Home Daily Commentaries USD higher ahead of Fed Beige Book. GBP plunges after very soft UK CPI data

USD higher ahead of Fed Beige Book. GBP plunges after very soft UK CPI data

Daily Currency Update

After the first day of the week saw the DJIA up over 200 points and the S&P 500 index more than 20 points higher, the second day brought more of the same with the S&P back above 2700 for the first time since March 22nd and the VIX index of volatility of equity market volatility down at 15. Futures markets overnight have seen the S&P hold this psychological support, whilst the DJIA is within 200 points of getting back to 25,000. The USD index against a basket of major currencies finished unchanged on Tuesday around 89.05 having at one point been as low as 88.80, but the weakness of the GBP/USD exchange rate this morning has helped push the USD up to 89.20.

Although Tuesday was the deadline for filing tax returns in the United States, the Internal Revenue Service has extended this until today due to a computer malfunction. Last year, about 90 percent of tax returns submitted by April 21 were e-filed, according to IRS data so the extension was swiftly expedited. With ‘Tax Day’ being so topical, the Administration has not been slow to use social media. Vice-President Mike Pence tweeted, “Thanks to the historic TRUMP TAX CUTS, today marks the last time the American people will file taxes under a complicated & outdated tax system. Our Tax Cuts– the largest in American history– will save YOU money, increase opportunity & create more JOBS for American workers.” The White House itself said, “When we began our push for tax cuts, I promised that our bill would result in more jobs, higher wages, and tremendous relief for middle-class families, and that is exactly what we have delivered.”

In incoming economic news, US industrial production rose a better than expected 0.5% m/m in March which took the y/y rate up to 4.3%; the fastest pace of growth since February 2012. Behind the headlines, however, there was a huge 3.1% m/m jump in energy output – entirely due to the pattern of weather in February and March – and manufacturing production rose a much more subdued 0.1% m/m. With capacity utilization rising three-tenths to 78.0% and housing starts very slightly stronger than expected, the Atlanta Fed nudged its Q1 GDP forecast back up to 2.0%. As well as three Fed speakers, the highlight of today will be the Federal Reserve’s Beige Book on current economic conditions. The USD index opens this morning in North America around 89.20.

Key Movers

There was no stopping the Canadian Dollar on Tuesday as it improved one place on Monday’s finish to end the day at the top of our one-day performance table and up against all the major currencies we follow closely here. USD/CAD opened around 1.2565 and really began to accelerate to the downside in the New York afternoon, reaching a low of 1.2530; its lowest point in just over two months, whilst GBP/CAD broke down through 1.80 and went on to reach a low just under 1.7910. Overnight in Asia and this morning in Europe, it seems investors have begun to lock-in profits on long CAD positions ahead of today’s Bank of Canada policy meeting. The CAD is weaker against the US, EUR and AUD, but has strengthened further against an under-pressure GBP.

The Bank of Canada holds its monetary policy meeting today. While the BoC is not expected to raise rates this time, expectations have risen that the central bank will tighten policy as early as next month given the recent run of strong economic data. Investors will be looking for any hints that could reinforce such views. All but two of the 23 economists surveyed by Bloomberg, including those from the country’s largest banks, predict the benchmark interest rate will remain unchanged at 1.25 percent. The central bank will also release new quarterly forecasts along with its decision at 10am in Ottawa, followed by an 11.15am press conference by Governor Poloz and Senior Deputy Governor Carolyn Wilkins.

Looking at the structure of the short-term interest rate curve, we can derive implied probabilities of a hike in interest rates at future BoC meetings. The market is currently reflecting only a 20% probability of a move today whilst a May hike is priced around 50%. In its last assessment of the economy, the BoC suggested that its potential growth rate was around 1.6% but most forecasts have GDP above 2% for this year so the Bank’s signaling about future intentions will be very closely scrutinized. The Canadian Dollar opens in North America at USD/CAD1.2590, AUD/CAD0.9760 and GBP/CAD1.7855.

