Wednesday was a day of big swings and reversals for all the FX majors after US CPI data. AUD/USD back to 79 cents, more than a full cent off its daily low.
Monday 19 February, 2018
Daily Currency UpdateAfter the much-hyped US CPI figures, Wednesday was a day of some stunning reversals in global equity and foreign exchange markets. Immediately prior to the CPI release, the Dow Jones Industrial Average was up 150 points at 24,810. Less than 10 minutes later, it had fallen almost 500 points to 24,350. Barely ninety minutes after that, the index had rallied 370 points off its low and added a further 100 points before the close. It was a similar tale of extreme swings in FX. AUD/USD stood at 0.7860 just before the inflation numbers and, as stocks tumbled, it fell almost a full cent to the 0.7775 area. Two hours later, the pair had regained all its losses and more to a best level of 0.7885 and by the close of business in New York it was back on a 79 cents big figure for the first time since February 5th.
After the NAB business survey earlier in the week, yesterday we saw the Westpac survey on consumer confidence fell by 2.3% to 102.7 in February from 105.1 in January. The bank notes, “The survey was conducted over the week of February 5 – February 11. That week was marked by a wave of volatility in global share markets. The Australian market, which was more stable than most, still experienced some significant swings, being down a net 4.6% for the week while the US market (S&P 500) was down by a net 7.2%... Extensive media coverage of these developments would have unnerved respondents on two fronts – the impact on their own financial position and concerns for general global stability. These concerns appear to have been acutely felt by retirees whose confidence fell by 13.5%”. Looking at the details, Westpac point out, ““Developments in the components of the Index are consistent with the likely impact from last week’s market volatility. In particular respondents’ assessments of their own finances suffered, the ‘finances vs a year ago’ sub-index fell by 4.5%; and the ‘finances, next 12 months’ sub-index fell by 3.1%. We assume that these components have suffered temporary set- backs associated with market volatility. On face value the ‘year ago’ component is sending a very weak signal about likely spending prospects.”
We noted earlier in the week that Commonwealth Bank of Australia have changed their interest rate forecasts to remove the two hikes they previously had penciled-in for 2018. Westpac haven’t yet done this but note, “While we are less optimistic about the unemployment rate and the growth outlook, the Bank’s forecasts are not entirely out of line with our own view and, arguably, consistent with steady rates over the next few years.” NAB, meantime, still has two 25bp hikes in its forecast profile for H2 2018. Let’s see what today’s labour market report does to all those forecasts. The Australian Dollar opens in Asia at USD0.7910, with AUD/NZD at 1.0745 and GBP/AUD1.7690.
Key MoversThe New Zealand Dollar traced out pretty much the same pattern as its Australian cousin in the wild period either side of the US CPI figures. The NZD/USD pair stood at 0.7325 just before the numbers then plunged to a low around 0.7245. Two hours later it was more than a cent off the low at a more than one-week high of 0.7350 and finished the day as the top performer of all the major currencies we track here with NZD/USD at 0.7360 and the all-important AUD/NZD cross down near a 6-month low of 1.0745.
The RBNZ's March quarter survey showed firms lifted their two-year inflation expectations to 2.11% from 2.02 % in the prior period, while one-year inflation expectations remained steady at 1.86%. Elsewhere in the survey, unemployment rate expectations are the lowest since September 2008. The unemployment rate in one year is expected to be 4.55% but then increase to 4.68% two years ahead. The official unemployment rate reported by Statistics New Zealand for the December 2017 quarter was 4.5% (this was released after the survey was completed). Official unemployment is now at a nine-year low. One year ahead expectations for annual growth in wages, meantime, have increased to 2.48% from 2.25% and two-year ahead expectations increases to 2.68% from 2.57%.
Today we’ll get to see data on home sales in New Zealand and on Friday its the manufacturing PMI survey. The New Zealand Dollar opens in Asia this morning at USD0.7365 and AUD/NZD1.0745.
The British Pound spent most of Wednesday morning steadily falling and by lunchtime in Europe was by some distance the worst-performing of all the major currencies. GBP/USD fell from a best level overnight of 1.3920 to 1.3885 immediately before the US CPI numbers then dropped to a low just a few pips above 1.3800. It was then the quickest of all the major currencies to reverse its losses and went on to a day’s high around 1.4000; more than a full cent above where it had been prior to the US data release.
