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USD extends rally after Powell testimony and stock market drop. AUD can’t hold US 78 cents

By Nick Parsons

The Aussie Dollar has spent most of the last three days moving lower against the USD, although from Monday’s opening levels in Sydney it is up against both the EUR and GBP. The combination of a stronger USD, much lower gold prices and a pick-up in volatility is rarely good for the AUD and though it has bounced a couple of times off technical support in the 0.7780-90 area, it might not take much of a further wobble in asset markets to see the pair make a fresh low for 2018.

According to data released by the Australian Bureau of Statistics yesterday, the value of credit extended to Australia’s private sector grew by just 0.3% in January. Over the year, total credit grew by 4.9%, the equal-lowest increase since May 2014. The details of the report showed it was yet again housing credit that drove the increase. It rose by 0.5% in seasonally adjusted terms, up from 0.4% in December, leaving the increase on a year earlier at 6.2%. Despite the small pick-up, the annual rate was still the weakest since May 2014. Credit extended to business fell by 0.1%, the first decline since February last year whilst personal credit rose just 0.1% with an annual rate of -0.9%.

We’ve been highlighting the lack of consensus on Australian interest rates from the ‘Big Four’ banks locally. The divergence has narrowed somewhat overnight as NAB have revised their outlook. They wrote that, “Weak wages growth and slow progress reducing unemployment means it is now less likely that the RBA will raise rates twice in 2018. We now see the RBA raising rates only once in late 2018 – with November 2018 as the most likely start date for a gradual RBA rate hiking cycle… By late 2018, growth should be near 3% and the unemployment rate approaching 5%. That, together with increasing tightness in employers’ ability to find suitable labour, may finally see private sector wages start to moderately edge up.” Over at Westpac, meantime, the team has re-iterated its view of a considerable widening in the US / Australia interest rate differential as the RBA remains on hold. Markets are currently pricing in a yield differential between US and Australian overnight rates of negative 45 basis points by end 2018 whereas Westpac expects minus 63 basis points. Markets are expecting a differential of minus 42 basis points compared to Westpac’s forecast of minus 112 basis points by end 2019. The Australian Dollar opens in Asia this morning at USD0.7785, with AUD/NZD at 1.0785 and GBP/AUD1.7700.

The extreme weakness of the GBP yesterday was the only thing preventing the NZD from marking a third straight day at the bottom of our one-day performance table. Indeed, it was such a gap from second-bottom to bottom that GBP/NZD actually fell almost one and a quarter cents. At one point in the day, the AUD/NZD cross was up on to a 1.08 ‘big figure’ for the first time in a little over two weeks whilst NZD/USD only just managed to hold on to US 72 cents.

ANZ’s monthly business outlook showed a net 19% of businesses are pessimistic about the year ahead, versus 38% in December. All five sectors improved this month with retail firms the closest to a positive outlook at -4%. Firms’ views of their own activity (which has the stronger correlation with GDP growth), lifted from +16 to +20. The analysts note, “A slower housing market, a small dip in net migration, difficulty finding credit and already stretched construction and tourism sectors are making acceleration hard work from here. But strong terms of trade and a positive outlook for wage growth are providing a push… Our composite growth indicator, which combines business and consumer confidence, suggests growth around 2-3%. Although we are constructive on the medium-term outlook (with incomes supported by the strong terms of trade and higher wage growth), we are conservative in our productivity growth assumptions and believe households need to rebuild their saving. We accordingly see downside risk to both the Reserve Bank’s and Treasury’s growth forecasts”.

Separate figures show New Zealand's visitor arrivals dropped for the first time in five years in January as fewer Chinese tourists visited the country, although though statistics officials said that was largely due to the timing of Chinese New Year, which this year fell in February. The country's annual net migration also eased off recent highs as government regulations introduced in the middle of last year came into force. On an annual basis net migration was 70,100, down from a record high of 72,400 in July. However, on a monthly basis, the country posed a net gain of 6,210 permanent and long-term migrants in January compared to 5,780 the previous month. Statistics New Zealand said there had been a dip in migrant arrivals on student visas from India and China, New Zealand's two largest education markets, down around 8 per cent to 11,100. The overall number of migrants arriving on student visas was 24,100 in the year to January 31, 2018, down just 150 from the preceding 12 months. The New Zealand Dollar opens in Asia this morning at USD0.7210 and AUD/NZD1.0785.

