro, notably against the US dollar. New business inflows in the service sector meanwhile slipped to an eight-month low, adding to signs of a broad-based waning of demand growth both at home and in export markets.”

Away from the regular economic data flow, French President Emmanuel Macron arrived in Washington on Monday for a three-day visit as Donald Trump hosts the first official state visit of his presidency. shortly after arriving at Joint Base Andrews in Maryland, Macron said, ““This state visit is very important for our people and very important for us… We will have the opportunity to discuss of a lot of bilateral issues and to discuss about our security, about trade, and a lot of military issues that are important for our countries and beyond our two countries. This is a great honor and I think a very important state visit given the moment of our current environment.” White House press secretary Sarah Huckabee Sanders told reporters, "I think we can expect this to be a very productive and very positive state visit for both countries." The EUR opens in London this morning at USD1.2215 with GBP/EUR in the low-1.14’s.

Both Antipodean currencies were hit hard on Monday and finished equal bottom of our one-day performance table. After the big technical signal we highlighted here on Friday morning (a ‘key reversal day’ with a higher high, lower low and lower close than the previous day), AUD/USD continued to come under pressure. Friday’s intra-day low of 0.7655 wasn’t quite the lowest of the year (that came around 0.7645 on March 28th) but the pair fell further in Europe and in New York yesterday to reach a low of 0.7635; the weakest since December 15th. As with most of the other currencies, overnight price action has been characterized by a further modest decline followed by a rebound to last night’s closing levels.

Australian CPI figures are just like London buses - you wait ages for one to come along then four come at once! Dealing with all of them in turn, the quarterly increases showed headline CPI up 0.4%, the weighted and trimmed means both up 0.5% and the ‘core CPI’ which the RBA targets also up 0.5%. Whilst the headline rate was unchanged in year-on-year terms at 1.9%, the core rate rose from 1.9% to 2.0%; finally hitting the lower band of the RBA’s 1-3% target range for the first time in two years. The headline rate was very slightly below consensus expectations as seasonal increases in health and utilities were offset by lower retail and international travel prices whilst rents helped lift the core rate. Looking in detail at all the component parts of the CPI, the number of items which rose 0.6% or more during the quarter (and which NAB note correlates well with core inflation) fell from just over 40% to around 35%.

The analysts at AMP capital make the very good point that, "Inflation in the private sector part of the economy excluding volatile items is running at just 1.1 per cent year-on-year… This is in contrast to inflation in the government-influenced parts of the economy where inflation is much higher with utilities prices up 9.3 per cent over the year, along with health costs +4.2 per cent, education +2.6 per cent and alcohol and tobacco costs +7 per cent." Speaking at a housing conference after the numbers were published, RBA assistant governor Christopher Kent said, there is "no particular rush" to hike rates. While the next change in interest rate was likely to be up, he said progress on inflation and unemployment was expected to be only gradual. The Australian Dollar opens this morning in Europe at USD0.7610 with GBP/AUD in the low-1.83’s.

The Canadian Dollar couldn’t keep up with a buoyant US Dollar on Monday, but it still ended the day higher against the EUR, AUD and NZD. USD/CAD opened around 1.2760 and after a very quiet session in Asia (not unusual for the CAD) it began to move higher during the European morning, eventually reaching a high in the New York afternoon of 1.2855; its highest since April 3rd. Its price action overnight has mirrored the other majors, with an initially stronger USD than a reversal back to last nights levels, albeit all within relatively narrow trading ranges.

Foreign ministers from the G7 industrialized nations have been meeting in Toronto. Among many topics for discussion, the ministers are exchanging views on possible ways to bring stability to Syria. Canadian Foreign Minister Chrystia Freeland told a closing news conference, “We spent a considerable amount of time talking about Russia ... we all share deep concerns about what we agree is unacceptable behavior including the despicable nerve agent attack in the UK. The countries of the G7 are united in our resolve to work together to respond to this continued flaunting of international laws,” she said, adding that a new working group would help democracies from being undermined. German Foreign Minister Heiko Maas also said the leaders of France and Germany would urge U.S. President Donald Trump not to pull out of an Iran nuclear deal with major powers.

Bank of Canada Governor Stephen Poloz yesterday appeared before the House of Commons Standing Committee on Finance, though this wasn’t until 3.30pm local time; only half an hour before the close of North American markets. His published Statement largely repeated what had been said after the BoC meeting last week. “After a lacklustre start to 2018, we project a strong rebound in the second quarter. All told, we expect that the economy will grow by 2 per cent this year, and at a rate slightly above its potential over the next three years, supported by both monetary and fiscal policies. The composition of growth should shift over the period, with a decline in the contribution from household spending and a larger contribution from business investment and exports. Inflation should remain somewhat above the 2 per cent target this year, boosted by temporary factors. These factors include higher gasoline prices and increases to the minimum wage in some provinces. Their impact should naturally unwind over time, returning inflation to 2 per cent in 2019. Of course, this outlook is subject to several important risks, and a number of key uncertainties continue to cloud the future, as was the case in October.” The Canadian Dollar opens in Europe this morning with USD/CAD in the low-1.28’s and GBP/CAD at 1.79.

After its very poor week, finishing down against every one of the major currencies we follow here, the New Zealand dollar did no better on Monday, finishing equal bottom of the table with its Aussie cousin. During the European morning, NZD/USD moved down on to 71 cents for the first time since March 29th and in New York trading the pair extended its decline to a low around 0.7150; its weakest since January 10th. Overnight in Asia, the Kiwi has fallen even further to 0.7115 but unlike the other majors, it has failed to rally and is once again bottom of the table.

The New Zealand Herald newspaper today makes a really excellent point about the Prime Minister’s trip to Europe last week which is worth quoting in full. “As citizens of a small and isolated nation, New Zealanders often seek validation from abroad. By that measure, Prime Minister Jacinda Ardern returned triumphant this week from a trip to Europe. Ardern met with the leaders of Germany and France and got support for a free trade agreement. She was applauded in Paris when she explained that in seeking a greener future, New Zealand had stopped issuing new permits for offshore oil and gas exploration. And she was named in Time magazine as one of the world's 100 most influential people. For many New Zealanders, an image defined the trip: Ardern wearing an indigenous Maori cloak and smiling as she and her partner Clarke Gayford arrived at Britain's Buckingham Palace. But back home, Ardern faces political pressures.”

Stats NZ released their always fascinating visitor arrivals data today. These showed 3.82 million visitors arrived in New Zealand in the year to March 2018; an increase of 276,200 (8 percent) from the previous year. The statisticians said, “Two-thirds of this rise was due to more visitors from Australia, China, the United Kingdom, and the United States… Over half of all overseas visitors were holidaymakers, and over one-quarter were visiting friends and family.” March 2018 broke the record for the number of overseas visitors for a March month – overseas visitor arrivals numbered 388,300, up 44,500 from March 2017. The top source of visitor arrivals in March 2018 was Australia, at 37% of all visitor arrivals followed by China and the US with 11% and the UK with 7%. The Kiwi Dollar opens in London this morning at USD0.7120, with GBP/NZD around 1.9590.