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US stocks reverse strongly higher but AUD little moved ahead of RBA. GBP is best performer but EUR held back by Italian election

By Nick Parsons

It has been a fairly quiet start to the week for the Aussie Dollar, stuck between better than expected incoming economic data and recovering stock markets on the one hand, and some nervousness around the RBA’s messaging and Q4 GDP figures on the other. AUD/USD has spent almost the whole of the past 24 hours in a relatively narrow band from 0.7725 to 0.7765, with both the VIX index of volatility and the gold price down a little from Friday’s closing levels.

In economic data, building approvals jumped 17.1% m/m in January, returning to growth following a revised 20.6% fall in December, according to the Australian Bureau of Statistics. That was above the 5% growth forecast in a Reuters poll of economists. Approvals for apartments, classed as private sector dwellings excluding houses, jumped 42.2% in January while approvals for private sector houses fell 1.1%. Meantime, CBA published their service sector PMI survey which rose to 54.2 in February from 53.8 in January, indicating a solid and accelerated rate of output growth. CBI noted that, “New order growth accelerated to a seven-month high, with the favourable demand environment encouraging firms to pass on higher cost burdens to their clients through greater output prices. Meanwhile, the rate of job creation remained weak relative to the series trend amid reports of increased labour costs.”

Even before today’s RBA Board meeting, there is plenty of data scheduled for release. First up at 9.30am is the weekly consumer confidence index, then a couple of hours later there’s the January retail sales report. As with other countries, a shifting pattern of consumption around Black Friday sales promotions in late November has tended to distort retail sales numbers but by the end of January, the y/y rate should see most of these distortions unwound. ANZ forecast a slight acceleration in the annual rate to 2.6%. Also at 11.30am, we get to see the December quarter current account and net export numbers; both of which will feed into Wednesday’s Q4 GDP number. Provisional estimates suggest around 0.6-0.7% q/q for an annual rate of growth around 2.6-2.7% but these are subject to revision after the last ’partial’ data. The AUD opens in Asia at USD0.7765, with AUD/NZD at 1.0740 and GBP/AUD1.7820.

For once, the New Zealand Dollar had an average, middle of the pack day on Monday; little changed against its Aussie cousin around 1.0740 and on the same 72 cents ‘big figure’ throughout the day against the US Dollar. For many businesses and traders, this will have been a welcome period of calm after the seemingly random daily movements over the past couple of weeks. Its biggest change came against the GBP which was way out at the top of the leaderboard, with GBP/NZD rising a full cent to a 5-day high of 1.9160.

In the first economic data of a fairly busy week, the ANZ Commodity Price Index rose 2.8% m/m in February, kicking on from the 0.7% gain in January. The lift was fairly broad-based, although the dairy group provided the major thrust, with a 6% gain and beef prices rose 3.9% m/m. ANZ’s analysts noted that, “New Zealand’s merchandise terms of trade hit a new all-time high in Q4. It represents a key purchasing power benefit for the economy. We are assuming that it stabilises around this level over the next couple of years. And while today’s figures only represent half of the equation, the lifts seen over 2018 to date do suggest there is a possibility of some further near-term upside.”

Away from the economic stuff, New Zealand’s National Institute of Water and Atmospheric Research (NIWA) reports that the Summer of 2018-18 was the hottest on record. Their cousins across the Tasman Sea may snigger, but the nationwide average temperature was 18.8 degrees Celsius, 0.3C above the previous 1934-35 record of 18.5C, and a significant 2.1C above the 1981-2010 averages. The hot summer was characterised by mean sea level pressures being higher than normal, bringing more northerly and northeasterly winds than normal - consistent with La Niña conditions. For the capital Wellington, there were 17 days when the temperature exceeded 25 degrees, whilst Alexandra reached 38.7°C on 30 January, the country’s hottest January temperature in 39 years. The New Zealand Dollar opens in Asia this morning at USD0.72425 and AUD/NZD1.0740.

The British Pound had a good day on Monday, as an apparent truce between the warring factions of the Conservative party and some decent economic data brought a recently-rare combination of good news. As recently as last Thursday, GBP hit a low point 1.3720; the lowest since January 12th (the day after the ECB first spoke about changing forward guidance). The pair rallied on Friday as the USD came under pressure and the GBP extended its gains on Monday to a five-day high around 1.3870. Approaching the close of business in New York, the GBP was at the top of our one-day performance table with gains of around three-tenths of a percent against most major currencies and more than one per cent against the CAD.

Monday’s UK economic data were generally better than expected. The service sector PMI registered 54.5 in February, up from 53.0 in January, to signal the strongest rate of output growth for four months. Higher levels of business activity were attributed to the resilient economic backdrop and an associated upturn in new work. Markit noted that, “UK service providers experienced a modest rebound in business activity growth during February, supported by the fastest rise in new work since May 2017. The latest survey also pointed to stronger job creation across the service economy, with payroll numbers rising to the greatest extent for five months as firms sought to boost operating capacity in response to improved order books.”

