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AUD and NZD finish in joint top spot on Tuesday as US stock markets rally sharply

By Nick Parsons

The price action for the AUD/USD pair on Tuesday was quite striking – it made successive highs in the Asian, European then North American time zones. Asia saw the pair rally from 0.7695 to 0.7735. Europe then took it up to 0.7745 and in New York it traded just over 0.7765; its highest level since March 22nd. With AUD/NZD steady at 1.0635, the Aussie Dollar shared top spot with its Kiwi cousin at the top of our one-day performance table.

The always-insightful NAB Business Survey showed the business conditions index declined by 6 points to +14, although it remains well above its historical average. The business confidence index fell by 2 points to +7, and it is now only just above its historical average of +6. Leading indicators in the survey softened this month, with capacity utilisation easing slightly, while forward orders gave up much of last month’s spike. Final product price inflation remains muted and retail prices declined. However, purchase cost growth has been moving higher since late 2016. NAB noted that, “The gradual trend rise in purchase costs provides a tentative sign of inflationary pressures, although it would need to keep rising to provide a convincing signal that core CPI inflation is about to move back within the RBA’s target band.”

NAB’s conclusion on the Survey was that, “The results for March do not change our outlook for the Australian economy. The strength in business conditions and leading indicators are consistent with stronger economic growth in coming quarters and the Survey employment index is pointing to strong jobs growth which should reduce unemployment, and put gradual upwards pressure on private sector wages. We expect that towards the end of this year the RBA will be in a position to start increasing the current emergency low policy rate although it will depend heavily on the data flow – particularly for wages and inflation - and the risk is that any action by the RBA will be delayed”. The Aussie Dollar opens in Asia this morning at USD0.7765, with AUD/NZD at 1.0535 and GBP/AUD1.8255.

Having shared top spot with the Canadian Dollar on Monday, the New Zealand Dollar shared the same place with the Aussie Dollar on Tuesday. The AUD/NZD cross traded in a range from 1.0515 to 1.0555 but finished the day pretty much where it had begun at 1.0535. NZD/USD, meantime, extended its gains to a high of 0.7375; its best level since February 19th.

The continued strength in the NZD came despite the latest NZIER Quarterly Survey of Business Opinion (QSBO) showing businesses continue to expect a deterioration in economic conditions over the coming months. Business confidence had fallen sharply in the December 2017 quarter in the wake of the new Labour-led Government taking office, and this pessimism has carried over into the first quarter of 2018. A net 9 percent of businesses expect worsening economic conditions over the coming months – slightly less than the 11 percent in the previous quarter. This continued pessimism about the economy remains in contrast to firms’ expectations about demand in their own business, which continues to hold up. A net 15 percent of businesses nationwide reported a lift in demand in their own business in the March 2018 quarter.

At some point this week we should see the REINZ home sales numbers and the wonderfully esoteric ANZ Truckometer index. Before then, the chief focus away from financial markets is likely on a huge clean-up operation after storm damage which was serious enough to shut Auckland airport and caused widespread power outages after sustained winds of 100km/h winds battered the area. MetService said a 133km/h gust of wind had been recorded at Auckland Harbour bridge. The New Zealand Dollar opens in Asia this morning at USD0.7370 and AUD/NZD1.0535.

The British Pound had another day of very mixed fortunes on Tuesday, rising against the USD, little changed against the EUR but down between four and five-tenths of a point against the CAD, NZD and AUD. The GBP/USD exchange rate reached a best level of 1.4185 – its highest in almost two weeks – but GBP/AUD and GBP/NZD both fell a full cent on the day.

In an interview with Reuters, Bank of England MPC member Ian McCafferty said that UK interest rates should be raised again without delay. “We shouldn’t dally when it comes to tightening policy modestly.” McCafferty said he could not be certain about whether to vote again for a rate rise until May’s policy meeting, but there had been no data or Brexit developments so far to make him think he was wrong in March to vote to raise rates to 0.75 percent. Speaking in his office in the BoE on Monday... McCafferty said that as well as the boost from the world economy’s strong recovery, he thought there was now no slack left in Britain’s labour market. Unemployment at its lowest rate since 1975, skill shortages and signs that employers were resorting to higher wage offers to lure staff from rival firms or stop them from leaving would also create inflation pressure. “It’s not wages suddenly bursting away, but it gives you a modest upside risk.” Known as one of the BoE’s most hawkish policymakers, McCafferty said there had been a case for following up November’s rate move with another hike as early as February. But he held off to avoid surprising households who had been told by the BoE that it plans to raise rates only gradually.

On the UK economic calendar today, we have the merchandise trade numbers and the industrial production data but perhaps the most important might be the NIESR’s estimate of GDP in the first quarter. The National Institute has had a very good record over the last few years of predicting the official GDP numbers and it is updated every month with an estimate of growth over the previous three months. Today will be one of the four occasions each year when its estimate lines up in time with the official numbers. Consensus looks for a 0.3% q/q increase though the bad weather might introduce some downside risk to this view. The GBP opens in Asia this morning at USD1.4175, GBP/AUD1.8255 and GBP/NZD1.9235.

