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A quiet week ahead for economic data locally but AUD is at the mercy of global risk appetite

By Nick Parsons

The Aussie didn’t just end lower against the USD last week. It was the worst performer of all the major currencies we follow closely here after a dive in the last hour of trading in New York. AUD/USD began the week around USD 0.7715, hit a low around lunchtime on Wednesday in Europe of 0.7677 but then rallied sharply immediately after the FOMC announcement as the USD was sold heavily. From a high of 0.7781 on Thursday morning, however, a near-1,000 point drop in the DJIA over the next two days saw the Aussie fall almost a cent to end the week around 0.7655. On the day, AUD/EUR was down around five-tenths of a percent whilst AUD/CAD, AUD/USD and AUD/NZD were all almost seven-tenths lower.

The news media this week have far more important things to talk about than the state of the currency. The first Formula 1 Grand Prix of the new season in Melbourne, the first ever non-stop Qantas flight between Australia and London and the scandal around the cricket team in South Africa are much more interesting than whether the currency goes up or down; especially in a week when there’s little or no fresh incoming economic data. The weekly consumer confidence numbers are due on Tuesday, whilst private sector credit and job vacancies are released on Thursday ahead of the Good Friday holiday.

The currency is more likely to be driven by events offshore than at home; especially by what happens in the US stock market. A 4% drop in the DJIA in two days and the worst weekly performance in almost 2 years saw the VIX index of volatility jump to 20.4 on Friday evening, more than offsetting the positive impact on the AUD of a $30 jump in the oil price. The low for Dow Jones futures in the sell-off in early February was around 23,300 and Friday’s close was barely 300 points above this level. The US stock market is down in year-to-date terms and with just four days to the end of the quarter, the opening of the futures market in Asia today will be watched very carefully. These are tricky times for the Aussie Dollar which is already hovering close to a 3-month low against the US Dollar. It opens in Asia this morning having closed on Friday at USD0.7735, with AUD/NZD at 1.0635 and GBP/AUD1.8300.

The New Zealand Dollar opened last Monday around USD0.7220. It fell to a low just under 0.7160 at lunchtime in Europe on Wednesday but recovered all its losses – and more – to a high of 0.7270 in New York on Friday before a last-hour drop to close around 0.7235. The main feature of the week, however, was the Kiwi’s performance against the Australian Dollar. The AUD/NZD cross fell to a near 8-month low around 1.0635 on Monday and after rallying a full cent on Wednesday, returned to test and then break this level on Friday. Elsewhere on its crosses, GBP/NZD rose from 1.9300 on Monday to 1.9630 on Wednesday before then falling over a cent into the end of the week. Volatility in the NZD seems now to be a permanent fixture of the FX landscape.

To no-one’s surprise whatsoever, the RBNZ left the Official Cash Rate (OCR) unchanged at 1.75 percent last week. The Statement concluded with the line that, “Monetary policy will remain accommodative for a considerable period. Numerous uncertainties remain and policy may need to adjust accordingly” and it was interesting that it made no reference at all to the exchange rate for the first time since 2012. The open-ended nature of the commentary and the lack of any directional clues was a nice parting gift from Acting Governor Grant Spencer to his successor Adrian Orr who starts his new job today. It doesn’t tie him down or pre-commit to any policy path.

The central bank is presently mandated to keep inflation within a 1 percent to 3 percent target range, with a focus on the midpoint. The new government has said it wants the RBNZ to target maximising employment along with price stability. It is also pushing for other changes, including shifting to a committee structure as opposed to a sole-decision maker, and a wider review of the Reserve Bank Act is currently underway. A press conference has been scheduled for 9am Monday morning where Finance Minister Grant Robertson and new Governor Adrian Orr will reveal the new Policy Targets Agreement (PTA) they have signed, along with the outcomes of phase-1 of the RBNZ Act review. The New Zealand Dollar opens in Asia this morning having closed in New York on Friday at USD0.7270 and AUD/NZD1.0635.

The British Pound had a pretty eventful week, finishing higher but off its best levels against nearly all the major currencies. It began last Monday morning in Asia around USD1.3940 and by Thursday morning touched a high just under 1.4175 before closing on Friday in New York around 1.4130. Against the Antipodean currencies, GBP/AUD started on Monday at 1.8075 but by Friday evening in North America touched 1.8360; its highest level since the EU referendum back in June 2016. GBP/NZD, meantime, rose from 1.9310 at the start of the week to a high on Wednesday of 1.9630 before giving back just over one cent of its gains into the New York close on Friday.

After last week’s positive news from the UK and EU on a Brexit transitional agreement running until December 31st 2020, there’s still a lot of detail to be agreed, most notably on the very tricky issue of the land border between Ireland (which is in the EU) and Northern Ireland which will not be. Talks will begin in Brussels on Monday which are aimed at reaching a deal on what will happen here. The Brexit Secretary David Davis has said the UK will agree to a 'backstop' text for the Irish border, but not the one proposed by the EU. In February, it was proposed Northern Ireland stay in the customs union or single market if there was no other way to maintain a soft border but Mr Davis said on TV on Sunday that it was "overwhelmingly likely" that the border issue would be solved in the context of a trade and customs agreement. He said trusted trader schemes and technological options would be able to maintain an invisible border. "There are ways of dealing with this. You can't just say 'we haven't done it anywhere else' – we haven't attempted to do it anywhere else."

