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GBP continues Tuesday’s solid performance, even though GBP/USD is still below 1.40.

By Nick Parsons

The Pound rose steadily on Tuesday against all the major currencies we follow closely here and finished top of our one-day performance table. GBP/USD opened around 1.3940 and after an initially steady start, it began to move higher in the European morning, eventually reaching a best level of 1.3980 just before the New York close. Overnight in Asia, it briefly extended these gains but couldn’t make it back on to a 1.40 ‘big figure’ and has subsequently slipped back to around 1.3960.

Yesterday’s UK economic figures didn’t directly tell us much about current economic activity but provided an interesting snapshot of government finances in the last month of the financial year. Public sector net borrowing excluding public sector banks was £1.3bn in March, below March 2017’s £2.1bn and consensus estimates of a much higher £3.0bn. This was the lowest March net borrowing since 2004 and means that public sector borrowing totalled £42.6bn in 2017/18, well below the Office for Budget Responsibility (OBR) forecast of £45.2bn March given in the Spring statement last month. It is the lowest annual net borrowing since the financial year ending March 2007 but still means that total public sector net debt is now £1,798.0bn, which was equivalent to 86.3% of gross domestic product.

As Brexit news comes back on to the radar after a very quiet month, European Commission vice-president Valdis Dombrovskis, who is responsible for financial stability, said at conference in London that Brussels must have the power to approve British financial regulations after Brexit if the City wants to preserve access to EU markets. He said that future access would depend on a system of “equivalence” under which Brussels would exercise “unilateral and discretionary” powers to judge whether UK regulations met its standards. It is hardly the sort of news the free-trade members of Theresa May’s government or backbench MP’s would wish to hear. The Pound opens in Europe this morning with GBP/USD at 1.3960 with GBP/EUR once again in the low-1.14’s.

All the drama in the US on Tuesday came in the equity market rather than in foreign exchange. We wrote here 24 hours ago that, “If equities take a sudden lurch lower, then the rally in bonds and the USD might well run into some resistance.” The S+P 500 index fell 60 points from its high and the DJIA at one point was down 800 points from its best level yesterday as the seemingly relentless rise in bond yields eventually took its toll on the stock market. The USD index against a basket of major currencies opened around 90.50, reached a high around 90.60 then slipped gradually to a a close around 90.35. Overnight in Asia, it has steadied and rallied to 90.50 but is still shy of Tuesday’s best levels.

The yield on US 10-year Treasuries yesterday broke above 3.0% for the first time since January 2014, although it is worth noting that 30-year yields are actually around 15bp lower than their highs earlier this year. There is nothing magical about the 3% threshold, other than a change of ‘big figure’ which of itself draws plenty of media interest. Overall, yields are up 59bp since the beginning of this year as the bond market faces the prospect of higher inflation, much greater supply from an increase in government borrowing, and a US Central Bank which is reducing the amount of bonds it bought during the period of Quantitative Easing.

In other news across the Atlantic, U.S. President Donald Trump and French President Emmanuel Macron pledged on Tuesday to seek stronger measures to contain Iran, but Trump refrained from committing to staying in a 2015 nuclear deal and threatened Tehran with retaliation if it restarted its nuclear programme. “If Iran threatens us, they are going to pay a price like few countries have ever paid.” This is the sixth time the two presidents have met, with the most notable being Trump’s trip to Paris for the Bastille Day parade on 14 July last year. Since Macron came to power, the two presidents have had about 20 phone calls together, according to the Elysée Palace. Talks today should move on from foreign policy to the more market-sensitive topics of trade and tariffs but there are no US economic statistics scheduled for release. The USD index opens in Europe this morning at 90.50.

The euro had a mixed day on Tuesday, initially rallying against a very strong US Dollar but then recovering ground later in the day. It opened at 1.2215 but then fell on to a 1.21 ‘big figure’ for the first time since March 1st. The pair did manage to bounce without testing that day’s low of 1.2170 and by the end of the day was exactly half a cent up from its earlier levels. Overnight in Asia, the euro has slipped back once more though it is still roughly in the middle of yesterday’s trading range.

Yesterday saw the release of the revamped German ifo index. Without getting bogged down in too many technical details, the headline index now combines both services and manufacturing (though the ifo still reports separate figures for each sector) and the base year has been moved from 2005 to 2010. This does mean that the main business climate index should be less volatile going forward, reflecting the more modest cyclical swings in services, compared to manufacturing. The Press Release from the ifo today leaves no room for doubt about the economic situation. It notes, “High spirits among German businesses have evaporated. The Business Climate Index for Germany fell to 102.1 points in April from 103.3 points in March. The indicator for the current business situation fell and expectations also deteriorated. The German economy is slowing down.” By sector, the manufacturing business climate deteriorated for the third consecutive month. Assessments of the current business situation declined but nevertheless remain at a high level. Business expectations dropped to their lowest ebb since August 2016. In services, meantime, the index dropped markedly. This was primarily due to far less optimistic future business expectations.

Ahead of the ECB Council meeting in Frankfurt tomorrow, there are scheduled speeches in both London and Paris but they will not be about monetary policy and should have no impact on foreign exchange markets. The EUR opens in London this morning at USD1.2215 with GBP/EUR in the low-1.14’s.

