USD slips from recent highs ahead of FOMC announcements. GBP rallies after good earnings data but AUD and NZD continue to struggle
Wednesday 21 March, 2018
Daily Currency UpdateIt’s the Vernal Equinox in the Northern Hemisphere today as the Earth starts to tilt toward the sun, which means longer, lighter days and the official start of Spring, though don’t tell that to Bostonians or New Yorkers who are forecast to receive 8-12 inches of snow! When US Treasury Secretary Steven Mnuchin ventured to the Davos snow in late-January, he knocked the US Dollar index down from 90.10 to 88.25. It hasn’t quite regained all those losses but at one stage on Tuesday, the USD index was back on a 90 ‘figure’ for the first time in almost 3 weeks. This morning in Europe it has slipped around a quarter of a point to 89.75 as both the EUR and GBP have rallied, whilst USD/CAD is also around three-tenths down from the New York close.
In a CNBC survey of top Wall Street names, nearly three-quarters of respondents to the survey say they are now worried about a trade war. Despite the exemptions announced for Canada and Mexico, nearly two-thirds of the survey respondents, including economists, fund managers and strategists, see the president's trade policies as negative for overall economic growth, with 23% saying it's too soon to tell. 48% of respondents say the steel and aluminum tariffs that the president will implement will result in fewer U.S. jobs overall, with 3% seeing no effect on employment. Just 13% said they believe the tariffs will increase jobs. More than 80% said it would be negative for the U.S. to leave NAFTA, including 48% who say it would be "very negative."
The FOMC ends its two-day monetary policy meeting today; one of four such occasions each year at which it will release new staff economic projections and so-called ‘dot points’ which show members’ estimates of where official interest rates will be over the next 2-3 years. There will also be a Press Conference where the Chairman of the Board of Governors, Jerome Powell, will be questioned on the economic outlook and the prospects for future monetary policy. Before then, there are no data scheduled for release other than existing home sales and the Q4 current account balance. The USD index opens this morning in North America around 89.75.
Key MoversThe Canadian Dollar had a much better day Tuesday after its poor performance over the past week. For sure, USD/CAD is still on a 1.30 handle but the CAD improved on all its crosses and actually finished in top spot on our one-day table, marginally beating the US Dollar which took second place. GBP/CAD fell two-tenths of a point, AUD/CAD was down four-tenths whilst NZD/CAD tumbled seven-tenths.
In economic news, Statistics Canada reports that wholesale sales edged up 0.1% to $63.3 billion in January. Sales were up in four of seven subsectors, accounting for 66% of total wholesale sales.
Increases in the food, beverage and tobacco and the machinery, equipment and supplies subsectors were almost completely offset by declines in the building material and supplies and the motor vehicle and parts subsectors. Meantime, wholesale inventories rose for the second consecutive month, up 1.1% to a record $83.5 billion in January. Five of seven subsectors posted increases, representing 73% of total wholesale inventories. The inventory-to-sales ratio rose from 1.31 in December to 1.32 in January. This ratio is a measure of the time in months required to exhaust inventories if sales were to remain at their current level.
There are no Canadian data scheduled for release today. Bank of Canada Senior Deputy Governor Carolyn Wilkins will deliver a speech on Thursday, while domestic inflation data for February is due on Friday. The Canadian Dollar opens in North America at USD/CAD1.3035, AUD/CAD1.0020 and GBP/CAD1.8335.
After a fairly quiet start to the day on Tuesday, the euro turned lower once more and by the end of the day in New York had lost more than three-quarters of a cent to a 2 ½ week low just above 1.2240. Overnight in Asia and this morning in Europe, the EUR has rallied around 40 pips off its low but investors’ enthusiasm to drive it higher faded from its recent peak and the pair still hasn’t managed to climb back on to a 1.23 ‘big figure’ whilst EUR/CAD at 1.6010 remains around one and a quarter cents below Tuesday’s peak just under 1.6150.
