GBP had a very strong day on Monday and opens firm ahead of UK employment and average earnings data.
Tuesday 17 April, 2018
Daily Currency UpdateThe British Pound had a very good day on Monday, rising against all the major currencies we follow here. Its’ gains ranged from 0.2% against the EUR to 0.4% against the AUD and 0.6% versus the US Dollar. GBP/USD came out of the blocks pretty strongly in Asia, moving from 1.4240 on to a 1.43 ‘big figure’ by the middle of the European morning. By the afternoon, it had made a fresh high just above 1.4330; its best level since the day of the EU referendum back in June 2016. EUR/GBP couldn’t quite reach 1.16 but GBP/AUD is up at 1.84. Overnight in Asia, the GBP is steady against the EUR but has extended its gains versus the other currencies, albeit mostly remaining on the same big figures as at last night’s close.
Yet again, the pound’s move was not driven by any strong incoming economic data or news flow. Instead, it appears to be in one of those phases where it is going up because it is going up: momentum-driven investors are riding its strength and in turn attracting fresh capital inflows as previous technical resistance levels are overcome. Latest figures from Visa show uncertainty surrounding Brexit, wage stagnation and creeping inflation are all weighing on consumer confidence, which has contributed to the largest quarterly fall in spending — of 1.4 per cent — since the final quarter of 2012. Consumer spending fell in all three months of the first quarter, with the rate of decline steepening from 1 per cent year-on-year in February to 2.1 per cent in March.
This morning we’ll get to see if the Sunday Times was indeed correct in its claim that, “figures out on Tuesday are expected to show that average wages in February climbed 3% on a year earlier, the first time pay growth has outpaced the rise in consumer prices since January last year.” The claimant count of the jobless total is expected to have risen by 5k with the unemployment rate steady at 4.3%. The Pound opens in Europe this morning with GBP/USD in the high-1.43’s with GBP/EUR in the high-1.15’s.
Key MoversThe US stock market had another good day on Monday with the DJIA up over 200 points and the S&P 500 index more than 20 points higher as worries over a possible escalation of the Syrian missile crisis seemed to quickly fade. After a higher open for index futures, the mood in Asia had been one of some caution but as neither index broke below Friday’s closing levels, so the early gains were progressively extended into the North American afternoon. Whilst the stock market did quite well, however, the US Dollar went into reverse. From an opening level around 89.40, the dollar index slipped steadily lower and at one point fell on to an 88 ‘big figure’ for the first time in over two weeks before rallying very marginally to close at 89.00. Overnight in Asia, the index has fluctuated in a very narrow band either side of 89.00 but still feels vulnerable to a downside break.
In economic data, the US Empire manufacturing survey saw the business conditions index slide to 15.8 in April from 22.5 in March. The new orders index fell to 9.0 from 16.8, while the shipments index declined to 17.5 from 27.0, and unfilled orders decreased to 3.7 from 12.7. Looking six months into the future, the general business conditions index plunged to 18.3 from 44.1 last month whilst the new orders index decreased to 18.5 from 43.0. Separate data showed U.S. retail sales rebounded in March after three straight monthly declines as households boosted purchases of motor vehicles and other big-ticket items. The Commerce Department said retail sales increased 0.6% last month after an unrevised 0.1% drop in February. Excluding automobiles, gasoline, building materials and food services, the so-called core retail sales - which correspond most closely with the consumer spending component of gross domestic product - rose 0.4% last month after being unchanged in February.
Kicking off a busy week of Fed speakers, Federal Reserve Bank of New York President William Dudley popped up on CNBC to say the central bank will stay on its gradual path of raising interest rates unless inflation moves up by an appreciable margin. “I don’t think we know exactly how many more rate hikes we are going to do this year… As long as inflation is relatively low, the Fed is going to be gradual. Now, if inflation were to go above 2 percent by an appreciable margin, then I think the gradual path might have to be altered.” In separate Fed news, President Donald Trump is expected to nominate Pimco executive Richard Clarida as vice chair of the Federal Reserve and Michelle Bowman, Kansas bank commissioner, who the president picked for an open governor's spot. Bowman's seat is reserved for a community banker or community bank regulator. Both nominees must be confirmed by the Senate before taking up their respective roles. The USD index opens in Europe this morning at 89.00.