UK Foreign Secretary Boris Johnson gave what was billed as a major set-piece speech on Brexit yesterday. He said there are three main branches to the opposition to Brexit: A geo-strategic concern that Britain is a relatively small nation that has made a mistake in choosing to leave such a major international alliance, a spiritual and aesthetic concern – that people feel we have pulled up a drawbridge – and an economic fear that Britain will be worse off outside the EU. The Foreign Secretary said Brexit “need not be nationalist, but can be internationalist” and sought to allay those three concerns, acknowledging that he “runs the risk of causing further irritation” in making such an argument. More practically, Mr Johnson warned against a second referendum, telling his audience, “I say in all candor that if there were to be a second vote I believe that we would simply have another year of wrangling and turmoil and feuding in which the whole country would lose. So let’s not go there.”
The problem with any UK Ministerial speech is that it simply draws attention to the practical problems of Brexit without showing any detailed roadmap forwards. This problem begins at the very top of government, with Prime Minister May trying so hard to keep her divided Cabinet together, that no concrete proposals are ever advanced, for fear of provoking rebellion. And, to the extent that Brexit itself then becomes the topic for journalists and the media, the GBP often then struggles with the subsequent political fallout. There are no UK economic statistics scheduled for release this Thursday and the pound opens in Asia this morning at USD1.3995, GBP/AUD1.7690 and GBP/NZD1.9000.
It’s hard to know where to begin with today’s US Dollar commentary so let’s stick initially to the facts and figures. The USD index peaked last Thursday around 90.25; a level it almost, but not quite, regained on Friday afternoon. From then on, as stock markets recovered, its index against a basket of major currencies fell over a full point to a low during Sydney time yesterday around 89.05. When January CPI came in above consensus expectations (see below) the index jumped to a high of 89.60 as 10-year bond yields hit 2.89%, the DJIA fell 460 points and the USD strengthened against all the currencies we follow here. Within 2 hours, however, the stock market was back in positive territory on the day and the USD had a stunning turnaround; losing almost a full point by the time European traders headed for home and hitting the lowest level in 10 days.
The much-hyped January CPI figures came in higher than consensus expectations which were for a m/m gain of +0.3% which would have taken the annual rate down from 2.1% to 1.9%. Instead, CPI rose 0.5% m/m and the annual rate was unchanged at 2.1%. The so-called ‘core’ rate of inflation which excludes food and energy prices and is seen as a better measure of underling inflation trends, was one-tenth higher than expected at +0.3% m/m (the biggest monthly increase since last January) which lifted the annual rate from 1.7% to 1.8%. Indeed, the actual unrounded figure for core inflation was just 1/1000th of a point from being revised up to 0.4% m/m. For all the angst over CPI, we should remember that – unlike the RBA, RBNZ or BoE – the Fed does not target this measure of inflation. It tracks a different index, the personal consumption expenditures price index excluding food and energy, which has consistently undershot the central bank’s 2 percent target since mid-2012 and tends to run around 0.3% below core CPI. In this sense, the panic over higher than expected CPI looks a little overdone, even if there’s no denying an upward trend.
As well as inflation numbers, the January retail sales data were also released. These were quite a bit softer than consensus forecasts with the headline number falling -0.3% m/m versus expectations of a +0.2% m/m increase. The ‘core’ number excluding auto sales was unchanged on the month compared to forecasts of a +0.4% increase. This was the first monthly drop in retail sales since last August and was accompanied by downward revisions to some of the back data. Details showed a significant decline in building materials & furniture while online sales and restaurant spending was unchanged. After the data release, analysts rushed to revise down their Q1 GDP estimates. JP Morgan moved from 3.0% to 2.5%, BAML from 2.3% to 2.0% and Morgan Stanley from 3.3% to 2.9%. The Atlanta Fed which just a few weeks ago was up at 5.2% and was 4.0% at the beginning of this week is now down much closer to the pack at 3.2%. The USD index opens in Asia this morning around 88.75.
