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Aussie Dollar goes from bottom to top spot as US stocks rally. GBP weaker, but CAD weaker still. Volatility seems here to stay for a while.

By Nick Parsons

Intra-day movements across asset classes are becoming more volatile, less predictable, and often occurring with little obvious catalysts. Did yesterday’s FOMC Minutes really warrant a 400 point drop in the Dow Jones Industrial Average? And if the answer is ‘yes’, then why did the same index rally 300 points the very next day on absolutely no fresh news or information? We may have to live with such swings for some time to come, and factor them into our decisions on when and how to execute our currency transactions; whether they be for hedging, investment or simply recreational cross-border expenditure such as vacations. As a good example of this volatility, after Wednesday when the AUD was the worst performer of all the major currencies we follow here, Thursday saw it back at the top of the table. Higher stocks and lower market-based measures of risk such as the VIX index help explain the AUD rally, but anyone who claims to know the precise reason that equities fell then rallied is guilty of merely fitting a story to the price action.

With that rant off your author’s chest, we note that Prime Minister Turnbull is scheduled to meet with US President Trump in Washington. This will be his fourth meeting with Mr Trump and he will be accompanied on this trip by four of Australia's six state premiers, other local leaders and 20 CEOs of the nation's largest companies. Briefing journalists ahead of the trip, an unnamed Australian official said, “The prime minister is travelling with a large delegation of business leaders and he is very keen to talk trade opportunities, while China will obviously be an important element of the talks". Mr. Turnbull is still keen to promote the Trans-Pacific Partnership, the official said, even though it is likely to receive a lukewarm reception from Trump who last year withdrew the United States to concentrate on protecting US jobs.

According to the Sydney Morning Herald, “Prime Minister Malcolm Turnbull will propose using a chunk of Australia's $2.53 trillion superannuation pool to help unlock funding for Trump's infrastructure push. "There's a very bold ambition to drive US infrastructure and Australia should be front and centre in terms of project design, build, financing and management," Trade Minister Steven Ciobo said in an interview ahead of the visit. It is certainly an area in which Australia has proven expertise but if it raises concerns about capital outflows to finance overseas projects, it could end up being another short-term marginal negative for the currency. The Australian Dollar opens in Asia this morning at USD0.7845, with AUD/NZD at 1.0685 and GBP/AUD1.7790.

The NZD/USD has been on a US 73 cents ‘big figure’ for every minute of the past 24 hours, despite a 450-point drop and subsequent 300-point rally in the main US stock market index. The pair has bounced three times off the 0.7310 level and reached a high during the European afternoon just above 0.7360; an unusually tight high-low range given the big swings in global equities. The AUD/NZD cross, meantime, remains below last week’s 6-month low of 1.0705, having been down to 1.0655; the lowest since August 4th last year.

Data from the Reserve Bank of New Zealand show total credit card spending in New Zealand decreased for the first time in five months in January. Credit card spending dropped 0.6% month-over-month in January, fully reversing a 0.6% rise in December. The numbers also showed that credit card balances increased at a slower pace of 0.2% in January, following a 0.4% rise in the preceding month. The good news is that credit card users are making much more of an effort to pay balances more promptly. As at December 2017, 60.4% of all balances incurred interest. That is the lowest level ever recorded since this data started in July 2000. Just one year ago it was 62.2%, and five years ago it was 64.8%. It peaked at 76.1% in January 2001.

Separate data from Stats NZ show labour productivity rose 0.9 percent in the year ended March 2017. Setting aside for a moment the irony of publishing productivity figures 10 months after the quarter-end, the statisticians’ Press release was punchily titled, “More New Zealanders working, and working smarter” and the details showed that New Zealand workers could produce 133 units of goods or services each hour in 2017, compared with 100 an hour 20 years ago. In the long run, productivity is regarded as key to increasing standards of living – as workers share the fruits of their labour. By producing more for each hour worked, Stats NZ helpfully explains, their incomes may rise and the country becomes wealthier. The New Zealand Dollar opens in Asia this morning at USD0.7345 and AUD/NZD1.0685.

Mornings have not been kind to the British Pound this week and by lunchtime in London on Thursday, it was down against all the major currencies and for the third time this week looked set to take bottom spot on our one-day performance table. It had very briefly regained USD1.40 for a few minutes after the FOMC Minutes were released but then began to fall sharply and couldn’t subsequently hold on to a USD 1.39 ‘big figure’, reaching an intra-day low yesterday of USD1.3860. The sharp rally in the US stock market helped lift GBP/USD up almost a cent from its low and the GBP finished the day up against USD and CAD but down against EUR, AUD and NZD.

In economic news, UK growth in the fourth quarter of last year has been revised down to 0.4%, from an initial estimate of 0.5% whilst annual growth for 2017 as a whole has also been revised down a little, from 1.8% to 1.7%. details showed that business investment was flat in Q4 and household spending rose by just 0.3% during the quarter, which means it only grew by 1.8% last year. A tenth or so off the GDP numbers doesn’t sound much but in terms of presentation it is very important. It means the UK is at the bottom of the G7 pack with average growth in 2017 back below Japan and Italy (Canada doesn’t report Q4 figures until March 2nd).

