NZD topped the FX charts on Tuesday. Now awaits Q4 employment report.
Wednesday 7 February, 2018
Daily Currency UpdateIf you want to get ahead take a holiday! The NZD jumped to the top of the one-day performance table even as markets locally were closed for the Waitangi Day holiday. The outperformance was driven by a sharp drop in the AUD/NZD cross rate which fell a full cent to a 6-month low of 1.0760 on talk of stop-loss orders being triggered on the break down from technical support around 1.0850.
Traders get back to work this morning to focus on the Q4 employment report. The published consensus is for the unemployment rate to be steady at 4.6% though analysts at both Westpac and BNZ forecast a small decline to 4.5%, which would be a new nine-year low. Westpac note that, “Job advertisements, benefit numbers and business opinion surveys all point to steady rather than rapid improvement in the jobs market over the quarter… The employment figures will undoubtedly come under more scrutiny this year, with diminishing slack in the labour market and a new Government focused on tipping the balance of power more towards workers.”
Once the employment report is out of the way, it will be time to look forward to the first RBNZ policy meeting of the year on Thursday. Analysts are unanimous that there will be no change in interest rates. Nor are they generally expecting much change to the Central Bank’s forecast track for interest rates, though the markets’ view on the timing of the first hike in early 2019 is a bit later than the RBNZ has so far penciled-in. Furthermore, ANZ note, “the spread between the New Zealand and US 10-year bond yield, at just 12bps, is the narrowest it has been since 1994. The 2-year swap differential has actually turned negative, with US 2-year bonds yielding 22bp more than their NZ equivalent.” The New Zealand Dollar opens in Asia today at USD0.7310 and AUD/NZD1.0785.
Key MoversAs the trading ranges in equity markets progressively narrowed through the Northern Hemisphere day, so too the non-USD currencies then stabilized and even found a bit of support. The low for AUD/USD in Sydney yesterday was around 0.7837 but the European low was just above 0.7840 and during the New York session the AUD managed to rally around half a cent. This brought to an end a run of six consecutive declines for the AUD/USD pair which had dropped almost 3 cents from its high back on January 26th.
The Statement released after first RBA Board meeting of the year seemed pretty upbeat overall. “The Bank's central forecast for the Australian economy is for GDP growth to pick up, to average a bit above 3 per cent over the next couple of years. The data over the summer have been consistent with this outlook. Business conditions are positive and the outlook for non-mining business investment has improved… Employment grew strongly over 2017 and the unemployment rate declined. Employment has been rising in all states and has been accompanied by a significant rise in labour force participation. The various forward-looking indicators continue to point to solid growth in employment over the period ahead, with a further gradual reduction in the unemployment rate expected.” The currency comment was reframed to mention the trade-weighted value of the AUD, which “remains within the range that it has been in over the past two years.”
Although the RBA made its usual reference that, “An appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast”, there was no sense at all in which this was a deliberate attempt to talk down the AUD. We’ll now have to wait for any further clues until Friday when it releases its latest Quarterly Statement of Monetary Policy. The Australian Dollar opens in Asia at USD0.7890, with AUD/NZD at 1.0785 and GBP/AUD1.7695.
Having broken down through USD1.40 on Friday evening, the Pound’s fall accelerated in Europe on Tuesday, reaching a low of 1.3855 during the London afternoon immediately prior to the opening of the US stock market. After a very sharp initial decline, equities were soon trading in the green and the strong bid to buy USD quickly disappeared. Though the pound ended the day down against the AUD, NZD, CAD and EUR, the so-called ‘cable rate’ was marginally up around 1.3970 even though it couldn’t get back on to a 1.40 big figure.
As political tempers run very high amongst members of the UK Government as well as its backbench MP’s, the Guardian newspaper carries this evening what it splashes as an exclusive report that, “Brussels will have the power to punish the UK at will during the Brexit transition period by closing off parts of the single market to British companies, according to a leaked legal document drawn up by the EU.” The leaked position paper, entitled Transitional Arrangements in the Withdrawal Agreement, lays out in legal language the EU’s terms for the transition period and says use of focused sanctions to “suspend certain benefits ... of the internal market”, would give the EU the freedom to punish the UK without prematurely terminating the transition period and risking damage to its economic interests. That is the type of threat which is hardly going to soothe nerves in the UK…
There are no major economic releases in the UK today but with growing tensions on all sides of the ruling Conservative Party, it would be no great surprise to see international investors hedging some of their GBP exposures after January’s sharp and generally unexpected rally. For today, the GBP opens in Asia at USD1.3970, GBP/AUD1.7715 and GBP/NZD1.9110.
