NZD volatility returns: Kiwi Dollar top of the table on Tuesday
Wednesday 7 March, 2018
Daily Currency UpdateIf a coherent narrative around the AUD on Tuesday is difficult, the New Zealand Dollar once again defies explanation. It was way out on top of the one-day leader board with NZD/USD printing on a 73 US cents ‘big figure’ for the first time in eight days. To some extent, this price action is similar to the AUD/USD pair but the Kiwi’s moves were amplified; as evidenced by a fall in the AUD/NZD cross from 1.0740 to 1.0705. NZD/USD ended the day 0.9% higher with GBP/NZD down 0.7%.
New Zealand’s statisticians have issued a reminder that today, March 6th, is census day in New Zealand. Already 1.2 million people have completed the census online and timing for online forms is averaging four minutes for the dwelling form and eight minutes for the individual form. Stats NZ has a target of 70 percent of all census forms completed online, but anyone can ask for a paper form instead. The Statistics Act 1975 requires everyone in New Zealand on census day to take part. People who choose not to fill out their census forms can be fined between $50 and $500. In 2013, Stats NZ announced about 100 people were being prosecuted for not completing their census forms whilst in 2006, the Government department prosecuted 72 people for not completing the census, resulting in 41 convictions.
Three of the ‘partial data’ which feed in to the calculation of the GDP numbers are out this week. Today 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 New Zealand Dollar opens in Asia this morning at USD0.7300 and AUD/NZD1.0710.
Key MoversAfter Monday’s fairly quiet start to the week for the Aussie Dollar, Tuesday was quite a bit livelier – albeit some of the explanations for its movement look a little contradictory. Despite the efforts of some analysts to talk up the RBA’s view on wages, AUD/USD finished the Asia session a lower than where it began. The pair was then very steady until lunchtime in Europe when an apparent offer from North Korea to talk about nuclear disarmament sent the USD sharply lower and boosted AUD/USD to a best level around 0.7835; the highest in exactly a week. Quite why this was a negative for stocks has yet to be fully explained but the DJIA then lost 250 points which, in turn, knocked a quarter of a cent off AUD/USD even as gold jumped by $15 per ounce. Fitting a coherent narrative to this price action across asset classes is tricky indeed!
To no-one’s great surprise, the RBA decided to leave the cash rate unchanged at 1.50 per cent; the 19th consecutive month of unchanged rates. Its Statement said, “The Bank's central forecast is for the Australian economy to grow faster in 2018 than it did in 2017. Business conditions are positive and non-mining business investment is increasing. Higher levels of public infrastructure investment are also supporting the economy. Further growth in exports is expected after temporary weakness at the end of 2017. One continuing source of uncertainty is the outlook for household consumption. Household incomes are growing slowly and debt levels are high.” The one thing that caught the attention of currency markets was the line that, “Notwithstanding the improving labour market, wage growth remains low. This is likely to continue for a while yet, although the stronger economy should see some lift in wage growth over time. Consistent with this, the rate of wage growth appears to have troughed and there are reports that some employers are finding it more difficult to hire workers with the necessary skills.”
It’s a bit of a stretch to jump from “wage growth appears to have troughed” to a forecast either that wages will go up or an observation that they have indeed already risen. But, foreign exchange markets often get way ahead of themselves and this merest hint of a bit more optimism on wages was the main reason the AUD initially moved higher. In other data yesterday, the Q4 balance of payments data showed exports -1.8% and imports +0.5% which will subtract around 0.5% from today’s GDP data. Forecasts for this indicate a number around 0.6-0.7% q/q for an annual rate of growth around 2.6-2.7%. The AUD opens in Asia at USD0.7810, with AUD/NZD at 1.0710 and GBP/AUD1.7760.
After Monday’s table-topping performance, Tuesday was a much poorer day for the GBP which fell against four of the five other currencies we follow closely here. The biggest fall (-0.7%) came against the NZD but losses elsewhere came against the EUR, CAD, AUD and NZD. The low point for GBP/USD was early in the London morning at 1.3820 and the pair rallied exactly one cent when the USD came under pressure after the North Korean news. By the end of the day, however, the GBP had fallen more than a quarter of a cent from its high, leaving it back on a 1.38 big figure.
On Brexit, we said yesterday that, “the reaction of the EU will be more important than the routine criticisms from Opposition parties in Westminster.” The Guardian newspaper carried the story that Stefaan de Rynck, the main adviser to the EU’s chief Brexit negotiator, Michel Barnier, stressed that the rules of the single market required far more than her chief proposal – a mutual recognition of standards. In his speech, at a special LSE lecture in London last night, de Rynck said, “The EU has moved away in the wake of the financial crisis from mutual recognition of national standards to a centralised approach with a single EU rule book and common enforcement structures and single supervisory structures.” He also claimed EU businesses, faced by a choice, “are more concerned with maintaining the integrity of the EU single market than any loss of access to British markets.”
It had been expected that the EU’s guidelines for the EU-UK post-Brexit trade talks would be released on Tuesday, but publication of that document, which will constitute the EU’s fullest response yet to Theresa May’s Lancaster House speech on Friday, has been postponed. This might remove one of the near-term negatives for the GBP, though Arlene Foster (the head of the DUP Coalition partner) has tweeted, “Just concluded a constructive meeting with Michel Barnier. There are sensible solutions to the border question. Greater flexibility needs to be shown by Brussels. Unacceptable for Northern Ireland to be treated separately from rest of UK as set out in the draft EU legal text.” The pound opens in Asia this morning at USD1.3880, GBP/AUD1.7750 and GBP/NZD1.9025.