After a quiet start to the week on Monday, EUR/USD began a rally which took the pair up from 1.2325 to a high on Tuesday just above 1.2410; the first time it had been on a 1.24 ‘big figure’ since March 28th. It subsequently gave back more than three-quarters of a cent to a low of USD1.2340 before rallying up to 1.2380 ahead of this morning’s final Eurozone CPI figures. EUR/CAD moved down towards last Friday’s low of 1.5875 but has subsequently rallied almost a full cent ahead of the BoC meeting.

Final Eurozone CPI figures showed inflation one-tenth below what had been expected at the time of the ‘flash estimate’ back on April 4th. The statisticians estimated CPI would be at an annual pace of 1.4% in March but the final number this morning showed a rate of just 1.3%. The highest contribution to the annual inflation rate came from services (+0.67 percentage point), followed by food, alcohol & tobacco (+0.41 pp), energy (0.20 pp) and non-energy industrial goods (0.07 pp). Services inflation appears to have risen to 1.5% largely due to early timing of Easter this year, lifting prices of airfares and accommodation services, whilst the usual rebound in clothing prices from the January sales was less visible than in previous years. Across the European Union (rather than just the Eurozone) lowest annual rates were registered in Cyprus (-0.4%), Greece (0.2%) and Denmark (0.4%). The highest annual rates were recorded in Romania (4.0%), Estonia (2.9%), Slovakia and Lithuania (both 2.5%). Compared with February, annual inflation fell in six Member States, remained stable in six and rose in fifteen.

Separate figures from Eurostat showed that construction output in the Eurozone fell by a seasonally-adjusted -0.5% in February, largely due to civil engineering falling by 1.7%, while building construction rose by 0.1%. Although the figures are seasonally adjusted, they can still be heavily affected by weather conditions, especially as those as extreme as seen in Europe over the Winter months. January was relatively mild but February was exceptionally cold and it would not be a big surprise to see the March data next month similarly affected by adverse weather. In year-over-year terms, construction output is up 0.4% but we may have to wait a while longer before more meaningful, distortion-free comparisons can be made. The EUR opens in North America today at USD1.2370 and EUR/CAD1.5575.

After Monday’s very good day, the British Pound went from hero to zero on Tuesday, finishing equal bottom of the table with the New Zealand Dollar. The GBP/USD pair opened at 1.4335 then raced up to a high of 1.4375; not only higher than the previous day’s high, but the best level since the EU referendum back in June 2016. A sharp sell-off was then seen after UK earnings and employment numbers were published and the GBP ended in New York around 1.4290. This morning in London, the pound is down even further, having hit a low point of just USD1.4180 after the latest UK CPI data were published, with GBP/CAD back down on a 1.78 ‘big figure’.

UK inflation figures came in not just lower than consensus expectations, but lower than the whole range covered by most professional forecasters. Prices rose just 0.1% in March to take the annual rate of inflation down from 2.7% to 2.5% against expectations that it would be unchanged at 2.7%. This means that CPI inflation is at its lowest in a year and March’s fall in the annual rate is the 2nd consecutive month in which the annual rate has fallen; we haven’t seen that since August – September 2015. The Office for National Statistics said that women’s clothing prices rose slower than usual for this time of year, rising by 0.7% between February and March 2018 compared with a larger rise of 2.0% between the same two months in 2017. Alcohol and tobacco also helped ease inflation pressures, with tobacco duty rises linked to the Budget being announced in November 2017 instead of March 2018.

It is not only investors holding British Pounds who are left nursing losses. The Bank of England has also suffered yet another blow to its credibility, having publicly agitated for at least two months about the likelihood of a rise in interest rates at its May MPC meeting. This might of course still happen, but the probability of it now is much lower than it was just a few days ago. And, with inflation on a sharp downtrend towards its 2% target, the feeling will persist that a rate hike in May is designed to save face on the MPC rather than being truly ‘data dependent’. The British Pound opens in North America this morning at USD1.4190, GBP/EUR1.1475 and GBP/CAD1.7855.

After two days of essentially directionless, albeit somewhat choppy trading, the Aussie Dollar is now edging lower against the USD. The pair had been stuck within a 30 pip range from 0.7760 to 0.7790 for more than 36 hours but this morning in Europe has finally broken below 0.7750. This isn’t a story of specific Aussie weakness however; the AUD is up against the NZD and CAD as well as the beleaguered GBP and is only down 10 pips against the EUR.