Through the first 8-10 hours of trading on Monday morning, EUR/USD was net unchanged around 1.2330, having been stuck in a very narrow range throughout the Asian session. Through the European morning, however, the pair began to rally quite sharply and by early afternoon had gained more than half a cent to 1.2390; just above last Wednesday’s high and the best level in 2½ weeks. The EUR gained against the AUD, NZD and CAD also but couldn’t keep pace with the strength of the GBP and finished in second place on our one-day performance table. Once again this Tuesday morning, Asia has been the graveyard of FX volatility with just 10 pips separating the high and low of EUR/USD which opens around 1.2385.
According to the latest Reuters poll, Eurozone economic growth, already moderating in part from a stronger currency, will take a further hit from the ongoing trade dispute between the United States and China. While the consensus for growth in the latest poll of over 100 economists taken April 6-16 was little changed from a poll last month, the dispersion has increased and the range of forecasts shows lower highs and lower lows for growth in the region compared with last month. Full-year GDP growth is expected to average 2.3 percent this year and 2.0 percent next whilst inflation is predicted to average 1.5 percent this year, 1.6 percent next and 1.7 percent in 2020.
The next ECB Council Meeting is on Thursday April 26th so there are only another two days before it goes into self-imposed radio silence on the subject of monetary policy. In the Reuters survey noted above, the central bank is forecast to take its deposit rate 15 basis points higher to -0.25 percent in the second quarter next year, as it was in the previous poll. The ECB is also expected to hike its refinancing rate in the final quarter of next year, a quarter later than forecast last month. After a totally empty economic data calendar on Monday, today brings Germany’s ZEW survey. The EUR opens in London this morning at USD1.2385 with GBP/EUR in the high-1.15’s.
The Australian Dollar has been unsure quite what to focus on: the rally in US equity markets and the consequent drop in the VIX index of volatility, an unchanged gold price or incoming economic data from its largest trading partner, China. AUD/USD therefore swung up and down quite a few times across the three main time zones on Monday before finishing on balance very little changed around 0.7775. It gained against the NZD but lost ground against the EUR, CAD and GBP. Overnight it has moved lower against everything except the NZD, albeit trading ranges have been pretty limited.
The RBA Board Minutes offered no great surprises, though your author was struck by a few phrases which could be interpreted quite dovishly. Most notably, the conclusion that, “In current circumstances, members agreed that it was more likely that the next move in the cash rate would be up, rather than down” is an explicit mention of the possibility of a cut in rates, even if it is the ‘straw man’ to be set up and then knocked over. Certainly, there was no sense of urgency in changing monetary policy. “Forward-looking indicators suggested that spare capacity in the labour market would continue to decline gradually over 2018. Consequently, wages growth was expected to rise gradually from its current low rate. Low growth in labour costs in combination with strong competition in the retail sector suggested that inflation would remain low for some time before also picking up gradually as the economy and labour market strengthen.”
The RBA noted that, “The low level of interest rates had supported growth over 2017, which had reduced the unemployment rate and brought inflation closer to the target. Further progress on these goals was expected in the period ahead, but this progress was likely to be gradual. Over 2018, GDP growth was expected to exceed potential growth and CPI inflation was expected to increase gradually to be a little above 2 per cent. Members noted that an appreciation of the Australian dollar would be expected to result in a slower pick-up in economic activity and inflation than forecast.” Eagle-eyed readers will have spotted the use of the word ‘gradual’ five times in just two paragraphs! It should not be difficult for markets to take the hint, whilst anyone expecting a rate hike any time soon will be left in an even more uncomfortable position now. The Australian Dollar opens this morning in Europe in the high-USD 77’s with GBP/AUD in the mid-1.84’s.