UK Government Ministers headed away on Thursday for a Cabinet ‘offsite’ meeting on Brexit, to discuss the ‘position paper’ which we wrote about here yesterday. In what is understood to be the Prime Minsiter’s preferred model, the UK would be in regulatory alignment with the EU in some areas while finding different ways to achieve the same outcomes in other sectors. In the so-called ‘third basket of sectors’, the UK would in time diverge from the EU and go its own way under the model. If that sounds an elaborate fudge, that’s because it is! The EU have spotted it too and a European Commission document timed to coincide with the meeting says, “The UK views on regulatory issues in the future relationship including ‘three basket approach’ are not compatible with the principles in the [European council] guidelines.” Oh well, maybe the government enjoyed the tea and sandwiches at Chequers. The pound opens in Asia this morning at USD1.3955, GBP/AUD1.7790 and GBP/NZD1.8900.

We warned earlier in the week that whilst we couldn’t be sure of the direction of causality between stocks and the US Dollar, the correlation was very strong. 700 points off the DJIA from last Friday’s high added a little over 2 points to the dollar’s index against a basket of major currencies, which yesterday morning traded up to 89.85; its highest in almost 10 days. As the Dow Jones then added 350 points by the time London traders left for home, so the USD index gave back around half a point of its recent gains. All that currency traders have to do is to figure out where stock markets are going!

St. Louis Federal Reserve President James Bullard cautioned that investors may be "getting ahead of themselves" in anticipating four rate hikes from the central bank this year. Speaking with CNBC Television, Bullard said he doesn't see the case for a 1.2% increase in the Fed Funds rate this year, adding that "one hundred basis points in 2018 seems a lot to me." He also said there was a "ways to go" with respect to sustainable upward move on inflation and reiterated the view that US GDP will likely grow between 2.4% and 2.5% this year. Fed Governor Randal Quarles, meantime, gave a speech in Tokyo saying, “The U.S. economy appears to be performing very well and, certainly, is in the best shape that it has been in since the crisis and, by many metrics, since well before the crisis… With a strong labor market and likely only temporary softness in inflation, I view it as appropriate that monetary policy should continue to be gradually normalized."

The US economic calendar is empty on Friday which might not be a bad thing given the volatility seen already in this holiday-shortened week. The USD index opens this morning in Asia around 89.30; down almost half a point from Thursday’s high but still 1 ½ points up on where it was this time last week.

The euro has had a pretty lively 24 hours. It jumped to 1.2355 on the Fed Minutes before plunging to a low early in Thursday’s European morning of 1.2260. As stock markets recovered and the USD gave back some of its recent gains, so the EUR first stabilised then jumped around three-quarters of a cent as the daily gains for the DJIA exceeded 300 points.

Investors have grown used to a steady stream of good and better than expected economic data in the Eurozone. There were the first cracks in this narrative with Wednesday’s ZEW Survey and yesterday morning’s ifo survey was a genuine disappointment. The institute noted, “Germany’s very favourable business climate cooled down considerably this month. The ifo Business Climate Index fell to 115.4 points in February from 117.6 points in January. Companies were less satisfied with their current business situation, but the indicator was at its second highest level since 1991. This signals economic growth of 0.7 percent in the first quarter. After the euphoria of recent months, companies’ assessments of the business outlook for the months ahead were also far less optimistic. In manufacturing the index fell considerably from last month’s record high. Assessments of the current business situation were slightly less favourable, although they remained at a high level. Manufacturers also downwardly revised their business expectations. They reported a marginal slow-down in demand and slightly lower order levels.”

The Minutes of the ECB Council Meeting said, “Some members expressed a preference for dropping the easing bias regarding the APP from the Governing Council’s communication as a tangible reflection of reinforced confidence in a sustained adjustment of the path of inflation… However, it was concluded that such an adjustment was premature and not yet justified.” Mr Draghi’s views on FX at the Press Conference were widely shared among Council members. “Concerns were expressed about recent statements in the international arena about exchange rate developments and, more broadly, the overall state of international relations…The importance of adhering to agreed statements on the exchange rate was emphasised.” An unusually extensive discussion of FX said, “It was also pointed out that the bilateral exchange rate of the euro against the US dollar had changed more than the euro's nominal effective exchange rate... However, explaining the US dollar weakness was not straightforward, given the strength of recent data releases and the fiscal and monetary policy outlook in the United States”. Friday’s Eurozone CPI numbers might show s the extent to which a stronger euro is still weighing on prices. The EUR opens in Asia this morning at USD1.2335, AUD/EUR0.6365 and NZD/EUR0.5960.

The Canadian Dollar has weakened steadily over the past week, not just against a rebounding US Dollar. On Thursday morning, USD/CAD moved on to 1.27 ‘big figure’; a fresh high for 2018 and the best level since December 26th last year. After the latest retail sales numbers were released, the CAD fell further. USD/CAD hit a high of 1.2740 whilst AUD/CAD is now less than a quarter of a cent from trading at parity.

Stats Canada reported that after three consecutive monthly increases, retail sales decreased 0.8% in December. Sales fell in 6 of 11 subsectors, representing 42% of retail trade. Lower sales at general merchandise; health and personal care; and electronics and appliance stores more than offset gains at motor vehicle and parts dealers and food and beverage stores. Excluding motor vehicle and parts dealers, retail sales fell an even bigger -1.8%m/m. There’s no doubting that these numbers were considerably worse than the +0.2% m/m consensus, but retail sales were up 1.5% in the fourth quarter and up 6.7% for the year.

Local analysts said the disappointing reading put the economy on track for growth of about 2 percent in the fourth quarter, below the Bank of Canada’s 2.5 percent forecast. Statistics Canada will release fourth-quarter growth figures next week. The market-derived probability that the BoC will remain on hold at its March 7th meeting rose to 96% , though another rate hike is still fully priced in by July. The Canadian Dollar opens in Asia this morning at USD/CAD1.2710, AUD/CAD0.9970 and NZD/CAD0.9340.