Once again, all the action appears to be in the US equity market rather than on the foreign exchanges. After its’ 400-point rally and sell-off into Monday’s close, the DJIA initially jumped 300 points in response to soothing Chinese words on trade (see below) and at one point extended these gains by a further 200 points. The US Dollar’s index against a basket of major currencies rose from 89.45 to 89.55 in early trading but then fell steadily during the day to 89.25 having at one point reached a near-one week low of 89.15.

Chinese President Xi Jinping gave a keynote speech at the Boao Forum – often referred to as the Chinese version of the Davos Forum, which is taking place on the tropical island of Hainan - where he addressed the trade situation. Xi called for an upholding of the multilateral trade system and said dialogue was the way to resolve disputes, diffusing trade tensions with the U.S. He vowed to open sectors of China’s economy from banking to auto manufacturing, increase imports and expand protection to intellectual property: "China does not seek trade surplus. We have a genuine desire to increase imports and achieve greater balance of international payments under the current account." He said countries should "stay committed to openness, connectivity and mutual benefits, build an open global economy, and reinforce cooperation within the G-20, APEC and other multilateral frameworks. We should promote trade and investment liberalization and facilitation, support the multilateral trading system… This way, we will make economic globalization, more open, inclusive, balanced and beneficial to all."

Speaking on Bloomberg television from Beijing, Federal Reserve Bank of Dallas President Robert Kaplan said trade issues between the U.S. and China won’t get resolved soon and warned of potential damage if the dispute is prolonged. “I really do think it is too early to judge how this is going to affect the economy. But I do think the rhetoric, if it goes on for long enough at this level, is having somewhat a chilling effect… I’m still hopeful when we look back a year or two from now you’ll see very little actually done in the way of tariffs that were implemented,” Kaplan said. “That would be my base case, and I think we are in the early innings of this.” Equity markets will hope very much that his judgment proves correct. The USD index opens in Asia this morning at 89.25.

The Single European Currency finished around the middle of the FX pack on Tuesday, up against the USD, little changed against the GBP but down against all three of the ‘Commonwealth Currencies’. EUR/USD opened around 1.2320 and after a very steady session through Asia and the European morning, then took off to a high of 1.2370 before then settling back to 1.2345 after an unusually public spat between ECB Council member Ewald Nowotny and his colleagues.

In very uncontroversial early remarks, Mr Nowotny said, “The normalisation [of monetary policy] requires a delicate balancing of measures as well as careful sequencing in time,” saying there were risks to both being too aggressive with the process or starting it too late. As for the impact of trade tariffs, “The direct effects might be on the exchange rate side but this is difficult to see or to forecast because today we have so many linkages, we have long production chains...It might have negative effects on financial stability, but effects on monetary policy are not very clear.” However, the Austrian central banker then gave an interview to Reuters in which he said that the ECB’s 2.55 trillion euro ($3.1 trillion) bond-buying program would be wound down by the end of this year, which would then pave the way for the first rate rise since a fumbled move in 2011. He called on the ECB to get on with the process to ensure it can take a gradual approach, and to start with the deposit rate, which has been in negative territory since mid-2014. “I would have no problem with moving from -0.4 percent to -0.2 percent as a first step and then, as a second step, include the (main refinancing) policy rate. This is the structure. The exact timing? It’s too early to tell you.”

In a very unusual move after EUR/USD had jumped around half a cent, the ECB - which rarely comments on statements from individual policymakers - distanced itself from Nowotny’s comments. “Governor Nowotny’s views are his own. They do not represent the view of the Governing Council,” an anonymous spokesperson said. The EUR opens in Asia today at USD1.2355, AUD/EUR0.6285 and NZD/EUR0.5965.

It was almost a three-way split at the top of our leader board on Tuesday, though the Canadian Dollar was ultimately just edged out by both the AUD and NZD. Just before Monday’s North American close, USD/CAD printed on a 1.26 ‘big figure’ for the first time since late February. Just 24 hours later, it was moving on to 1.25 for the first time since February 20th. Despite the CAD strength, both AUD/CAD and NZD/CAD ended around 10 pips higher on the day.

After Monday’s very healthy BoC Business Outlook Survey concluded, “the indicator continues to be high, signalling positive business sentiment”, the focus yesterday switched towards the housing market. January’s numbers had been unusually strong with a 5.6% m/m gain so it was always likely that the February numbers would show some pullback. The outturn was that Canadian municipalities issued $8.2 billion in building permits in February, only a 2.6% m/m drop. Single-family homes as well as the commercial and institutional components saw lower levels of construction intentions. The total value of building permits decreased in six provinces in February. The largest declines were in Quebec and Ontario, while Alberta reported the largest increase followed by Manitoba. A separate report from the Canada Mortgage and Housing Corp said housing starts slowed slightly in March. The seasonally adjusted annual rate of starts declined to 225,213 in March from February’s upwardly revised 231,026 had forecast a sharper decline to 218,000 homes.

More data on housing comes later this week. Thursday is new home prices and Friday is nationwide home sales. The Canadian Dollar opens in Asia this morning at USD/CAD1.2595, AUD/CAD0.9785 and GBP/CAD1.7860.