The German Council of Economic Experts (GCEE) has this morning slightly revised upwards its growth forecast for 2018. The GCEE now expects real gross domestic product (GDP) to grow by 2.3 % in 2018 and 1.8 % in 2019. The main reason for the upward revision is the renewed improvement of the international economic environment. Its new report says, “After the strong growth of recent years, Germany is experiencing an economic boom. In this situation, the continuing expansionary monetary policy of the ECB contributes to the rise in the degree of overutilisation. Even more expansionary impulses will follow if CDU, CSU, and SPD implement the fiscal measures stated in their coalition agreement”. The GCEE has revised upwards its forecast for GDP growth in the euro area to 2.3% in 2018. It expects a growth rate of 1.9 % next year. Despite the upward revisions, the experts warned that, “Positive growth prospects should not obscure the fact that risks to the economic development have risen in recent times. Next to the election result in Italy and uncertainties about the outcome of the Brexit negotiations, the US announcement to increase customs tariffs on steel and aluminum weighs most heavily. A spiral of protectionist measures would have negative consequences both for the world economy and for the German economy.”
On Thursday we get to see the ifo Survey of businesses which has recently been incredibly upbeat in its numbers and commentary. It is not unusual to see a divergence between the ZEW and ifo surveys but if the ifo repeats the downbeat message from investors on Tuesday, the EUR is likely to remain under some near-term pressure. Before then, however, there is all the news from the Fed to digest this evening, whilst tomorrow morning brings the ‘flash estimates’ of the PMI Surveys in France, Germany and the Eurozone. The EUR opens in North America today at USD1.2280 and EUR/CAD1.6010.
The GBP has certainly had a spring in its step over the last 10 days. Although on Tuesday GBP/USD couldn’t maintain its hold on a 1.40 handle, this morning the pound is back at the top of our one-day performance table having made a fresh 4 ½ month high against the NZD and a fresh 20-month high against the AUD. GBP/CAD is up around a quarter of a cent on the day but still almost a cent below Monday’s 1.8400 peak.
There was arguably something for everyone in this morning’s UK labour market report, though on balance the message was definitely a positive one. Unemployment fell by 24,000 in the three months to January, based on a 144,000 increase in the working population and a 168,000 rise in employment. There were 32.25 million people in work, 168,000 more than for the previous 3-month period and 402,000 more than for a year earlier. The Office for National Statistics noted the employment rate (the proportion of people aged from 16 to 64 who were in work) was 75.3%, higher than for a year earlier (74.6%) and the joint highest since comparable records began in 1971. The unemployment rate, meantime, was 4.3%, down from 4.7% a year earlier and the joint lowest since 1975.
We wrote in our UK commentary this morning that, “In its February inflation report, it suggested that a 4.4% unemployment rate would begin to put upward pressure on wages. If this happens today, then the GBP might well find some more support.” The good news is that this is exactly what transpired. The new figures show that average weekly earnings for employees in Great Britain in nominal terms (that is, not adjusted for price inflation) increased by 2.6% excluding bonuses, and by 2.8% including bonuses, compared with a year earlier. The squeeze on real earnings hasn’t officially ended as today’s numbers were for January whilst the CPI data are for February. But, if the wage data are repeated next month, then the 12-month run of negative earnings growth will finally come to an end; a relief not just for workers, but also for the UK Government and the Bank of England whose forecasts of real pay growth have been consistently too optimistic. The British Pound opens in North America at USD1.4060, GBP/EUR1.1445 and GBP/CAD1.8305.
Price action in the Australian Dollar has been pretty negative recently. AUD/USD has fallen more than 2 cents in less than 5 full trading days, whilst AUD/GBP has fallen to just 0.5475; its lowest since the day of the UK referendum back in June 2016. Notably, we’ve now begun to see the AUD fall on days when the stock market has risen (like yesterday) as well as fall when there’s more of a general risk-off mood (as on Monday). AUD/USD yesterday again fell on to a US 76 cents handle and moved down to the lowest since the week before Christmas. This morning in Asia, it clawed its way back on to US 77 cents but hasn’t been able to sustain its very modest rally in the European session.
