Higher AUD/NZD pressures NZD on its crosses.
Tuesday 13 February, 2018
Daily Currency UpdateThe Kiwi Dollar has been pretty much out of the spotlight given the volatility in global equity markets and most of its movement is being driven by the AUD/NZD cross than by any great shift in sentiment or investor appetite elsewhere offshore. Last Tuesday saw the pair hit a 6-month low of 1.0750 but having opened in Sydney yesterday around 1.0775, it then rallied almost half a cent to 1.0825. This move pressured the NZD/USD rate from a high around 0.7270 back to Friday’s closing level of 0.7245.
Statistics New Zealand reported yesterday that consumers spent more on eating out and on hardware, furniture, and appliances in January 2018. This contributed to a 1.4% rise in total retail card spending in the month, when adjusted for seasonal effects. Spending rose across four of the six retail industries last month. The largest movements were: hospitality, up $15 million (1.5%) durables, including hardware, furniture, and appliances, up $14 million (1.2%) and fuel, up $9.0 million (1.5%). Core retail spending (which excludes the vehicle-related industries) rose 1.0% in January, after a 0.2% fall in December 2017. Cardholders made 141 million transactions across all industries in January with an average value of NZ$50 per transaction. The total amount spent across all transactions was NZ$7.0 billion.
There is no economic data scheduled today but on Wednesday it’s food price inflation and the RBNZ’s own quarterly survey of inflation expectations which is released midweek. In last month’s survey the one and two-year expectations were at 1.87% and 2.02% respectively. The New Zealand Dollar opens in Asia this morning at USD0.7245 and AUD/NZD1.0825.
Key MoversThe Australian Dollar actually finished top of our one-day performance table on Monday, though this might tell us more about how surprisingly quiet foreign exchange markets were than anything particularly new or insightful about the AUD itself. The scale of the absolute movements certainly wasn’t very impressive. AUD/USD opened in Sydney at 0.7810 and closed in New York barely 40 pips higher around 0.8150. Volatility as measured by the VIX index fell back two points to 25.2 and US 10-year Treasury yields edged down around 3bp from their 2.89% intra-day high; both of which helped the Aussie a little. It’s probably also the case that market positioning was still net short after the equity market decline of the last 10 days and there may have been some buying to square off these positions.
Commonwealth Bank of Australia was quoted on newswires yesterday reaffirming their view that the AUD will strengthen this year. This is predicated on ongoing US Dollar weakness as the global economy continues to recover, which will support commodity prices. The bank says, “Leading economic indicators like the global manufacturing PMI remain consistent with world GDP growth of 3.6% and 3.4% in 2018 and 2019 respectively [but] we do not expect the Fed to shift to tight monetary policy settings and aggressively lift the target range for the funds rate — currently at 1.25-1.50% — above the neutral nominal policy rate of roughly 2.75% because of soft US inflation”. As for their exchange rate forecast, “Our base case scenario remains for AUD/USD to trade closer to 0.8300 by year-end.”
The main domestic highlight today in terms of economic data is the NAB monthly business survey. Most attention always focuses on the headline-grabbing numbers around business confidence and conditions though there should be more interest on capacity utilization and wage costs given that RBA policy this year will be determined more by the inflation outlook than by absolute levels of activity in the economy. The Australian Dollar opens in Asia at USD0.7850, with AUD/NZD at 1.0825 and GBP/AUD1.7620.
By the time London traders headed for the train home, the DJIA was up almost 400 points so judged against this rally, the pound’s performance was pretty uninspiring. GBP/USD ended the day barely 20 pips higher around 1.3835, with the GBP losing ground against both the EUR and the AUD, though up against the CAD and NZD.
In UK economic news, household spending fell by 1.2% in January compared with 12 months ago, according to research by Visa, the payments business. It is the first time that there has been a decline at this time of year since 2013. Individuals’ spending has now fallen in eight of the past nine months, with clothing, furniture and household goods bearing the brunt of consumers’ caution, according to figures on spending on Visa cards, which account for more than £1 in every £3 spent in the UK. Analysts at Markit, who compiled the survey said, “Subdued spending trends coincide with a slowing of the overall UK economy during 2017. Lingering uncertainties around the outcome of the Brexit negotiations are also weighing on consumer confidence, which has stayed well below the levels seen prior to the 2016 Brexit vote.”
Speaking to MP’s yesterday, BoE MPC member Gertjan Vlieghe expanded somewhat on the conditions that might see a rate hike postponed, saying the Bank of England would likely reconsider its assumption of a “smooth” transition to Brexit if a breakdown in talks between London and Brussels causes big shifts in financial markets and economic indicators. Vlieghe said the Bank would watch surveys of businesses and households for big moves if expectations of a disorderly exit from the European Union became widespread. “And that might be the kind of material change that we’d (need to see to) say our assumption of ... a smooth transition is clearly not tenable any more.” The big event on Tuesday in the UK will be the January CPI figures. Inflation last month slowed from 3.1% to 3.0% and consensus looks for another drop to 2.9% in January. With BoE interest rate policy now aligned very closely with current and expected inflation, it should be a straight read-across for the GBP. The pound opens in Asia this morning at USD1.3835, GBP/AUD1.7625 and GBP/NZD1.9080.