In economic data this morning, the six month annualised growth rate in the Australia’s Westpac–Melbourne Institute Leading Index, which indicates the likely pace of economic activity relative to trend three to nine months into the future, fell from 1.43% in February to 0.69% in March. The analysts at Westpac note, “Drivers of the slowdown in the month have been from the domestic components – a slowing labour market; and some weakness in housing while rising short term interest rates have reflected liquidity pressures from global markets.” They go on to say that, “It appears likely that the Reserve Bank will lower its upbeat 3.25% growth forecast for 2018. The latest minutes from the Board refer to growth as “expected to exceed potential growth” (consistent with the signal from the Leading Index). However, with potential growth at 2.75% we expect the RBA will lower its growth forecast for 2018 to 3.0%.” In separate data from the Department of Jobs and Small Business, the internet job vacancy index rose 0.9% in March and has now risen for 18 consecutive months; the longest such run since March 2011.

In its massive 280-page document on the World Economic Outlook released yesterday (we read it so you don’t have to!) the International Monetary Fund (IMF) upgraded its forecasts for economic growth in Australia to 3% this year, a sharp rise from 2.3% in 2017, and up from the 2.9% rate expected in February. Next year, Australia’s GPD is forecast to grow by 3.1%. The numbers are pretty much in line with the federal government’s mid-year budget update which had GDP forecast to grow by 2.5% in 2017-18 and 3% in 2018-19 after growth of 2% in 2016-17. The IMF sees the consumer price index increasing 2.2% this year, and then 2.4% in 2019. Inflation is currently running at 1.9%. The Australian Dollar opens in North America this morning at USD0.7750, with AUD/NZD at 1.0605 and AUD/CAD0.9755.

After Monday’s poor session in which it finished second from bottom on our one-day performance table, the Kiwi Dollar had an even worse day on Tuesday, sharing bottom spot with the GBP. It hasn’t done a great deal better so far this Wednesday morning, falling against everything except a very weak British Pound. NZD/USD is down from an opening level in Asia around 0.7240 to just 0.7210; its lowest level in just over a week whilst the ND/CAD cross is on a 91 cents ‘big figure’ for the first time since mid-February.

Ahead of the quarterly CPI numbers tomorrow (see below) Statistics New Zealand earlier this week produced its fascinatingly detailed look at monthly food prices. Tomato, lettuce, cauliflower, cabbage, and broccoli prices rose sharply in March 2018, boosting vegetable prices 9.5 percent in the month after adjusting for typically seasonal changes. The statisticians noted, “Vegetable crops have been affected by a run of storms in recent weeks – lower supply due to bad weather usually means higher prices” Overall, food prices rose 1.0 percent in March. This rise was mainly driven by the lift in vegetable prices, up 11 percent. Meat prices rose 1.2 percent in the month. There was no change in grocery and non-alcoholic beverage prices in March and little change in restaurant and takeaways prices (up 0.1 percent)

Most of the major bank forecasts for tomorrow’s quarterly CPI numbers are now published. ANZ expect headline CPI rose 0.4% q/q in Q1, which would see annual inflation slow from 1.6% to 1.0% y/y – a touch below the RBNZ’s expectation of 1.1%. They say, "The fall in annual headline inflation is more noise than signal. Nonetheless, evidence of a broadening in domestic price increases beyond housing remains elusive. Core inflation measures are expected to be broadly stable." BNZ forecast a 0.3% increase for the quarter, a result that would pull annual inflation down to 0.9% and highlight a very large drop in education prices reflecting recent policy changes making first year tertiary education free. Over at Westpac, meantime, they also factor in the fall in education prices but see a 0.5% increase in the March quarter to take the annual rate down to 1.1%. One of the three banks will probably be right! The Kiwi Dollar opens in North America at USD0.7345 and NZD/CAD0.9225.

Expected Ranges

  • USD/CAD: 1.2530 - 1.2620 ▼
  • EUR/USD: 1.2325 - 1.2415 ▼
  • GBP/USD: 1.4145 - 1.4310 ▼
  • AUD/USD: 0.7720 - 0.7790 ▼
  • NZD/USD: 0.7285 - 0.7370 ▼