Stocks and USD steady after Monday’s tech plunge. Is all the good news now in the GBP? AUD and NZD both trading heavily.
Tuesday 20 March, 2018
Daily Currency UpdateThe US Dollar Index rose modestly through Monday’s Asian session to reach a best level just below 89.95 before then turning sharply lower as the GBP jumped above 1.40 and the EUR found solid buying interest after its early dip to a low of USD1.2260. By mid-afternoon in New York, the US Dollar had tumbled to 89.35, unable to benefit from a sharp decline in the stock market. More than $100bn was wiped off the value of US technology shares with Facebook alone accounting for $35bn of these losses. According to the Financial Times, this was one of the top ten daily losses in value ever suffered by a technology company. Equity markets have steadied overnight with the DJIA called 50-70 points higher at the open, which in turn has helped stabilized the USD.
The drop in Facebook shares wasn’t just in reaction to allegations about the use of personal data in the US election campaign. It followed reports from the G-20 meeting in Buenos Aries that officials are considering a ‘digital tax’ which would also impact companies such as Google, Amazon and others. A US Treasury Official said the US strongly opposes such measures on the digital sector but the so-called “FANG” group of stocks was sold heavily on Monday, dragging the US down in its wake. If only the US Administration had a market friendly face always available to pop up on 24-hours financial TV to reassure the markets…
The FOMC begins its two-day monetary policy meeting today; one of four such occasions each year at which it will release new staff economic projections and so-called ‘dot points’ which show members’ estimates of where official interest rates will be over the next 2-3 years. There will also be a Press Conference where the Chairman of the Board of Governors, Jerome Powell, will be questioned on the economic outlook and the prospects for future monetary policy. For today, however, there are no data scheduled for release, so all eyes instead on ‘Bubble TV’ and the POTUS Twitter feed. The USD index opens this morning in North America around 89.65.
Key MoversAs the negative sentiment surrounding the Canadian Dollar continued over the weekend, USD/CAD yesterday morning hit a high of 1.3125; its highest level since late June. GBP/CAD hit 1.83; its best level since the EU referendum 20 months ago although both AUD/CAD and NZD/CAD slipped a little from their recent 9-month highs. By the middle of the New York afternoon, however, USD/CAD had fallen around three quarters of a cent, though this was more a reflection of a poor session for the US Dollar than any new-found enthusiasm for its northern neighbour. The pair still shows no sign yet of returning below the psychological 1.30 barrier.
It is reported by Bloomberg that, “the Trump administration is pressing countries to ally with the U.S. in pushing back against Chinese trade policies in exchange for relief from American tariffs on steel and aluminum which take effect this Friday. US Trade Representative Robert Lighthizer has laid out five conditions that countries must address before being excluded. They are: Limiting steel and aluminum exports to the U.S. to 2017 levels; actively addressing China’s various trade-distorting policies; being more assertive and cooperative with the U.S. at the G-20 Global Steel Forum; cooperating with the U.S. in launching cases against Chinese practices at the WTO; and enhancing security cooperation with the U.S” Although Canada has already been granted exemption from the steel tariffs, there are fears that this exemption could be revoked unless it takes the US side in disputes with third countries.
Despite these concerns, Prime Minister Justin Trudeau sounded quite upbeat on Monday: “We’re renegotiating NAFTA, we’ve seen from the President he’s enthusiastic about getting to a deal,” he said during a panel discussion, adding that Canada was continuing to work on resolving the trade talks. The Canadian Dollar opens in North America at USD/CAD1.3060, AUD/CAD1.0075 and GBP/CAD1.8310.
After a generally underwhelming performance last week, the euro kicked off Monday by re-testing Friday’s lows in the USD1.2260 area. Throughout the Northern Hemisphere day, however, the Single European Currency was progressively well-bid and by the middle of the New York afternoon had gained almost a full cent to a shade under 1.2360. By the end of the day, it shared second-spot on our one-day performance table with the NZD; beaten only by the surging British Pound. After a fairly quiet Asian session overnight, with less than 20 pips separating the high and low in EUR/USD, the euro has turned lower once more and another look below 1.23 cannot be ruled out.
