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ECB Council Meeting this afternoon holds key to GBP/EUR rate as USD holds firm.

By Nick Parsons

At the very beginning of this week, the British Pound fell below USD1.40 and has stayed there ever since, reaching a low of 1.3920; its weakest since March 12th. This was all about the US Dollar rather than the Pound, however, and the GBP is up against all the other major currencies this week, even though it lost a bit of ground on Wednesday to the Canadian Dollar as well as the USD. Overnight in Asia, GBP/USD has recovered around a quarter of a cent off its lows but is finding further upside progress a bit of a struggle.

David Davis, the Brexit secretary, gave evidence to the House of Commons Brexit Committee yesterday. Mr. Davis said he wants the political agreement on trade in the autumn to be very detailed and that it should be possible to turn that into a treaty within six months. He said it is not the government’s intention to allow the trade negotiations to spill over into the transition period post-March 2019. According to the UK Press Association, “The motion put before parliament this autumn on the final Brexit agreement will be amendable by MPs and its outcome will be binding on the government. The Brexit secretary said the motion - which Prime Minister Theresa May has previously described as a “take it or leave it” choice - will relate to a political agreement expected to be reached with Brussels, rather than a full legal treaty. But he said it remains the government’s intention to have a treaty ready for signing immediately after the formal date of Brexit on March 29 2019.”

Late in the afternoon, it was the turn of the Chancellor of the Exchequer, Philip Hammond, to give gives evidence to the House of Commons Treasury Committee. He appeared in quite a confident mood after news that UK public sector borrowing had totalled just £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. He told the Committee that, the UK is not yet in any substantive discussions with the European Union about a future relationship in financial services. “We’ve only just got past the agreement on the implementation period, we haven’t yet come to substantive discussions on the future partnership. But we are in the preliminary foothills of exploring what might be possible in financial services.” The Pound opens in Europe this morning with GBP/USD at 1.39450 with GBP/EUR in the mid-1.14’s.

The US Dollar continues what has been a virtually uninterrupted advance over the past 10 days. Yesterday its index against a basket of major currencies opened around 90.40 and reached a high late in the London afternoon of 90.80; its best level since January 12th. It has broken above its 100-day moving average and now eyes the 200-day measure at 92.00. 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. Indeed, a cynic might observe that its only when we start to see a run of upgraded forecasts from the major banks that it’s time to call a halt to the current USD rally.

US President Donald Trump and French President Emmanuel Macron continue their mutual love-in with the President tweeting enthusiastically about their great relationship. In his address to the US Congress, however, Mr. Macron denounced protectionism and nationalism and said the United States should step up its engagement with the world - a direct challenge to Trump’s calls for withdrawal from the Paris climate pact and international trade agreements. “The United States is the one who invented this multilateralism. You are the one now who has to help preserve and reinvent it,” he said.

After a lull in the US economic calendar, there are plenty of numbers scheduled for release today with weekly initial jobless claims, wholesale inventories and the durable goods orders. Once these are out of the way, the Atlanta Fed will be updating its estimate of first quarter GDP which currently stands at an annualized pace of 2.0%. This will be the last update before the official Q1 numbers are published tomorrow. The USD index opens in Europe this morning at 90.75.

The Single European Currency hasn’t had a great week, with EUR/USD down 2 ½ cents from last Thursday’s high just above 1.2410. It had a modest rally into Tuesday’s New York close at 1.2240 but was then sold again yesterday, hitting a low of 1.2160; just under its low back on March 1st. Overnight in Asia, the euro has tried to rally but – like the GBP – is finding it hard to get much upside traction against the USD even as it improves on its other major crosses.

Ahead of the ECB meeting in Frankfurt today, it was very surprising to hear Council members quoted yesterday morning about the monetary policy outlook. The normal convention – though not a legally binding one – is for a black-out period of one week during which no clues are offered about the immediate or future decisions. This convention was broken not once, but several times today, although Lithuanian policymaker Vitas Vasiliauskas might argue in his defence that comments came in a published magazine article. He said, “The (bond) purchases will be ended gradually rather than abruptly, ensuring a smooth transition of sufficient length. Any further policy steps will be well-discussed, data-based and gradual, providing sufficient time for markets to adjust… We should be ready for an increase in market volatility, which has been exhibiting unnaturally low levels.”

Mr Vasiliauskas’ colleague, Yves Mersch, might offer a similar defence after his comments appeared on the website of Eurofi, which is convening a meeting of financial regulators. “Confidence has recently risen and convergence is being confirmed --partly because the temporary decline in the inflation rate has been weaker than our internal calculations had predicted… More resilience will follow eventually. Still, patience and persistence with respect to our monetary policy is required.” These are two words which are very likely to be repeated by ECB President Draghi at his Press Conference which starts as usual at 1.30 this afternoon. The EUR opens in London this morning at USD1.2175 with GBP/EUR in the mid-1.14’s.

The last few days have been pretty difficult for the Aussie Dollar. AUD/USD fell from a high of 0.7680 on Monday morning in Europe to a low on Wednesday afternoon just above 0.7650; its lowest level since December 12th, whilst GBP/AUD at 1.8425 is within half a cent of what would a fresh high for 2018. The only consolation for our Australian clients is that the currency has outperformed its Kiwi neighbour. AUD/NZD is up on a 1.07 ‘big figure’ for the first time in almost 5-weeks.