The analysts at NAB produce a series of economic indices to track the real-time performance of the Australian economy ahead of the official data releases. One of these is its Cashless Retail Sales Index which measures all cashless retail spending by consumers using debit and credit cards (both in person and online), BPAY and Paypal. Their index is derived from personal transaction data from NAB platforms (around 2 million transactions per day) and offers a 2-3 week lead on ABS retail trade data. The latest numbers showed annual growth in cashless sales continued to improve with growth of 9.4% y/y in February, up from 8.8% in January, and the fastest rate since mid-2016. The rate of growth of electronic transactions always outstrips that of official retail sales but when mapping their own data across, NAB estimate this implies a 0.7% monthly increase for the official measure.
In separate work over at Westpac, the six month annualised growth rate in the Westpac–Melbourne Institute Leading Index for Australia, which indicates the likely pace of economic activity relative to trend three to nine months into the future, rose from +0.68% in January to +1.30% in February; well above its recent average levels. However, this did not prevent a downbeat commentary from the team who noted, “The contribution to growth from the eight components of the Index emphasises the disproportionate impact of international factors. US industrial production (0.53 ppts) and commodity prices (0.40 ppts) explain 0.93 ppts of the overall 1.30 ppts reading. It is disappointing that only 0.18 ppts are contributed by the "domestic" components of the Index – consumer and employment confidence; dwelling approvals and hours worked. Of some concern is that recent prints of the Index have shown a marked deterioration in the contribution of the hours worked series (-0.19 ppt’s in February).” The Australian Dollar opens in North America this morning at USD0.7690, with AUD/NZD at 1.0725 and AUD/CAD1.0005.
After its decent start to the week on Monday. the New Zealand Dollar slumped to the bottom of our one-day performance table on Tuesday, falling against all the major currencies we follow closely here. AUD/NZD rose around 35 pips to 1.0690 but losses elsewhere for the Kiwi extended to as much as 0.4-0.5% against the GBP and USD. Indeed, NZD/USD again fell back on to a US 71 cents ‘big figure’ and went on to hit the lowest level since January 10th whilst NZD/CAD is at 0.9320 is more than one and a half cents below Monday’s peak.
Stats New Zealand released their annual migration figures earlier today. New Zealand saw a net gain of 68,900 migrants in the year ended February 2018, with 131,000 migrant arrivals and 62,000 migrant departures. This is the first time since May 2016 that annual net migration has been below 69,000. Annual net migration reached a record high of 72,400 in the July 2017 year, but has continued to slow since then. The lower annual net migration was mainly caused by an increase in non-New Zealand citizen migrant departures. There were 29,100 departures of non-New Zealanders in the February 2018 year, up 1.5 percent from the January 2018 year and up 22 percent from the February 2017 year. All migrant departures to Asia increased by 31 percent in the February 2018 year to 11,700. Nearly two-thirds of migrant departures to Asia were to China, India, Japan, and the Republic of Korea. In the year to February 2018, more New Zealand citizens left the country than returned, with a net loss of 800 people.
Acting RBNZ Governor Grant Spencer holds his last Board meeting this Thursday in Wellington but note that due to time differences, the results will be announced late afternoon in New York and Toronto. Mr. Spencer has had a distinguished career at the Central Bank: he was Deputy Governor and Head of Financial Stability from April 2007 until September 2017 whilst previous positions included Assistant Governor and Head of Economics. Not a single analyst expects any change in official interest rates at his last meeting, with most attention focused instead on the likely new Policy Targets Agreement between the Government and the Central Bank. The Kiwi Dollar opens in North America at USD0.7165 and NZD/CAD0.9320.
- USD/CAD: 1.2950 - 1.3095 ▼
- EUR/USD: 1.2240 - 1.2330 ▼
- GBP/USD: 1.3990 - 1.4130 ▼
- AUD/USD: 0.7620 - 0.7775 ▼
- NZD/USD: 0.7080 - 0.7200 ▼