AUD/USD firmer as stock markets surge and USD tumbles and gold rises
Tuesday 27 March, 2018
Daily Currency UpdateWe wrote here yesterday morning about the Aussie Dollar that, “the currency is more likely to be driven by events offshore than at home; especially by what happens in the US stock market”. That is pretty much exactly how things have turned out over the past 24 hours as the much-feared “Black Monday” in the equity market failed to materialise. Having finished on Friday evening barely 300 points above its early February low, the Dow Jones Industrial Average on Monday was up more than 500 points after futures markets opened up in Asia and then moved relentlessly higher for the next 18 hours through to late-afternoon in North America. AUD/USD opened at 0.7700, tracking stock markets up to a high around 0.7745. Another $8 on the price of gold also helped support the AUD, as did a modest drop for the VIX index of volatility.
There’s so much going on simultaneously that it is very difficult from one minute to the next to determine what is the key driver of the AUD. There’s a menu of influences which includes China trade, US tariffs, precious and industrial metals’ prices, the level of global asset markets, the volatility of stock markets and, of course, interest rate differentials and incoming local economic data. At any given moment there are three or four different menu items which can be ticked off, and different weights then ascribed to each of these. Sometimes, it’s hard even to explain a movement which has just happened, let alone to be brave enough to have a firm view on what the next move might be.
Amidst all the noise, perhaps the most important level to watch is the 200-day moving average on the S+P 500 index. It was this point from which the market rebounded in early February and it did the same again yesterday morning; dragging AUD/USD higher in its wake. As we write this commentary, Facebook is down another 3%, though the negative impact on the so-called FANG stocks is mitigated by a near-3% gain for Amazon. The only local economic data scheduled for release on Tuesday is the weekly consumer confidence index; hardly a market-mover at the best of times and likely to be completely overshadowed today by whichever one of the menu items noted above gets the biggest tick. The Aussie Dollar opens in Asia this morning at USD0.7735, with AUD/NZD at 1.0595 and GBP/AUD1.8400.
Key MoversThe New Zealand Dollar was one of three currencies which pretty much tied for top spot on our one-day performance table on Monday; the other two being the GBP and EUR. NZD/USD opened the week around 0.7240 and it was onwards and upwards throughout the Asian and European sessions, with a high just under 0.7300 late in the North American afternoon. The Kiwi’s most notable performance came on the AUD/NZD cross which moved on to a 1.05 ‘big figure’ for the first time since mid-July last year.
Back in early December, the New Zealand Dollar got a lift when it was announced that Adrian Orr would become the next Governor of the RBNZ effective March 27th. The flightless bird got a further lift when the date finally arrived and the new Policy Targets Agreement was unveiled yesterday. There wasn’t a great deal of surprise in the announcements, but the tone appeared to be one of mutual consent and agreement between the Bank and Treasury which certainly helped create a favourable first impression. The new PTA re-iterates the goal of keeping annual CPI inflation between 1 percent and 3 percent over the medium term, with a focus on the mid-point of 2 percent. But, along with a goal of maintaining price stability, the RBNZ will have a goal of "supporting maximum sustainable employment within the economy."
As well as a change in its mandate, the RBNZ will also shift responsibility for interest rates away from the Governor himself to a newly-formed Monetary Policy Committee. The MPC will have seven members: four internal at the bank and three external, along with a non-voting observer from the Treasury. On the inclusion of external, expert, members on the Monetary Policy Committee, Mr. Robertson said this would help ensure a "diversity of perspectives is harnessed in the decision making" whilst the presence of the Treasury official "was the subject of significant discussion during the first phase of the review." As Mr Orr very diplomatically put it, "What the new PTA does is make the employment side far more transparent and the Reserve Bank will be obliged to talk openly and transparently about how its short-term considerations have been taken into the decision-making framework when setting interest rates.” The New Zealand Dollar opens in Asia this morning at USD0.7295 and AUD/NZD1.0595.
The British Pound had a decent start to the week, even if its performance against the US Dollar gives a much-exaggerated picture of its overall strength. GBP/USD opened around 1.4135 and, along with most other currencies, rose steadily and without interruption through the day. By lunchtime in New York, the pair had reached a best level around 1.4245; its highest since the day of the US non-farm payroll figures back on February 2nd. The seven-tenths of a percent increase for GBP/USD compares with 0.5% for GBP/CAD and 0.3% for GBP/AUD, whilst GBP/EUR and GBP/NZD were little changed on the day.
Latest figures on the UK housing market showed that mortgage approvals fell 11% m/m in February to 38,120, well below consensus expectations for around 39k. UK Finance who compile the data said more home-owners were seeking remortgaging deals ahead of expected further interest rate rises by the Bank of England later this year. “We are also seeing a continuing rise in credit card spending, reflecting the growing number of transactions carried out using cards, while other forms of borrowing such as overdrafts continue to fall.” Net credit card lending amounted to 309 million pounds last month, down slightly from a net increase of 325 million pounds in January.
On Brexit, a new report from credit ratings agency Moody’s says the UK-EU agreement “provides clarity that is credit positive for a broad range of UK issuers because it extends the narrow time frame that is available to shape and implement a new trade agreement and regulatory regimes with the EU until existing common rules cease to apply. It also buys the UK limited time to negotiate free trade agreements (FTAs) with other countries. However, the agreement remains conditional on the UK and the EU overcoming other challenges, such as the need to find a solution that prevents the creation of a hard border between Ireland and Northern Ireland. Until a conclusive final agreement is reached, uncertainty over the terms of the UK’s future long-term relationship with the EU will persist, weighing on the operating environment for UK issuers and hampering corporate investment.” The GBP opens in Asia this morning at USD1.4230, GBP/AUD1.8395 and GBP/NZD1.9500.