By Friday of this week, there will be less than one year to Brexit on March 29th 2019 but it will still be the dominant theme for UK politics, economics and financial markets. The Bank of England has done its best to maintain a sense of normality; assuming a smooth transition and preparing the ground for the second interest rate rise of the current cycle. Indeed, the 7-2 split at last week’s MPC meeting with two members voting for an immediate rate hike was the exact same tactic employed in September last year to prepare the market for a rate hike in December. The Bank of England has revised down its forecast for quarter-on-quarter GDP growth in Q1 to 0.3%, from 0.4% and said that it would be "difficult to quantify" the damage that the bad weather would do to Q1 GDP. Retailers will be hoping for a significant pick-up in both temperature and activity over the Easter weekend. The GBP opens in Asia this morning having closed on Friday at USD1.4135, GBP/AUD1.8360 and GBP/NZD1.9535.

The US Dollar ended lower after what was yet another week of high political and economic drama. Say what you will about the Trump Presidency, it’s never dull… The US Dollar’s index against a basket of major currencies opened the week around 89.80. If fell half a point on Monday, rallied back to 90.00 for the first time in three weeks on Tuesday then tumbled almost a full point to a low on Thursday morning of 89.05. A near-half point rally was then entirely reversed on Friday and having reached a low of 89.00, it ended only a few pips above this level.

The Dow Jones Industrial average was down 500 points intra-day on Monday as more than $100bn was wiped off the value of technology shares. It ended the day down 330 at 24,610. Tuesday brought a 100-point gain and Wednesday a 100-point loss. On Thursday President Trump announced the US Trade Representative’s “Section 301” investigation into alleged misappropriation of US intellectual property by China and the DJIA fell 325 points, followed by a further 420 points loss on Friday. Overall, it was the worst weekly performance by the stock market since January 2016 with the DJIA at a four-month low. The picture is just as bad for the S&P 500 Index which fell six per cent on the week. Indeed, the S&P 500 has closed lower than the midpoint of its daily range for 10 straight days, the longest stretch since at least 1982. The index closed on Friday at 2,588.26, hovering just above its 200-day moving average and its decline since March 9th was its third dip of at least 5 percent in the past two months.

In the period since his election victory in November 2006 to the stock market peak in early February, President Trump tweeted about it more than 60 times, often appearing to take credit for it. The POTUS Twitter feed has been noticeable quiet since then. The last tweet on the market came shortly after the fall in early February, warning investors they were making a “big mistake” for selling stocks despite “good news” about the economy. As at Friday’s close, the market was still just above the February low. The futures market this morning in Asia will be watched very carefully to see if this turns out to be another ‘Black Monday’ or whether there is any investor interest to buy this latest dip. The USD index opens in Asia this morning having closed on Friday at 89.05.

The EUR ended a volatile week higher against the US, Australian and New Zealand Dollars but down against the GBP and CAD. EUR/USD began the week around 1.2280 and rose on Monday as the US stock market tumbled. A much weaker than expected ZEW survey sent the euro tumbling to a low of 1.2240 on Tuesday but as the USD fell immediately after the FOMC announcement on Wednesday, EUR/USD rallied sharply, moving to a high on Thursday morning of 1.2380. By that evening it was back on a 1.22 ‘big figure’ before then rallying on Friday to end the week around 1.2355.

The economic data in the Eurozone have gradually eased back during the course of Q1. The ZEW research institute said in its monthly survey last week that economic sentiment among investors dropped to 5.1, its lowest reading in a year and a half. The ‘flash estimate’ of the Eurozone composite PMI, meantime, fell to 55.3 in March, down from 57.1 in February. This was the lowest since January of last year and signaled a second successive monthly easing in the rate of expansion. Completing a poor set of survey data, The Munich-based Ifo economic institute said that its business climate index, based on a monthly survey of some 7,000 companies, fell to an 11-month low of 114.7 from 115.4 in February.

There is more survey evidence to come on Tuesday this week when the Eurozone business and consumer confidence numbers are published. The ‘flash estimate’ of German CPI is out on Wednesday and consensus expectations suggest there may finally be some pick up with the annual rate of inflation set to rise from 1.2% to 1.6%, largely due to favourable base effects from a year ago rather than an immediate acceleration in price pressures now. It is otherwise a pretty quiet week for economic data across Continental Europe whilst the only scheduled ECB speech is on banking supervision rather than monetary policy. The EUR opens in Asia this morning having ended the week at USD1.2355, AUD/EUR0.6230 and NZD/EUR0.5860.

After its very poor performance year-to-date in 2018, the Canadian Dollar had a very good week; almost managing the rare feat of topping our one-day table for three consecutive days from Tuesday to Thursday. USD/CAD began the week at 1.3090 and only very marginally extended gains on Monday to a high of 1.3120 at the start of the European morning. From then on, however, it was downhill all the way to a low on Thursday just under 1.2850. The pair was then back on 1.29 as the US Dollar found some support more generally but closed the week back down around 1.2890 on stronger than expected Canadian inflation data. Having peaked at 1.0235 on March 14th, AUD/CAD moved back down through parity on Wednesday and fell below 0.9920 on Friday to finish at its lowest level in more than three weeks.

There seemed plenty of positive hints about NAFTA on both sides of the US-Canada border last week, with trade representatives talking about flexibility shown by the US after its specific exemptions from steel and aluminium tariffs for Canada, Mexico and others. The Globe and Mail newspaper, citing unidentified sources, reported the U.S. had altogether dropped its demand for 50 percent U.S. content in vehicles. Traders rushed to cover short positions in the Canadian Dollar on Wednesday and Thursday and on Friday the currency was given a further lift by stronger than expected inflation figures. Statistics Canada reported that CPI rose 2.2% on a year-over-year basis in February, following a 1.7% increase in January and compared to consensus expectations of a 2.0% annual rate. All eight major components increased year over year in February.

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 having ended last week at USD/CAD1.2895, AUD/CAD0.9925 and GBP/CAD1.8225.