The GBP had a very bad day on Wednesday, bottom of our one-day performance table by quite a margin, with losses ranging from -0.6% to -0.9% against the major currencies we follow closely here. GBP/USD lost one and a quarter cents to 1.3785, matching its low back on February 9th and a move below this technical support level could conceivably see all its 2018 gains being wiped out.

Yesterday morning, the European Commission published a detailed draft withdrawal and transition agreement: more than 120 pages made up of 168 treaty articles and two protocols setting out the EU’s terms for Brexit to be negotiated over the next seven months. The document is politically incendiary in the UK, whose Government is a Coalition between the Conservatives and the Democratic Unionist Party in Northern Ireland. According to the draft, the territory of Northern Ireland would be considered part of the EU’s customs territory after Brexit, with checks required on goods coming in from the rest of the UK, under the text produced by the European commission. “A common regulatory area comprising the Union and the United Kingdom in respect of Northern Ireland is hereby established… The common regulatory area shall constitute an area without internal borders in which the free movement of goods is ensured and North-South cooperation protect.”

Theresa May told the House of Commons that, “No UK prime minister could ever agree to it… I will be making it crystal clear to President Juncker and others that we will never do so.” The European Union’s chief negotiator, Michel Barnier, denied that he was challenging the territorial or constitutional integrity of Britain. “This backstop will not call into question the constitutional or institutional order of the UK. We will respect that. I am not trying to provoke anyone here. I am not being arrogant in any way.” He may well be sincere in his claims, but ahead of a keynote speech from UK Prime Minister May on Friday, worries are growing that British businesses could find themselves without a transition deal to cushion their adjustment to life after Brexit. Moreover, it is by no means clear that all the PM’s own Conservative MP’s will back her vision if it comes to a vote in Westminster. No wonder the GBP is so weak, opening in Asia this morning at USD1.3785, GBP/AUD1.7695 and GBP/NZD1.9100.

The USD index hit 90 for the first time in 2-weeks in New York on Tuesday evening and yesterday it extended these gains, more due to independent concerns about the GBP and EUR than to any fresh fall in US equity markets which has tended recently to offer the USD some support. The index high around 90.25 takes it back to where it was before US Treasury Secretary Mnuchin’s remarks in Davis in late January and means it has rallied more than two full points from its recent low of 87.95.

Wednesday’s US economic data generally came in shy of consensus expectations. Against a median estimate of a small drop to 64.1, Chicago PMI in February dropped from 65.7 to 61.9; lower than any of the 30 economists in a Bloomberg poll had been looking for. None of the seven sub-indices (prices paid, new orders, employment etc) rose on the month and the headline was the lowest since August 2017. Elsewhere, pending home sales fell by 4.7% m/m in January and though this might be simply weather-related, there’s some talk, too, that sharply rising mortgage rates on the back of higher US bond yields might be feeding through more quickly than usual into lower housing market activity.

Whatever the case, there’s no doubt that the US economic data have been running somewhat slower than expected over the past few weeks. Citibank produce a very well-regarded “economic surprise index” (scaled from -100 to +100) and this is down from a high over 80 in late-December to just 33.5 today. The Atlanta Fed’s GDPNow model which back in late January was suggesting 5.4% for Q1 GDP has been revised notably lower and after Tuesday’s durable goods numbers, the latest estimate is just 2.6%. This will be updated later today after the release of Personal income and expenditure, the ISM Manufacturing Index, and construction spending. The USD index opens this morning in Asia at 90.25; up almost three-quarters of a point from Monday’s opening level.