The US Dollar had a bad start to the week, falling against every one of the major currencies we follow closely here. Its index against a basket of major currencies tumbled from 89.05 to 88.55; its lowest level since February 16th. The Dollar’s smallest loss (-0.2%) came against the CAD but mostly it was down between seven and nine-tenths of a percent as the stock market rallied sharply and fears of a ‘Black Monday’ for global equities proved both alarmist and misplaced.
US Treasury Secretary Steven Mnuchin told Fox News that he’s “cautiously hopeful” that China will reach a deal to avoid tariffs on $50 billion of U.S. exports, and investors are coming round to the view that President Trump’s opening gambits on tariffs are merely the headline starting point for a series of concessions. Over the weekend, the US Administration reportedly sent a letter from US Treasury Secretary Mnuchin and Trade Representative Lighthizer to China seeking reductions of Chinese tariffs on US autos, more access to China's financial sector and more purchases of US semiconductors but there were also reports that that South Korea would be exempt from US steel tariffs in a revision of the bilateral trade pact between the two countries.
A report from S&P Global Ratings said, “President Trump’s long-threatened package of trade sanctions on China has landed, but a trade war isn’t yet inevitable. In general, the threatened tariffs and investment restrictions on China won’t likely cause deep pain to the Chinese economy, nor will they have a material impact on corporate borrowers in either country… Preliminary analysis shows that the overall impact on Chinese corporates and banks will be contained because the US represents only about 15% of China’s exports, and China’s domestic activity now drives its economic growth rather than exports. The $50 billion-$60 billion targeted by potential tariffs could affect up to 10%-12% of Chinese imports to the US.” Later today we’ll see the extent to which recent sharp declines in the equity market have impacted consumer confidence and we’ll also get the Richmond Fed’s manufacturing index. The USD index opens in Asia this morning at 88.55.
The EUR had a good day on Monday although – as with the British Pound – a focus just on its exchange rate with the US Dollar gives a misleading appearance of its overall strength. EUR/USD opened in Sydney around 1.2355 and made a series of intra-day highs as it moved to a best level in the New York afternoon around 1.2460; its highest since Friday, February 16th. Its 0.7% daily increase compares to more modest gains of 0.3% against the AUD, 0.65% against the CAD and virtually no change versus the GBP and NZD.
Speaking at the Austrian Central Bank on Monday, Bundesbank President and ECB Council member Jens Weidmann said, “The markets see a first rate hike around the middle of the year 2019, which is probably not entirely unrealistic. However, the end of net purchases is only the beginning of a multi-year process of monetary normalization. That's why it's so important to actually start soon… ECB economists expect the inflation rate to be 1.4 percent each in 2018 and 2019, and to rise to 1.7 percent in 2020, a level that is broadly consistent with our medium-term definition of price stability. Against this background, it is not surprising that the financial markets have been expecting net bond purchases to end in 2018.”
Of course, Mr. Weidmann’s views are nothing new and don’t differ in any material respect from comments he has previously made. But, repetition can lead to attrition, and his comments will over time add to the pressure for some clearer QE exit strategy to be communicated by the Governing Council. His ECB colleague Ewald Nowotny is head of the Austrian Central Bank and he will on Tuesday present its annual report. Mindful of Austria’s position as the gateway to the EU accession countries and always very aware of spillover effects of monetary policy, he is often seen as more ‘dovish’ on ECB monetary policy. We’ll see what he has to say later this morning. The EUR opens in Asia today at USD1.2455, AUD/EUR0.6210 and NZD/EUR0.5860.
The Canadian Dollar was unable to extend its recent very positive momentum which had twice seen it at the top of our one-day performance table and left it as the best performing currency last week. USD/CAD moved only very slightly lower on Monday to 1.2870, having been up and down in a 70 pip range from 1.2845 to 1.2915. After the US dollar, it was the second-weakest currency on the day, even though AUD/CAD couldn’t quite get back up to parity with a best level around 0.9980.
Stepping back from the minute-by-minute twists and turns of financial markets, Canadian Trade Minister Francois-Philippe Champagne spoke in Singapore at the weekend after several days of meetings to strengthen ties with the Association of Southeast Asian Nations, whose 10 members represent Canada’s sixth-largest trading partner with annual merchandise trade worth about $17 billion. He said plans by President Trump to impose tariffs on a wide array of Chinese imports threatened the stability of the international trading order. “We have all benefited from the world trade order that was put in place after the Second World War, including the US… All of us need to take a step back and take a look at what we’ve achieved over the last few decades.”
The main economic data to be published this week come on Thursday when we have the monthly GDP data as well as industrial raw materials prices. There’s nothing from the Bank of Canada until well after the Easter break but looking at interest rate markets, the probability of a hike in May rose to 82 percent after Friday’s CPI release, from 74 percent before the data were published. The Canadian Dollar opens in Asia this morning at USD/CAD1.2870, AUD/CAD0.9960 and GBP/CAD1.8310.
- AUD/NZD: 1.0570 - 1.0650 ▼
- GBP/AUD: 1.8250 - 1.8445 ▼
- AUD/USD: 0.7675 - 0.7785 ▼
- AUD/EUR: 0.6160 - 0.6295 ▼
- AUD/CAD: 0.9830 - 0.9980 ▼