As we trailed here yesterday, Theresa May gave a speech in the House of Commons on Brexit: essentially a mini-version of what she had said at the Mansion House last Friday. She then took questions for almost a couple of hours from all sides. There was more heat than light generated in the Q+A session, but expectations recently have been so low that the absence of any controversy was itself taken as reason for hope about future progress. As ever, though, the reaction of the EU will be more important than the routine criticisms from Opposition parties in Westminster. The pound opens in Asia this morning at USD1.3835, GBP/AUD1.7825 and GBP/NZD1.9150.

The US Dollar had a very mixed day on Monday: down against a buoyant GBP, unchanged against the EUR but quite a bit higher against the friendless CAD. The day began with equity index futures extending Friday’s losses – something with often lends support to the USD – but in the New York afternoon, stock markets caught a bid and the DJIA moved from being almost 200 points down to 300 points up. The USD index against a basket of major currencies traded in a relatively narrow range from 89.55 to 89.80 and finished pretty much around the mid-point of this at 89.65.

February’s ISM non-manufacturing index slipped very slightly from 59.9 to a still very strong 59.5; the 97th consecutive month of expansion in the service sector. Business activity rose 3 points to 62.8, whilst new orders rose 2.1 to 64.8 but employment fell 6.6 from an exceptionally high reading of 61.6 in January to 55.0 and prices paid fell 0.9 to 61.0. According to the ISM, 16 non-manufacturing industries reported growth and the majority of respondents’ continue to be positive about business conditions and the economy.

Although the Atlanta Fed updates its GDP forecast after the ISM manufacturing report, it doesn’t do so after the service sector index is published. Its next update will come on Wednesday after the international trade numbers are released. Currently, its forecast for Q1 growth is an annualized pace of 3.5%. Tuesday brings factory orders and durable goods numbers whilst New York Fed Chief Bill Dudley – who last week said that four rate hikes in 2018 would be ‘gradual’ - is scheduled to make a speech on the economy. 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.

By last Thursday morning, EUR/USD had fallen to 1.2160; its lowest since mid-January. It began to rally as soon as President Trump announced his trade tariffs and having gained a full cent by the close of business in New York, it extended gains on Friday to a high of 1.2330. Yesterday, the EUR initially rallied on news that Angela Merkel could form a coalition government but subsequently gave back some of its gains as investors attempted to digest the results of the Italian general election.

With almost all the votes now counted in Italy, it seems that none of the three main factions will be able to govern alone. A majority of Italian voters have supported Eurosceptic candidates in the national election and projections suggest the two parties with the most gains, the eurosceptic Five Star Movement and the anti-migrant League, could reach a majority in at least one of the houses of parliament should they join forces. Observers say such a coalition would likely challenge EU budget restrictions and be little interested in further European integration. According to Reuters, “with the centre-right coalition on course for 37 percent of the vote and 5-Star for 31 percent, swift new elections to try to break the deadlock are another plausible scenario.”

In economic news, the final Eurozone PMI Composite Output Index posted 57.1 in February, down from January’s near 12-year high of 58.8. The headline index has signaled expansion in each of the past 56 months, although the latest reading was slightly below the flash estimate of 57.5. The manufacturing sector again registered stronger output growth than services. Both sectors also continued to enjoy the best periods of expansion for seven years, despite seeing rates of increase in output and new orders easing across the board in February. By country, Markit reported that rates of output growth were solid despite mostly slowing since January. Germany (three-month low) topped the rankings, followed by France (five-month low) and then Spain (eight month high). Rates of expansion in Ireland and Italy slipped to four- and three-month lows respectively. The euro open in Asia this morning at USD1.2325, AUD/EUR0.6300 and NZD/EUR0.5860.

We explained here on Friday that the announcement of US tariffs hits the Canadian Dollar in two ways. First, and directly, Canada is the world’s number one exporter of steel to the United States. Second, it throws into question the delicate renegotiation of the NAFTA agreement. Yesterday all these worries finally hit the CAD hard. USD/CAD rose to just under 1.2995; its highest since early July whilst AUD/CAD hit an 8-month high around 1.0080.

In a couple of fresh tweets on tariffs, President Trump said, “We have large trade deficits with Mexico and Canada. NAFTA, which is under renegotiation right now, has been a bad deal for U.S.A. Massive relocation of companies & jobs. Tariffs on Steel and Aluminum will only come off if new & fair NAFTA agreement is signed. Also, Canada must.. ...treat our farmers much better. Highly restrictive. Mexico must do much more on stopping drugs from pouring into the U.S. They have not done what needs to be done. Millions of people addicted and dying.” Canada's Finance Minister Bill Morneau said the country is negotiating the North American Free Trade Agreement (NAFTA) with a partner that has "changed the terms of the discussion". Speaking at a women’s entrepreneurship event in Toronto, he stressed the tariffs are not advantageous to either country or national security.

Tuesday brings the Canadian PMI survey and on Wednesday morning before the Bank of Canada policy meeting, we have the housing starts and labour productivity data. On Friday, the Canadian labour market report will be released at the same time as the US employment numbers; plenty of opportunities for USD/CAD to move on to a new ‘big figure’. The Canadian Dollar opens in Asia this morning at USD/CAD1.2990, AUD/CAD1.0080 and GBP/CAD1.7970.