Italian Elections weigh on EUR. Trump tariffs raise trade war fears. GBP awaits PMI numbers and EU reaction to Friday’s Brexit speech.

Key Movers

The US Dollar had a week of two unequal halves: up for the first three and a half days and down for the remainder. Its index against a basket of major currencies opened on Monday morning at 89.50 and as stock markets fell, volatility rose, and Fed Chair Jerome Powell hinted at the possibility of four 25bp hikes this year, so the USD index hit a high on Thursday of 90.50; back to where it was before US Treasury Secretary Mnuchin’s remarks in Davos in late January. On Thursday afternoon, President Trump announced tariffs of 25% on imported steel and 10% on aluminium products. This surprise move sent stocks plunging once more, with the DJIA down more than 500 points and the VIX index above 20. This time, however, the USD did not respond positively. Amidst fears of retaliatory action from other countries, the index gave back around half a point to 90.00 and fell further on Friday to 89.60.

President Trump tweeted on Friday that, “When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win. Example, when we are down $100 billion with a certain country and they get cute, don’t trade anymore-we win big. It’s easy!”. In response, most countries - including Canada, China and much of Europe - have issued statements condemning Trump's decision and threatened retaliatory action. The European Union vowed to “react firmly” with World Trade Organization-compliant countermeasures in the next few days. An EU Commission spokesman said that the EU already has counter-measures ready against US tariffs and stands ready to respond, whilst Canada, which is the biggest foreign supplier of steel to the US was furious: Ottawa said the US measures were “unacceptable.”

Over the weekend, President Trump doubled down on his threats. After hearing that the EU was considering specifically target measures on Harley Davidson motorbikes and Levi Strauss jeans, he tweeted that, “If the E.U. wants to further increase their already massive tariffs and barriers on U.S. companies doing business there, we will simply apply a Tax on their Cars which freely pour into the U.S. They make it impossible for our cars (and more) to sell there. Big trade imbalance!” He went to say, “The United States has an $800 Billion Dollar Yearly Trade Deficit because of our “very stupid” trade deals and policies. Our jobs and wealth are being given to other countries that have taken advantage of us for years. They laugh at what fools our leaders have been. No more!”. We’d note that the last time the US started a trade war over steel in 2002, the S+P 500 fell almost 30% and the USD fell 20% over the next 18 months until the WTO ruled the tariffs were illegal… The USD index opens this morning in Europe around 89.70.


EUR/USD ended last week almost exactly unchanged but it was far from dull. Having opened in Sydney on Monday in the low 1.23’s, by Thursday morning it had fallen 1½ cents to 1.2160; its lowest since mid-January. The euro began to rally as soon as President Trump announced his trade tariffs and having gained a full cent by the close of business in New York, it extended gains on Friday to a high of 1.2330 to end the week up against the AUD, NZD, CAD and GBP. Overnight in Asia, the EUR initially rallied on news that Angela Merkel can form a coalition government but has subsequently given back almost half a cent to the high USD1.22’s as investors attempt to digest the results of the Italian general election.

In a speech on Friday night at Harvard University, European Commissioner for Competition, Margrethe Vestager, said the EU will respond to the tariffs, “to defend European industry, and the world trading system”. She called the Trump action, “one-sided protectionist measures, which hurt, not just jobs, but the whole system of rules that makes our global economy work.” According to Reuters, the United States had a $22.3 billion automotive vehicle and parts trade deficit with Germany in 2017 and a $7 billion deficit with the United Kingdom. The United States accounts for about 15 percent of worldwide Mercedes-Benz and BMW brand sales, while it accounts for 5 percent of VW brand sales and 12 percent of Audi sales.

With half the ballot counted, it looks almost certain that none of Italy’s three main factions will be able to rule alone. Though this itself isn’t a surprise, a right-wing alliance including former prime minister Silvio Berlusconi’s Forza Italia (Go Italy!) has emerged with the biggest bloc of votes, ahead of the anti-system 5-Star Movement, which has seen its support soar to become Italy’s largest single party. The way forward from here isn’t clear but possible scenarios now include the creation of a more euro-sceptic coalition, which would likely challenge EU budget restrictions and be little interested in further European integration, or fresh elections to try to break the deadlock. This is not a great outcome for the euro which opens in London this morning in the high USD1.22’s with GBP/EUR in the low 1.12’s.


The Dow Jones Industrial Average, fell over 1,500 points in just a few days last week. When new Fed Chair Jerome Powell delivered his maiden semi-annual monetary policy testimony, the DJIA stood at 25,800. By Friday afternoon it was down at 24,260. Lower asset markets and higher volatility are usually bad for the Aussie Dollar. Add in a $20 drop for the gold price and it was no surprise to see the AUD weaken. Against the US Dollar it has spent the last three days of a 77 cents ‘big figure’; having hit a low of USD0.7715 which was its weakest since December 27th.