After the data disappointments of last week in the Eurozone, it seems investors finally exited long EUR currency positions on Tuesday and by the end of the day, EUR/USD had fallen more than a full cent to a low of 1.2230. Yesterday it extended those declines, falling to a low during the European afternoon around 1.2190; it slowest since way back on January 18th. We had suggested earlier this week that “Mr. Draghi has often shown himself to be a master of market expectations… and he might well be actively trying to push the EUR lower ahead of the ECB meeting.” If he was, he’d certainly be happy with the price action over the last couple of days!

German inflation slowed more than expected to hit a 15-month low in February. Harmonised CPI rose by just 1.2% year-on-year after an increase of 1.4% in the previous month, the data showed. That was weaker than the 1.3 percent consensus estimate, the lowest reading since November 2016 and marked the third consecutive fall in the headline figure. Although the German numbers raised fears of a weaker than consensus outturn for the Eurozone CPI yesterday morning, they were no softer than expected. The rate of price growth slowed to 1.2% this month from 1.3%, dropping to its weakest since 2016. A fall in energy inflation and a big fall in fresh food inflation were the main drivers of the headline dip this month. The core measure was unchanged at 1.0%.

The softness of inflation both in Germany and the Eurozone overall help take some of the pressure off ECB President ahead of next Thursday’s Council Meeting. He said to the European Parliament this week that an expansionary policy is still warranted even as the economic situation is “improving constantly” and there’s no sense of urgency around communicating a withdrawal of monetary stimulus. Bundesbank president Jens Weidmann said in a Bloomberg Television interview that guidance on interest rates is “rather vague” and should be strengthened. “This could probably be one part of our discussion - whether to complement any decision on the asset-purchase program and on communication regarding the asset-purchase program with a bit more specificity with respect to the interest-rate guidance. ‘Well past’ is a rather vague time dimension.” The EUR opens in Asia this morning at USD1.2205, AUD/EUR0.6375 and NZD/EUR0.5910.

After the Federal Budget, the Canadian Dollar had another poor day on Tuesday, kept off bottom spot in our one-day performance table only by the weakness of the NZD. As the US Dollar caught a bid on a weaker stock market and liquidation of long positions in EUR and GBP, so USD/CAD moved up on to a 1.28 ‘big figure’ for the first time since December 20th. The pair reached a high just above 1.2830 and closed in New York within a few pips of the high of the day.

The 2018-19 budget, presented in Ottawa on Tuesday evening, had a fiscal track largely in line with what Canadian Finance Minister Bill Morneau forecast in his last fiscal update in October. One major change is C$7.2 billion less infrastructure spending through 2019, an amount that has been allocated to other departmental spending, largely for veterans, indigenous Canadians, women and research. The economy is forecast to average growth of 2 percent between 2017 and 2022, including a 3 percent expansion in 2017 whilst forecasts for debt and the deficit are overall little changed from October’s fiscal update with deficits over the six years including 2017-18 projected to total C$98 billion. The ratio of debt to gross domestic product will drop to 28.4 percent by 2022 from 30.4 percent in 2017-18.

It’s fair to say that local reaction to the Budget has been at best mixed. The Financial Post says, “Bill Morneau may have passed up his last chance to balance Canada’s budget. Prime Minister Justin Trudeau’s finance chief released his third fiscal plan on Tuesday in circumstances that have hardly been better. Canada’s economy is near full capacity, led the Group of Seven in growth last year and unemployment recently hit a four-decade low - all of which Morneau boasts about. He couldn’t have asked for better conditions to move toward what was once his goal: balance. And yet Morneau’s budget Tuesday plots no such course.” Mr Morneau responded to criticism in a Bloomberg interview, saying, ““We’ve got a really low level of debt to our economy, we can deal with all eventualities and we’re being fiscally responsible along the way.” For the moment, currency markets have given him the thumbs-down and the Canadian Dollar opens in Asia this morning at USD/CAD1.2825, AUD/CAD0.9980 and GBP/CAD1.7700.