In economic news this morning, the ZEW research institute said its monthly survey showed economic sentiment among investors dropped to 5.1, its lowest reading in a year and a half, from 17.8 in the previous month. The consensus forecast in a Reuters poll was for 13.0. ZEW President Achim Wambach said “concerns over an U.S.-led global trade conflict have made the experts more cautious in their prognoses…The stronger euro is also hampering the business outlook of German exporters”, Wambach said, adding that the outlook for the economy as a whole remained “largely positive” despite the risks.
President Trump has warned the European Union it would get hit with a “big tax of 25 percent on their cars” for not treating the United States well when it comes to trade, and this mornings ZEW survey shows the threats are already resonating with investment professionals. On Thursday we get to see the ifo Survey of businesses which has recently been incredibly upbeat in its numbers and commentary. It is not unusual to see a divergence between the two surveys but if the ifo repeats the downbeat message from investors, the EUR is likely to remain under some near-term pressure. The EUR opens in North America today at USD1.2305 and EUR/CAD1.6075.
After finishing in top spot last week, the British Pound continued where it left off on Monday, rising against every major currency we closely follow here. GBP/USD was back on a 1.40 handle for the first time since February 26th whilst GBP/NZD reached a 3-month high of 1.95 and GBP/AUD hit 1.82 for the first time since the EU referendum back in June 2016. Overnight in Asia, the GBP consolidated its gains, holding steady against the USD and EUR before a somewhat softer than expected CPI report led to some profit-taking after its recent strong run.
The main reason for the continued strength in sterling was confirmation that the UK and EU have reached agreement on the terms of a Brexit ‘transition’ period extending beyond March 29th 2019 until December 31st 2020. Britain has won concessions from the EU to allow it to negotiate and sign trade deals during the period without seeking authorisation, but it will elsewhere have to follow EU rules, with strict sanctions if the government fails to do so. At a joint press conference, Brexit Secretary David Davis and EU negotiator Michel Barnier said they had resolved all the major sticking points to allow the deal to be signed by European leaders this week. The Brexit secretary said that the agreement represented a “significant step” while the EU’s chief negotiator described it as “decisive”. The director-general of the Confederation of British Industry, said: “Agreeing transition is a critical milestone that will provide many hundreds of businesses with the confidence to put their contingency planning on hold and keep investing in the UK.” Whether or not the early optimism is well-founded remains to be seen: The reaction of right-wing Conservative MP’s, those in fishing communities and in Northern Ireland may now be crucial in determining whether the GBP can hold on to its gains of the past week.
Today’s UK CPI numbers came in below the consensus expectation of 2.8% and, crucially, below the 2.9% which the Bank of England had been assuming when it warned last week of a somewhat faster pace of UK interest rate hikes. Annual inflation fell from 3.0% to 2.7% in February according to the Office for National Statistics which said, “The largest downward contributions to the change in the rate came from transport and food prices, which rose by less than a year ago.” Petrol prices fell by 0.2 pence per litre between January and February, to 120.8 pence per litre. Food and non-alcoholic beverages prices, meantime, rose by 0.1% between January and February this year compared with a rise of 0.8% a year ago. The British Pound opens in North America at USD1.4010, GBP/EUR1.1395 and GBP/CAD1.8320.
The Australian Dollar continued its recent decline on Monday, reaching a low around USD0.7690 before then stabilizing in the European morning and actually clawing its way back on to a US 77 cents handle during the North American afternoon. Its modest rally came despite a sharp sell-off in stock markets on both sides of the Atlantic which saw the DJIA at one point more than 400 points lower and the VIX index rise almost 3 points to 19.1. Overnight in Asia and this morning in Europe, it has just managed to hold 77 cents but still feels vulnerable to any further deterioration in global risk appetite.