It’s been quite a volatile series recently, but building approvals jumped 17.1% m/m in January, returning to growth following a revised 20.6% fall in December, according to the Australian Bureau of Statistics. That was above the 5% growth forecast in a Reuters poll of economists. Approvals for apartments, classed as private sector dwellings excluding houses, jumped 42.2% in January while approvals for private sector houses fell 1.1%. Meantime, CBA published their service sector PMI survey which rose to 54.2 in February from 53.8 in January, indicating a solid and accelerated rate of output growth. CBI noted that, “New order growth accelerated to a seven-month high, with the favourable demand environment encouraging firms to pass on higher cost burdens to their clients through greater output prices. Meanwhile, the rate of job creation remained weak relative to the series trend amid reports of increased labour costs.”

The next two main events for the Aussie Dollar are tomorrow’s RBA Board meeting and then Wednesday’s Q4 GDP report. It would be one of the biggest surprises ever if the RBA changed interest rates and there’s no great need for any change of signaling from the Central Bank on future policy intentions. Not all the ‘partial data’ are yet in for GDP but early estimates indicate a number around 0.6-0.7% q/q for an annual rate of growth around 2.6-2.7%. The Australian Dollar opens this morning in the mid-USD77’s with GBP/AUD at 1.78.




















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The Canadian Dollar had another poor week. USD/CAD opened last Monday morning in the mid-1.26’s and moved relentlessly higher to a best level on Friday around 1.2910; its first time on a 1.29 ‘big figure’ since November 30th and the highest level since mid-July. AUD/CAD, meantime, on Friday hit parity for the first time since August 18th and is up 3½ cents since its early-December low, whilst GBP/CAD at 1.78 is the highest since late-June.

The announcement of US tariffs hits the Canadian Dollar in two ways. First, and directly, Canada is the world’s number one exporter of steel to the United States, followed by Brazil, South Korea, Mexico and Russia. Canada’s Foreign Minister Chrystia Freeland said it’s “entirely inappropriate” for the US to consider the country a threat to national security. “We will always stand up for Canadian workers and Canadian businesses... Should restrictions be imposed on Canadian steel and aluminum products, Canada will take responsive measures to defend its trade interests and workers.” Second, as a seventh round of NAFTA talks is underway in Mexico City, an escalation of a trade and tariffs war makes for a very difficult backdrop, throwing doubt on the whole process.

The week ahead could be quite busy for the Canadian Dollar, not just in terms of economic data and trade news, but also on Wednesday the Bank of Canada policy meeting. The BoC is unanimously expected to leave official rates unchanged at 1.25% after the 25bp hike in January and the accompanying statement will be closely read for what the Central Bank has to say about trade and the economy. Ahead of that on Tuesday is the PMI survey and on Wednesday morning the housing starts and labour productivity data. On Friday, the Canadian labour market report will be released at the same time as the US employment numbers. The Canadian Dollar opens in Europe this morning with USD/CAD in the low-1.29’s and GBP/CAD at 1.78.


The New Zealand Dollar continues to defy analysis or even explanation. On Friday ten days ago, it was bottom of our one-day performance table without any incoming news. Last week, it was top on Monday; again with no fresh incoming data or news catalyst. Both Tuesday and Wednesday it was bottom of the pile and on Thursday it was back in top spot. Friday was notable only for the fact that it didn’t finish either top or bottom! These seemingly random swings are frustrating for everyone but show the importance of placing orders in advance to benefit or protect from volatility in offshore centres. After the first session of the week in Asia, NZD/USD is just clinging on to a 72 cents handle whilst the AUD/NZD cross rate is around the mid-point of last week’s range at 1.0730.

In the first economic data of a fairly busy week, the ANZ Commodity Price Index rose 2.8% m/m in February, kicking on from the 0.7% gain in January. The lift was fairly broad-based, although the dairy group provided the major thrust, with a 6% gain and beef prices rose 3.9% m/m. ANZ’s analysts noted that, “New Zealand’s merchandise terms of trade hit a new all-time high in Q4. It represents a key purchasing power benefit for the economy. We are assuming that it stabilises around this level over the next couple of years. And while today’s figures only represent half of the equation, the lifts seen over 2018 to date do suggest there is a possibility of some further near-term upside.”

The GDP numbers are not out until March 15th but this week there are three of the ‘partial data’ which feed in to the calculation. On Wednesday it is Building Work Put in Place and Wholesale Trade whilst Thursday is the quarterly Survey of Manufacturing. For the moment, early estimates of the GDP number are for growth around 0.4-0.6% in the December quarter. The Kiwi Dollar opens in London in the low-USD 72’s with GBP/NZD at 1.91.

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