The calm which had engulfed the euro is now decisively over. EUR/USD traded on three different ‘big figures’ on Wednesday, tracing out a very similar pattern to that described above for the GBP. The pair edged lower throughout the Asian day and European morning, falling from a high of 1.2390 to 1.2345 immediately prior to the US CPI and retail sales numbers. The EUR then plunged to a low around 1.2285 but within ninety minutes had completely unwound its losses and went on to a best level of 1.2435.
Figures released by Eurostat confirmed the January 30th preliminary estimate that GDP in the Eurozone rose 0.6% in Q4 last year. Growth slowed a little in Germany and Italy, while the pace of expansion accelerated in the Netherlands and Portugal. Germany’s upswing – despite a slowdown in quarterly output – continues to be a key ingredient for growth in the euro area. Momentum at the end of last year was driven by a strong increase in exports, according to a national report. Government consumption and equipment investment increased, while private spending remained largely unchanged and construction slipped. The Dutch economy also benefited from buoyant global trade. GDP increased 0.8% in the fourth quarter, exceeding consensus estimates. Italian growth slowed to 0.3%, leaving it lagging behind France and Germany and providing a note of caution ahead of general elections next month. GDP increased 0.7% in Portugal.
A fascinating Bundesbank study published yesterday shows that cash no longer makes up most of the money spent in Germany. Cash accounted for 47.6% of German transactions by volume last year, down from 53.2% three years earlier and below the 50% mark for the first time since polling started in 2008. Cards grabbed a 39.4% market share last year compared to 33.4% in 2014, mirroring a global trend that has long taken hold in many other countries including Sweden and Britain. Internet payments also grew but still accounted for a modest 3.7% of total volume. Germans and Austrians are the biggest users of cash among countries in the euro zone’s richer “core”, according to a recent study by the European Central Bank (ECB) and the Bundesbank survey found most Germans thought that cash was useful to teach children about the use of money and to ensure a better control of one’s personal finances. The vast majority also believed the abolition of notes and coins would cause problems to parts of the population, such as the elderly, while only just over a third saw it as a way to fight tax evasion and money laundering. The EUR opens in Asia today at USD1.2435, AUD/EUR0.6360 and NZD/EUR0.5920.
The Canadian Dollar had pretty much exactly the same price action as all the other major currencies on Thursday (though of course we have to invert it for comparison) but having reversed all its losses in the immediate aftermath of the US economic data, it didn’t then go on to make the same degree of gains as the GBP, EUR and others. USD/CAD jumped from 1.2575 to a high around 1.2645 and after coming back to its starting point within a couple of hours, could then only move another 50 pips lower even as WTI recovered more than a dollar from a 2018 low of $58.30 to $59.30.
In economic data, January’s Teranet National Composite House Price Index rose 0.3% from the previous month, a touch higher than the historical average for January and a second consecutive monthly increase. The composite index was up 8.7% from a year earlier, the smallest 12-month rise since May 2016 and a seventh consecutive deceleration from the record 12-month gains of 14.2% last June. Moreover, only four of the 11 metropolitan markets surveyed showed gains – the first time since January 2016 that a rise in the Composite Index has had so little breadth. The rise was due mainly to a second straight monthly jump of the index for the important Vancouver market (1.2% in January on the heels of 1.3% in December). The Toronto index rose 0.2%, the Victoria index 1.0% and the Montreal index edged up 0.1%. For Vancouver, January was a ninth consecutive month without a decline. The cumulative rise over that period was 14.5%; comprised of 18.2% for condo units and 11.4% for all other housing. Vancouver and Montreal were the only markets surveyed whose index reached an all-time high in January
Today we’ll get to see the ADP payrolls report but coming almost a week after the official labour market data, it’s unlikely to have a great deal of market impact. At lunchtime local time there’s a speech from Bank of Canada Deputy Governor Lawrence Schembri. The Canadian Dollar opens in Asia this morning at USD/CAD1.2525, AUD/CAD0.9910 and NZD/CAD0.9225.
- AUD/NZD: 1.0700 - 1.0805 ▼
- GBP/AUD: 1.7580 - 1.7760 ▼
- AUD/USD: 0.7830 - 0.7950 ▼
- AUD/EUR: 0.6330 - 0.6410 ▼
- AUD/CAD: 0.9840 - 0.9940 ▼