Because Australia has a different mix to its economy than many other countries – a much greater proportion of resource and mining output – GDP is arguably less of a guide to the correct stance of monetary policy. GDP may rise substantially without necessarily directly impacting jobs and wages across the whole economy. For this reason, household consumption may be the more appropriate gauge for an inflation-targeting Central Bank such as the RBA. The Minutes of the March Board meeting out this morning note that, “Wages growth had remained low. The wage price index had increased by 0.6 per cent in the December quarter and growth over the year had increased slightly to 2.1 per cent. Across the states, wages growth had risen to almost 2½ per cent in Victoria, and in Queensland and Western Australia had increased from the lows recorded during 2016/17. In contrast, wages growth in New South Wales had been steady at around 2 per cent for a couple of years, despite the strong labour market conditions in that state. By sector, wages growth had been rising in an increasing number of industries over the prior year. In particular, some (but not all) of the industries with a relatively high share of employees on individual agreements had seen wages growth pick up.”
The reference to a pick-up in individual agreements (rather than those which are firm-wide or union-driven) was a straw for some analysts to clutch at but overall there is no sense of anything other than a very slow pick-up in pay and activity. As the RBA puts it, “Employment had grown strongly and the unemployment rate had fallen over the preceding year. However, the improvement in overall conditions had not yet translated into a definitive pick-up in wages growth, which remained low. Forward-looking indicators suggested that spare capacity in the labour market would continue to decline gradually over 2018 and, as a consequence, wages growth was expected to rise gradually.” If there is one word which thus far defines Phil Lowe’s time as Governor, it is “gradual”. The Australian Dollar opens in North America this morning at USD0.77055, with AUD/NZD at 1.0685 and AUD/CAD1.0080.
The New Zealand Dollar had a decent start to the week on Monday, especially given the souring of risk appetite globally. AUD/NZD fell almost 40 pips to a 7-month low of 1.0650 whilst NZD/USD – which earlier in the Asian session has fallen below 72 cents – was back up around 0.7245. The Kiwi Dollar shared second place with the EUR on our one-day performance table, beaten only by the British Pound which rose to an intra-day high of GBP/NZD1.95 before settling back to the 1.9380 area. Overnight in Asia and this morning in Europe, the NZD has given back a large part of yesterday’s gains even though the incoming economic data was at the upper end of consensus expectations.
According to the latest Westpac McDermott Miller survey for March, consumer confidence has now returned to pre-Election levels. The index rose 3.8 points to 111.2; reversing almost all its drop over the past few months. The analysts at Westpac said, “"The past few months have also seen mortgage rates pushing down and a related second wind in the housing market. We've also continued to see positive conditions in some key sectors of the economy, like the hospitality sector." Westpac said households are feeling more optimistic about the outlook for their own financial situation over the coming year. "They have also become more upbeat about the economy's longer-term trajectory more generally… The lift in confidence was widespread across geographic regions and household groups.”
Acting RBNZ Governor Graeme Wheeler holds his last Board meeting this Thursday before Adrian Orr takes the reins next week. Not a single analyst expects any change in official interest rates, with most attention focused instead on the likely new Policy Targets Agreement between the Government and the Central Bank. Even this is more likely a shift of nuance, rather than substance and it would be a big surprise if there were a material shift towards explicitly targeting unemployment rather than inflation. Before the RBNZ meeting, Wednesday brings the net migration numbers. The Kiwi Dollar opens in North America at USD0.7205 and NZD/CAD0.9430.
- USD/CAD: 1.2975 - 1.3125 ▼
- EUR/USD: 1.2260 - 1.2360 ▼
- GBP/USD: 1.3915 - 1.4080 ▼
- AUD/USD: 0.7630 - 0.7775 ▼
- NZD/USD: 0.7145 - 0.7260 ▼