The Canadian Dollar continued its good run on Monday, almost tying with the EUR for second place in our one-day table and gaining ground against the AUD, NZD and US Dollars. USD/CAD began the week around 1.2605 and having moved to a high around 1.2625 by the end of the Asian session, then fell all the way down to 1.2565; barely 10 pips above last Friday’s 2-month low. The Canadian Dollar could not keep pace with the strength of the pound, however, and GBP/CAD moved back on to a 1.80 ‘big figure’ for the first time in a week; reaching a high just above 1.8040.
In political news, Canadian Prime Minister Justin Trudeau has been forced to intervene in a dispute between the provinces of British Columbia and Alberta over plans to expand an existing pipeline and lay nearly 1,000km of new pipe from Alberta’s oil sands to the Pacific coast. The political stalemate over the C$7.4bn project became a national issue last week after contractor Kinder Morgan Canada announced it would walk away from the project unless it saw a clear path to completion by the end of May. Mr.Trudeau and his Liberal government came into office in 2015 on promises to strike a balance between economic growth, environmental concerns and repairing the country’s fraught relationship with indigenous peoples. The move by Kinder Morgan Canada, which was spun off by its U.S. parent last year, puts pressure on Trudeau to solve the problem without alienating voters in British Columbia or presiding over an investment failure ahead of 2019 elections. It is a delicate balancing act and one which could at the very least cast some doubt over the durability of the Canadian Dollar’s recent rally should it escalate from a domestic concern to gain more international attention.
The Bank of Canada holds its monetary policy meeting on Wednesday having already hiked rates three times since July 2017. Economists from 10 of the 11 primary dealers of Canadian government securities told the Wall Street Journal they anticipate the BoC will keep its key rate at 1.25% this week. A majority of those surveyed said they expect at least one more interest rate increase during the second half of 2018. The Canadian Dollar opens in Europe this morning with USD/CAD in the high-1.25’s and GBP/CAD in the low-1.80’s.
The New Zealand Dollar had a disappointing session in Asia on Monday but then regained all its losses against the USD, even if it remained lower against all the other major currencies we follow closely here. NZD/USD fell from 0.7355 to a low at lunchtime in Europe of 0.7335 but by the time European traders headed home, it had bounced back to 0.7365. Overnight the pair has lost around a quarter of a cent and as trading begins in Europe, the Kiwi Dollar is in bottom spot on our one-day performance table.
In economic data, New Zealand’s performance of services index rose 3.5 to 58.8 in March, signaling the fastest pace of expansion since January 2017. The analysts at BNZ who compile the survey noted that, “Sales activity drove the strength, with this sub index rising to 64.1 – near its highest level since the survey started 11 years ago… At least some of the March strength is likely a bounce back from a soft February. We have seen a similar pattern of a softer February followed by a strong March in other indicators like electronic card transactions. At this point, a stronger PSI is pleasing to see, especially in the context of the slowing we saw in last week’s Performance of Manufacturing Index. Combined, these indicators suggest reasonable GDP growth has continued into 2018.”
In other news today, the Real Estate Institute of New Zealand (REINZ) said t that the median house price for New Zealand rose 1.8% in March 2018 to reach a new record high of $560,000 up from $550,000 in March 2017. Prices in Auckland fell 2.2% year-on-year to $880,000 but this was compared to March 2017 which saw the region experience the record price of $900,000. The REINZ said, “March was a very strong month from a price perspective with record prices achieved for New Zealand, New Zealand excluding Auckland, Gisborne, the Hawke’s Bay and Wellington. Looking at the whole country, median house prices increased in 13 out of 16 regions.” The number of properties sold in March across the country fell by 9.9% when compared to the same time last year with 7,768 properties sold in comparison to 8,622 in March 2017 which was the highest month for sales volume in 2017. The Kiwi Dollar opens in London this morning at USD.7345, with GBP/NZD around 1.9540.
- GBP/USD: 1.4300 - 1.4400 ▲
- GBP/EUR: 1.1560 - 1.1650 ▲
- GBP/AUD: 1.8410 - 1.8600 ▲
- GBP/CAD: 1.8005 - 1.8140 ▲
- GBP/NZD: 1.9445 - 1.9800 ▲