Political drama on both sides of the Atlantic but currency markets are very calm
Thursday 15 March, 2018
Daily Currency UpdateWe wondered yesterday morning whether the British Pound could hold onto the gains made on the back of the Chancellor’s Spring Statement. As we noted here, “Rarely has such poor news been so well received; both by backbench MP’s and a usually more skeptical foreign exchange market”. On Wednesday it seems the market had second thoughts and it was only the weakness of the EUR which prevented the GBP from taking bottom spot on our one-day performance table. It’s trading range against the USD was only a little over half a cent from high to low but the pound lost between one and three-tenths against most of the major currencies we follow closely here. Overnight in Asia it has steadied around the New York closing levels in what has been an unusually quiet and news-free session.
With no official economic data released on Wednesday and none scheduled for today, the news agenda in London was dominated by a furious row between the UK and Russia which ended with the expulsion of 23 Russian diplomats. This is likely to overshadow preparations for next week’s EU Summit and is already showing a fractured response by UK allies in Europe. In contrast to German chancellor Angela Merkel and US president Donald Trump who assured British Prime Minister Theresa May they were taking her government’s views on possible Russian involvement in an alleged assassination attempt extremely seriously, President Emmanuel Macron and other French officials have declined to mention Russia directly.
There is a more serious split potentially between the two major parties in the UK, with the opposition Labour Party being much more hesitant and circumspect in criticizing Russia than the ruling Conservative-led Coalition Government. How all this plays out is impossible to predict, but it serves to show how even in an age of careful news-management, unforeseen events can introduce a huge degree of political and economic uncertainty into financial markets.
Key MoversThe US Dollar ended Wednesday little changed as a generally weaker EUR offset a stronger CAD on the USD index. Having opened in Asia around 89.25, it fell to a low of 89.05 before rallying up to a high just above 89.40 then closing around the mid-point of its daily trading range. Overnight in Asia the USD has been essentially unchanged with its index against a basket of major currencies stuck at 89.25.
The US political circus show seems to have many rings, with plenty of action to occupy the spectators in each one. Around lunchtime in New York, it was reported by CNBC that President Donald Trump plans to name Larry Kudlow as his top economic advisor to replace Gary Cohn, who left the White House earlier this month amid disagreements about tariffs on steel and aluminum imports. Separately, it was reported by the New York Times that that Attorney General Jeff Sessions is reviewing a recommendation to fire the former FBI deputy director, Andrew G. McCabe, just days before he is scheduled to retire on Sunday. Rounding out a busy day, in a statement on the USTR website, Trade Representative Robert Lighthizer announced that the United States has requested dispute settlement consultations with the Government of India at the World Trade Organization (WTO) challenging Indian export subsidy programs.
In economic news, US retail sales fell for a third straight month in February as households cut back on purchases of motor vehicles and other big-ticket items. The Commerce Department said retail sales fell 0.1% last month against consensus expectations of a +0.3% monthly rise. It was the first time since April 2012 that retail sales have declined for three straight months. After the numbers were published, the Atlanta Fed yet again slashed its Q1 GDP forecast; this time from 2.5% to just 1.9%. As recently as end-January, the model was signaling a 5.4% pace of growth in Q1. Later today we’ll have two surveys of business activity: the Philly Fed and Empire Manufacturing reports as well as the NAHB housebuilders index. The US Dollar index opens in Europe this morning around 89.25.
The EUR came under steady pressure in the Northern Hemisphere on Wednesday, falling to a low in the European afternoon of 1.2350 and taking bottom spot on our one-day currency performance table. It has traded pretty much sideways in a very tight range in Asia overnight, with little enthusiasm from investors to push it one way or another.
Speaking to the annual “ECB Watchers” conference in Frankfurt, its President Mario Draghi said the European Central Bank will avoid surprising investors with sudden changes to its stimulus plans, stressing that inflation is still too low and US trade policies and a stronger euro are concerns. “Adjustments to our policy will remain predictable, and they will proceed at a measured pace… We still need to see further evidence that inflation dynamics are moving in the right direction. So monetary policy will remain patient, persistent and prudent.” Speaking about US trade tariffs, he said that while the initial impact is likely to be small, “there are potential second-round effects that could have much more serious consequences. These include the risk of retaliation across other goods and an escalation of trade tensions, and the potential for negative confidence effects which would weigh on business investment in particular.”
In a separate interview in Dublin, Governing Council member Philip Lane who heads Ireland’s Central Bank said the European Central Bank must keep its guard up against the risk of a sudden appreciation in the euro. “There’s no concern about the current level. But if it moves a lot within a short time interval then you have to think about the implications.” Repeating this message, Mr Draghi said that “any further sharp repricing” must be watched carefully. The EUR opens in London this morning at USD1.2370 with GBP/EUR again in the high-1.12’s.
Once more, the high of the US equity market on Wednesday coincided almost exactly (in fact within 10 minutes) of the high of the AUD/USD exchange rate. The Aussie Dollar rose steadily through the European morning to reach a best level at 12.20pm of 0.7910; the first time it had been back on a 79 cents ‘big figure’ since February 20th. From its level at that point of 25,110, the Dow Jones Industrial Average then fell almost 430 points over the next 4 hours, dragging AUD/USD down to a low of 0.7870. Overall, however, the Aussie has been pretty resilient. The US stock market is this morning almost exactly where it was immediately prior to Friday’s US labour market numbers but AUD/USD is still three-quarters of a cent higher.