According to what is billed as an exclusive in the Sydney Morning Herald, “The European Union is preparing to launch trade talks with Australia in June to strike a deal that would add $15 billion to both economies, including a push for more rights to geographic names such as parmesan cheese and Parma ham that are essential to European food brands. The EU’s lead trade negotiator, Cecilia Malmstrom, said she hoped to visit Australia within weeks to start talks on a free trade agreement, which are likely to be authorised to proceed on May 20. Ms Malmstrom told Fairfax Media the agreement would serve a “strategic” purpose by creating a “circle” of allies to remove barriers at a time when US President Donald Trump has imposed steel tariffs that could trigger a trade war. “The most important thing right now, with growing protectionism in the world and uncertainties coming from traditional allies, is to expand this circle of friends,” the EU trade commissioner said in an exclusive interview.

Earlier this morning, NAB released their Quarterly SME Survey which complements the bank’s comprehensive Quarterly Business Survey (QBS) covering larger businesses. Small and Medium Enterprise (SME) business conditions were unchanged in Q1 2018 at +12, while SME business confidence declined 2pts in Q1 to +6pts. According to Alan Oster, NAB Group Chief Economist “SME business conditions remained at their highest level since the GFC and while SME business confidence slipped in the March quarter it too remains above average… Across industries, health again reported the strongest business conditions. While retail continues to be the weakest sector, there has been a large fall in property services conditions, likely reflecting the cooling in housing markets.” The Australian Dollar opens this morning in Europe at USD0.7575 with GBP/AUD at 1.84.

Despite some big moves in global foreign exchange markets, the USD/CAD exchange rate has been firmly stuck on a 1.28 ‘big figure’ for every single minute since mid-afternoon in Europe on Monday. Optimism around a possible NAFTA agreement has helped cap the upside even as a sharp decline in oil prices has been seen over the past two days. WTI crude is down from a high of $69.25 on Tuesday afternoon to just $67.55 yesterday. GBP/CAD on Thursday reached a one-week high of 1.7975 but this morning is back down on a 1.78 ‘big figure’.

Canadian Foreign Minister Chrystia Freeland said yesterday that good progress has been made at the NAFTA trade talks on the key issue of auto rules, though the threat of proposed U.S. steel and aluminum tariffs coming into force next week clouded the mood. According to Reuters, Freeland, U.S. Trade Representative Robert Lighthizer and Mexican Economy Minister Ildefonso Guajardo met for a second straight day in a push to seal a quick deal on revamping the North American Free Trade Agreement. She told reporters, “There is a very strong, very committed, good-faith effort for all three parties to work 24/7 on this and to try and reach an agreement… “I think we made some good progress. We’re very much working on a set of proposals based on the creative ideas the U.S. came up with in March and I think there was good constructive progress.”

Bank of Canada Governor Stephen Poloz yesterday faced the Committee on Banking, Trade and Commerce. It wasn’t scheduled until 4.15pm local time, which meant that his remarks came just after financial markets close for the day. Mr. Poloz said he was "much more encouraged" about the economy than he had been when he last talked to the committee in November 2017. Pressed by one senator about what she called the bank's ‘fairly rosy’ outlook that it issued on April 18, he replied, “When we describe the economy, as you say, in rosy terms, it is, I would say, more like finally positive terms… For the economy as a whole, it has put the adjustments to the oil price shock behind us, but we still have softness in several areas of the country." The Canadian Dollar opens in Europe this morning with USD/CAD in the mid-1.28’s and GBP/CAD at 1.7890.

The New Zealand Dollar has had a totally dismal run over the past 10 days and on both Tuesday and Wednesday it once again finished bottom of our one-day performance table. Indeed, over the past five trading days, NZD/USD has traded on ‘big figures’ of 73, 72, 71 and now 70 US cents. Yesterday’s collapse to a low of just 0.7060 marked a fresh 2018 low and was the weakest for the pair since back on December 27th last year. It is still stuck at that level this morning which leaves GBP/NZD at a fresh high for this year of 1.9750.

The weakness of the Kiwi Dollar makes it by far the weakest of the major currencies over the past week and has come despite the second highest 10-year bond yields. Whilst all attention has been on US 10-year breaking through 3.0% and trading up to a 4-year high of 3.03%, New Zealand’s equivalent bond is now yielding 2.92%, just 11 basis points under the US. Of course, investors trading currencies don’t take positions for a decade and don’t do their funding in the 10-year maturity but don’t be surprised – when the Kiwi – eventually turns – to hear talk of its attractive long-term interest rates. For the moment, we’re in that phase of the cycle where the NZD is falling simply because it’s falling: momentum-driven algorithmic strategies exaggerate the move even without fresh incoming economic news flow to validate it. Perhaps we have to see the NZD/USD below 70 cents for fundamental investors to step in on the other side of the trade.

After yesterday’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 USD0.7060, with GBP/NZD around 1.9750.