The big question for Monday was whether buyers would step into the equity market even after its sharp reversal higher on Friday afternoon in New York. The answer most definitely was ’yes’. DJIA futures were up 175 points by the time of the London opening, 200 points at the opening bell on Wall Street and then 500 points higher early in the New York afternoon. Indeed, the Dow Jones is now up more than 1500 points from last week’s low; having regained almost 50% of its entire peak-to-trough losses. Against this background, it could be said that the US Dollar actually did well to limit its losses to less than half a point on its index against a basket of major currencies. The high last Thursday was 90.25 - its best level since before Treasury Secretary Mnuchin’s comments in Davos two weeks’ earlier – and the USD has retraced only slightly to 89.80.
US total government debt today stands at $20.49 trillion. The White House Office of Management and Budget yesterday released proposals under which the debt is projected to rise almost 50% over the next decade to $29.9tn in 2028. The annual increases in total debt are sequentially lower but even in Year 10, are projected to add some $352bn to the total stock of debt. The US Government has abandoned all pretence at a balanced budget. Along with the borrowing proposals, the US Administration also published its detailed infrastructure plans. According to Goldman Sachs who have the resources, expertise and connections to know such things, “the low odds of enactment this year have not changed, in our view…in light of the need for 60 votes in the Senate, a lack of bipartisan consensus regarding the appropriate structure for federal infrastructure funds, and political considerations ahead of the upcoming midterm election”. Whilst the odds of enactment are low, the odds of a US debt downgrade seem to be high and rising. Credit ratings agency Moody’s didn’t join S&P in downgrading the US in August 2011 but it seems to be hinting very strongly that it will now do so. Whether or not it actually matters is another question…
Today in the United States we have the NFIB small business survey which contains an important question on earnings. Last month’s Press Release breathlessly said that, “With a massive tax cut this year, accompanied by significant regulatory relief, we expect very strong growth, millions more jobs, and higher pay for Americans… There’s a critical shortage of qualified workers and it’s becoming a real cost driver for small businesses… They are raising compensation for workers in order to attract and keep good employees, but that’s a positive indicator for the overall economy.” The earnings trends number in the December survey was down 5 points to -15. This could be a key data point today. The USD index opens in Asia around 89.80.
Monday was another day when the DJIA moved at least 500 points but, once again, EUR/USD remained firmly on a 1.22 ‘big figure’, albeit the pair ended almost half a cent up from its opening level in Sydney. As the end of the day approached in New York, the EUR had gained against every major currency except the Aussie Dollar and finished in second place on our one-day performance table.
After all the criticism of the Coalition agreement negotiation by Angela Merkel, in a prime-time ZDF television interview on Sunday, she defiantly brushed aside any suggestion of quick change. “I ran for a four-year term. I promised those four years and I’m someone who keeps promises. I totally stand behind that decision.” Giving Finance to the Social Democrats is “acceptable” and “European policy will be formulated jointly” within the government, limiting the SPD’s ability to set the agenda, Merkel said.
The world’s biggest hedge fund, Bridgewater Associates, disclosed it now has wagers valued at more than $14 billion that stocks in the Eurozone will decline. The value of the firm’s short bets in Europe has more than quadrupled this month and as well as selling Italian companies ahead of the March elections, it is also betting against energy, manufacturing and construction firms in Europe. There are no economic statistics scheduled for release in the Eurozone today and the EUR opens in Asia at USD1.2285, AUD/EUR0.6385 and NZD/EUR0.5900.
On both Thursday and Friday last week, USD/CAD briefly broke through the upper end of its 2018 trading range from the mid 1.22’s to the high 1.25’s. Yesterday, too, it regained 1.26 but this time managed to stay there, as investors began to take notice of a near-10% weekly drop in crude oil prices. This has taken WTI down from a recent high of $66.50 per barrel on January 25th to just under $59.15 this morning.
Over the weekend, Canadian Prime Minister Justin Trudeau finished a 3-day trip to Chicago, San Francisco and Los Angeles as he attempts to win support from US lawmakers and businesses to keep President Trump from pulling out of the North American Free Trade Agreement. As reported by Bloomberg, Trudeau spoke on Friday night at the Ronald Reagan Presidential Foundation & Institute, where he hailed Canada-US ties. He recalled meeting Reagan when Trudeau’s own father, Pierre, was Canada’s prime minister. “I’d just received a master’s class in political charisma, and one I like to think kind of stuck,” he said. In Los Angeles he said he didn’t “think anyone can now entirely predict or understand” the impacts on the three countries if NAFTA were to end. “This accord should and can be modernized and updated, with effort, hard work and willingness to compromise on all sides, this is eminently achievable. If trade between Canada and the US is a bad idea, then there are no good ideas.”
The Bloomberg Nanos Canadian Confidence Index showed continued negative pressure for the sixth week in succession. The BNCCI, a composite of a weekly measure of financial health and economic expectations, registered 58.59 compared with last week’s 58.98. The twelve-month high stands at 62.17. "While household balance sheets remain better off than last year, consumers are factoring in expectations of slowing growth for the economy and real estate holdings, and slightly more risk to their employment situation. It’s likely that any additional financial stress will have a knock-on effect on household consumption”, said the authors of the report. With no further economic news scheduled for Tuesday, the Canadian Dollar opens in Asia at USD/CAD1.25605, AUD/CAD0.9885 and NZD/CAD0.9130.
- NZD/AUD: 0.9185 - 0.9300 ▼
- GBP/NZD: 1.9100 - 1.9340 ▼
- NZD/USD: 0.7180 - 0.7260 ▼
- NZD/EUR: 0.5860 - 0.5935 ▼
- NZD/CAD: 0.9025 - 0.9180 ▼