In a very tough statement issued today, the Australian prime minister Malcolm Turnbull and the foreign minister Julie Bishop said British prime minister Theresa May had “made a compelling case on the responsibility of the Russian state for this attack in an unlawful use of force by Russia against the United Kingdom and her people”. The statement said Australia was “gravely concerned that a military-grade nerve agent developed by Russia” was used in an attack on British soil, and “we share the UK’s outrage over this targeted attempt to commit murder using chemical weapons”. Turnbull and Bishop said Australia supported the May government’s efforts to investigate and bring the perpetrators to justice, and also backed the UK’s right to take “retaliatory measures, including its decision to expel 23 Russian diplomats and to call for an emergency session of the UN Security Council”. Australia is considering its options by way of response, in coordination with the UK government and other allies
In the only incoming economic data today, expected inflation rate as represented by the Melbourne Institute Survey of Consumer Inflationary Expectations, increased by 0.1 percentage points in March to 3.7% from 3.6% in February. Total pay growth over the 12 months to March 2018 increased to 2.0% from the December quarter reading of 1.5% although respondents appear cautious about future wage growth; expectations for pay growth in the next 12 months fell to 1.8% from 2.4% in the previous quarter. The Australian Dollar opens this morning in the mid-USD78’s with GBP/AUD at 1.77.
As markets continued to digest Tuesday’s speech from Bank of Canada Governor Stephen Poloz, the CAD stabilised yesterday after its initial sharp losses. USD/CAD opened around 1.2955 and traded in a relatively tight 40 pip range throughout the Northern Hemisphere day, finishing towards the lower end of its trading band around the 1.2940 mark. GBP/CAD is still within a few pips of this week’s 20-month high of 1.8125 which was its best level since the day after the UK referendum on Brexit back in March 2016.
Canadian Prime Minister Justin Trudeau said yesterday that he was “very optimistic” of a successful result for his country, the United States and Mexico as they renegotiate the North American Free Trade Agreement. Speaking in a Bloomberg TV interview, he said there was an “eminently achievable win-win-win” result available, and that NAFTA has been good for all three countries. Analysts locally don’t share his optimism and are busy revising down their Canadian Dollar forecasts. TD Securities, for example, write that, “CAD is on the cusp of a renewed down-leg. Though there was no new substantive information in Governor Poloz's speech, the market appears to have finally heeded the message that there is no urgency for the Bank to tighten anytime soon. We continue to view July as the earliest hike… We have recently noted that the market needs to curb its enthusiasm in CAD; economic growth should decelerate while Canada's largest trading partner is leaning towards more protectionist policies. NAFTA negotiations remain unresolved and still far apart on the contentious issues.”
Thursday brings existing home sales data in Canada; these fell 14.5% in January from December to the lowest monthly level in three years as tighter mortgage rules hit demand. New and tougher rules on mortgage lending were imposed at the start of January amid fears of a housing bubble, requiring lenders to “stress test” borrowers to ensure they could withstand higher interest rates. The changes mean fewer buyers qualify for loans. The Canadian Dollar opens in Europe this morning with USD/CAD in the mid-1.29’s and GBP/CAD at 1.81.
The New Zealand Dollar underperformed its Aussie cousin on Wednesday. The peak of NZD/USD actually came during the Asian session around 0.7350 and at the time of the peak in AUD/USD, it had fallen short of this level by around 10 pips. Its subsequent decline extended only another 20 pips, however and the Kiwi has now remained on a 73 cents ‘big figure’ ever since late Tuesday morning; a notable period of calm for this recently very volatile currency.
The long-awaited Q4 GDP figures released earlier this morning fell short of consensus expectations. Most of the banks locally had penciled-in growth of 0.7% but the New Zealand economy actually
grew 0.6% in the final three months of 2017, the same pace as the previous quarter. Although the year-on-year rate accelerated to 2.9%, it was also below the 3.1% expansion expected by economists. For the full year 2017, the economy grew by 2.9%, down from 4% in 2016. According to the officials at StatsNZ, “Hot, dry weather appeared to have a negative impact this quarter on agriculture production, which fell 2.7%. Falling milk production was reflected in lower dairy manufacturing and dairy exports.” The statisticians said that household expenditure - the largest part of the New Zealand economy at around 60% - grew by 1.2% over the quarter. “Households ate out more and spent more on groceries and alcohol. This fueled increased retail trade activity, with food and beverage services and supermarkets experiencing growth.”
Today’s numbers effectively draw the line under 2017 and it’s only a couple of weeks until the end of the first quarter of 2018. Tomorrow we’ll get the performance of manufacturing numbers for February and next week there’s an RBNZ meeting. For now, the Kiwi Dollar opens in London this morning in the low-USD 73’s with GBP/NZD just under 1.91.
- GBP/USD: 1.3930 - 1.4060 ▼
- GBP/EUR: 1.1255 - 1.1380 ▼
- GBP/AUD: 1.7720 - 1.7820 ▼
- GBP/CAD: 1.8040 - 1.8185 ▼
- GBP/NZD: 1.9030 - 1.9130 ▼