With very real concerns that Tuesday might develop into another bloodbath for US equity markets, the US Dollar index against a basket of major currencies rose as high as 89.70 in the New York morning. This took it right back to the level at which it stood before US Treasury Secretary Mnuchin’s comments in Davos which so enraged ECB President Mario Draghi. As stocks regained early losses, so the USD was sold and the index gave back around half a point to 89.25 even as bond yields began to climb once more.
St. Louis Fed President James Bullard is not an FOMC voting member this year but markets are hanging on every clue they can. In a speech at the University of Kentucky’s College of Business and Economics, Bullard said higher wages was not a key driver of inflation. “I caution against interpreting good news from labor markets as translating directly into higher inflation… The empirical relationship between these variables [wages and inflation] has broken down in recent years and may be close to zero… Continued strong labor market performance is unlikely to translate into meaningfully higher inflation,” he concluded. We said here yesterday that, “It will be interesting to see if the speakers have soothing words for stock market investors or focus, instead, on the continued normalization of US monetary policy.” There are four more still scheduled this week but the first out of the traps was definitely in market-calming mode.
Messrs. Evans, Dudley and Kaplan are all due to give speeches Wednesday, though there are no top-tier US economic data releases scheduled. The USD index opens in Asia around 89.20.
As with most of the non-US dollar currencies, the low point for the EUR came early in the European afternoon as nervousness mounted around what lay in store for US equity markets. As a much feared 3rd day of extreme downside pressure failed to materialize, EUR/USD rallied from a low just above 1.2320 to just about regain a 1.24 handle late in the New York day.
When ECB chief Mario Draghi addressed the European Parliament in Strasbourg earlier in the week he said, “Our confidence that inflation will converge towards our aim of below, but close to, 2 per cent has strengthened, but… we cannot yet declare victory”. Monetary policy has been famously described as like pulling on a brick with a piece of elastic. You pull and pull and nothing happens, then suddenly it hits you in the face. It seems a particularly good time to recall this analogy after Tuesday’s German Construction PMI which rose sharply from 53.7 in December to 59.8, its highest reading since March 2011 (and the joint-fourth best seen since the survey began in late-1999). A warmer than usual January resulted in a sharp and accelerated increase in total industry activity across Germany’s constructor sector and housing and commercial activity rose at some of the fastest rates seen in the survey’s 18 ½ year history, while growth in new orders was at a record-high.
In other news, Reuters reported that, “Industrial workers and employers in southwestern Germany struck a hard-fought deal on pay and working hours on Monday night, setting a benchmark for millions of workers across Europe’s largest economy”. The agreement between labor union IG Metall and the Suedwestmetall employers’ federation foresees a 4.3% pay increase from April and other payments spread over 27 months. Analysts calculate it is equivalent to a 3.5% annual raise The EUR opens in Asia at USD1.2400, AUD/EUR0.6360 and NZD/EUR0.5895.
The Canadian Dollar gave up its hold on US 81 cents on Friday immediately upon publication of the US employment report and on Monday, it lost its hold on 80 cents too. With the US Dollar generally well-bid, and as WTI crude oil extended its decline to almost $3 per barrel down over the last three days, so the CAD has struggled. From its low point on Friday in Asia of 1.2260, USD/CAD rose exactly 3 cents to a 3-week high of 1.2560.
In economic news, Statistics Canada reported the country's merchandise trade deficit increased to $3.2 billion in December as rising imports outpaced export growth. This was at odds with consensus forecasts that the deficit would be smaller than November’s $2.7bn. Total imports increased 1.5 per cent to a record $49.7 billion in December, boosted by higher imports of energy products and industrial machinery, equipment and parts. Meanwhile, total exports rose 0.6 per cent to $46.5 billion driven by higher exports of energy products and metal and non-metallic mineral products. The bilateral trade surplus with the United States rose slightly to $3.42bn with exports and imports both falling a little during the month. Overall, there was nothing to ring any immediate alarm bells over NAFTA.
After the trade numbers, the next big event in domestic economic news this week will be the employment report on Friday. Two consecutive blockbuster jobs numbers prompted the Bank of Canada rate hike in January, though a third strong print would be a mighty surprise. Consensus is looking for only a 10k rise after a 78k gain in December. The Canadian Dollar opens in Asia today at USD/CAD1.2530, AUD/CAD0.9875 and NZD/CAD0.9150.
- NZD/AUD: 0.9215 - 0.9300 ▼
- GBP/NZD: 1.8980 - 1.9190 ▼
- NZD/USD: 0.7250 - 0.7350 ▼
- NZD/EUR: 0.5850 - 0.5920 ▼
- NZD/CAD: 0.9100 - 0.9230 ▼