Up until the end of last week, the USD had a fairly close inverse relationship with the stock market: Equities up, dollar down and vice-versa. This broke down on Friday when both the stock market and the USD fell as a result of threatened retaliation to President Trump’s proposed steel tariffs. A huge rally in the stock market on Monday saw the USD trade essentially sideways but for much of Tuesday, stocks and the USD both headed south again as the DJIA fell 300 points in the New York morning.
It is not immediately obvious why a reported North Korean offer to ‘de-nuclearise’ should have been seen as negative for risk assets. The headlines came from South Korean National Security Office special envoy Chung Eui-yong, who was speaking to reporters in Seoul after returning from Pyongyang. He also said that "North Korea and South Korea agree to hold summit in April and Pyongyang vowed not to test any ballistic missiles or make further provocations during talks”. Instead, it seems more likely that the culprit for the simultaneous drop in stocks and the dollar was a report that former Goldman Sachs COO Gary Cohn will leave his White House job if Trump decides to go forward with tariffs on imported steel and aluminum. This itself might not be enough to cause the President to change his mind, although Bloomberg subsequently reported that Georgia Senator David Purdue (a well-known Trump ally) has made comments that President Trump is "open to changes on tariffs."
Keeping up with all the twists and turns of global foreign exchange markets is an exhausting business at the moment, though our clients around the world can’t say they weren’t warned about this extreme volatility. We wrote here 24 hours ago that, “All eyes elsewhere will be on the POTUS’ Twitter feed; a single tweet from Mr. Trump could easily move stocks and the US Dollar by one per cent in a matter of moments.” As we’ve said many times before, having orders already in place to profit from or mitigate the impacts of this volatility is a key component of a corporate risk management strategy.
On Monday, the euro was unsure whether to focus on the diminution of political risk in Germany or the uncertainties of the Italian general election. On Tuesday, the Single European Currency put the Italian concerns firmly behind it; breaking above Monday’s high to reach a best level around 1.2410; the first time it had been back a 1.24 big figure in two weeks.
After Sunday’s Italian election, the two populist parties which emerged triumphant both claimed the right to form the next government. According to The Times, “Matteo Salvini, head of the anti-migrant League party, said that he had “the right and the duty” to lead a government after he took 17 per cent of the vote on Sunday, making him the senior partner in his right-wing coalition with Silvio Berlusconi’s Forza Italia. With a combined 37 per cent of the vote, their bloc is the largest in the new parliament. Minutes after Mr Salvini’s victorious press conference, however, Luigi Di Maio, head of the anti-establishment Five Star Movement, declared that his party, which came first with 32.6 per cent of the vote, was “the absolute winner” and should dictate the pace. “We feel we have the responsibility to create a government… We are sure the president [of Italy] will give us this opportunity.”
The combined electoral share of the two rival parties doesn’t quite form a mathematical majority but by gaining 49% of the total votes cast, it was a result which surprised all the political experts in the country. The Five Star Movement did best in the south where unemployment is highest and it had promised to pay a minimum €780 minimum wage to the jobless. The Northern League did best in the North (the clue is in the name!) where it received more votes than its presumed coalition party Forza Italia led by Silvio Berlusconi. The League and 5SM have both ruled out any power-sharing agreement so it now falls to the President to choose which one he will call to see if they can form a formal Coalition government. Failing that, new elections will have to be called. The euro open in Asia this morning at USD1.2400, AUD/EUR0.6305 and NZD/EUR0.5880.
We can’t deny the Canadian Dollar has few friends at the moment. But, we warned in our North American commentary on Tuesday that whilst, “there are plenty of opportunities for USD/CAD to move on to a new 1.30 ‘big figure’… one word of caution is the large number of investors who are now expecting it; suggesting that the market is already heavily positioned that way.” More than eight hours since we wrote that, USD/CAD has not only failed to break on to 1.30 but is now back on 1.28. AUD/CAD is only a few pips above where it opened yesterday morning in Sydney whilst even NZD/CAD is barely a quarter of a cent higher. Sometimes it pays to keep an eye on market positioning…
Ahead of Wednesday’s BoC meeting, a really excellent article in the Financial Post says that Governor Stephen Poloz’s narrative boils down to something like this: “There is more uncertainty in the world today. This heightened uncertainty is the sort you can’t measure or estimate. Geopolitics is an important factor, but so is growing uncertainty about the reliability of models to prescribe policy. Because of this, policy makers are injecting more “realism” and judgment into the narrative and nudging the decision-making process toward something that looks less like a mechanical exercise akin to engineering and more like risk management. More art, less science, in Poloz’s words.” The BoC Governor travelled to London last week to accept an award as ‘Central Banker of the Year’; something with which your author fully concurs. His acceptance speech said, “we have learned that it is far better to be open and honest about the uncertainty we face, as well as how we deal with it, rather than to just assume the uncertainty away and project a false sense of confidence.”
Before the Bank of Canada policy meeting – where a poll of 30 analysts by Reuters unanimously forecasts the central bank will hold its benchmark rate at 1.25 percent - we have the housing starts and labour productivity data. The Canadian Dollar opens in Asia this morning at USD/CAD1.2895, AUD/CAD1.0080 and GBP/CAD1.7915.
- NZD/AUD: 0.9290 - 0.9390 ▼
- GBP/NZD: 1.8920 - 1.9170 ▼
- NZD/USD: 0.7235 - 0.7340 ▼
- NZD/EUR: 0.5855 - 0.5900 ▼
- NZD/CAD: 0.9340 - 0.9450 ▼