April 25th is celebrated as the ANZAC day holiday in both Australia and New Zealand, to honour the members of the members of the Australian and New Zealand Army Corps (ANZAC) who fought at Gallipoli against the Ottoman Empire during the First World War and the thousands of men who lost their lives there. Local financial markets have been closed, though trading continues elsewhere in the Asia-Pacific region. For the Australian Dollar, the last 24 hours have been pretty brutal. AUD/USD fell from a high of 0.7680 yesterday morning to be clinging just on to 76 cents by the close in New York. Overnight, the pair has fallen further to 0.7575; its lowest level since December 12th, whilst GBP/AUD is up testing its 2018 highs in the mid 1.84’s.

Australia is hoping to secure a permanent exemption to US steel tariffs before they come into force on May 1st but if not will have to rely on another temporary reprieve, the Australian Industry Group says. The deadline when US steel tariffs will apply to all countries including Australia is less than one week away and no permanent exemption has yet been put in place, according to the US Customs and Border Protection agency. Earlier this month, Australian trade minister, Steve Ciobo, said Malcolm Turnbull had “secured an agreement with the US president that Australia will be exempt and that continues to be the case”. The Australian Industry Group chief executive, Innes Willox, said, “We are hopeful that a new proclamation confirming Australia’s exemption will be made in the coming days, however, based on past experience, if the necessary instruments are not ready by 30 April, we expect that there will be an announcement extending our exemption by another 30 days.”

When traders locally get back to work on Thursday, they will have the quarterly export price numbers and the NAB Quarterly SME Survey but its an otherwise quiet end to the week for official economic statistics. Analysts will be poring over the detail of Tuesday’s CPI release to write their monthly updates, though there was probably not enough fresh news to make anyone change their well-established views on RBA monetary policy and interest rates. The Australian Dollar opens this morning in Europe at USD0.7575 with GBP/AUD in the low-1.84’s.

The Canadian Dollar has traded in a relatively tight range over the past 24 hours, not only on the same 1.28 ‘big figure’ for USD/CAD, but within just a 40-pip range from 1.2820 to 1.2860. Overnight in Asia it has moved up towards the top of this band as traders reflect on a big fall in oil prices on Tuesday. WTI crude is down from a high of $69.25 yesterday afternoon to just $67.65 this morning and is definitely weighing on sentiment towards the CAD. This has also allowed GBP/CAD to regain 1.79 after trading on Friday as low as 1.7750.

US President Donald Trump said on Tuesday a new North American Free Trade Agreement could be agreed on quickly, as Canada hailed progress on forging new rules for the auto industry. Ministers from the United States, Canada and Mexico met in Washington to try to narrow differences on regional content rules for autos in the hope of tying up a deal in the coming days. “NAFTA, as you know, is moving along. They (Mexico) have an election coming up very soon,” Trump said at a Cabinet meeting briefly attended by reporters. “But we’re doing very nicely with NAFTA. I could make a deal really quickly, but I’m not sure that’s in the best interests of the United States. But we’ll see what happens.” Canadian Foreign Minister Chrystia Freeland, left a 3½ hour meeting with US Trade Representative Robert Lighthizer, saying there was progress on autos, which she described as “the heart” of NAFTA.

After his appearance on Monday afternoon before House of Commons Standing Committee on Finance, Bank of Canada Governor Stephen Poloz gets to do it all again today with the Committee on Banking, Trade and Commerce. It isn’t scheduled until 4.15pm local time, just after financial markets close for the day There are no other economic statistics released for the rest of this week. The Canadian Dollar opens in Europe this morning with USD/CAD in the mid-1.28’s and GBP/CAD at 1.7950.

The New Zealand Dollar has been totally friendless over the past 10 days and on Tuesday it once again finished bottom of our one-day performance table. Indeed, over the past 24 hours, NZD/USD has traded on ‘big figures’ of 73, 72, 71 and now this morning 70 US cents. Its overnight collapse to a low of just 0.7090 is the weakest point since January 3rd and will need to fall only a few more pips for headline writers to be reporting a fresh 2018 low. GBP/NZD is up at 1.97 for the first time this year, and if it were to break the 1.9805 level seen on November 30th, it would be the highest since the UK EU referendum in June 2016.

We highlighted yesterday the New Zealand visitor arrivals figures which showed the top source of inbound visitors 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 data 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. Speaking in India this week, Tourism New Zealand regional manager, South and South-East Asia, Steven Dixon said, "In 2017-18, ending February, we hosted 62,000 travellers from India, which was 16.05 percent growth over the previous year. So looking at the trend this year, which began in March, we expect the growth to be in double digit as well." New Zealand government has set a target of 1,00,000 visitors from India by 2023, and if the growth continues at the current rate it will be achieved earlier. It’s time to look up the NZD/INR cross rate !

After today’s ANZAC day holiday, the next focus of attention locally in New Zealand will be the trade figures on Friday as well as the April consumer confidence numbers. The Kiwi Dollar opens in London this morning at USD0.7090, with GBP/NZD around 1.9710.