No surprises seen in RBA Minutes today, but can AUD hold on to US 79 cents?
Tuesday 20 February, 2018
Daily Currency UpdateAs half of Asia and more than half of North America was out for holidays on Monday, it always threatened to be a fairly quiet day for the Australian Dollar and that’s pretty much how it turned out. That’s not to say it was totally uninteresting, and it was noticeable how sensitive the AUD was to moves in US stock index futures – which were open for trading even as cash equities were closed. The high for the day for AUD/USD around 0.7935 came with the DJIA up around 100 points and when the market turned negative in the European afternoon, so too the AUD fell back to just a few pips above 0.7900. Holding on to that psychological level was a positive, and technically it was good to hold above Friday’s 0.7895 low. Whether this holds or crumbles after today’s RBA Minutes is now the big question for global FX markets.
The Governor’s statement after the February 6th Board meeting said, “Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual. Taking account of the available information, the Board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time”. The 68-page Quarterly Statement just 3 days later had exactly the same message, whilst Deputy Governor Luci Ellis last week was notably cautious in her assessment of wage pressures and household consumption. The discussions in the Minutes released today are unlikely to deviate much from this path of gradualism, and it would be a source of genuine surprise if future interest rate expectations were to be much changed as a result.
One thing is certain however: on current published forecasts, both CBA and NAB cannot be simultaneously correct. CBA has erased the two rate hikes it had penciled-in for 2018 whilst the NAB still has them in its forecast profile. We doubt the Minutes will be the peg on which to hang any forecast changes, but Wednesday’s quarterly wage prices will be scrutinised closely for any clues. The last set of numbers in November showed a +0.5% q/q increase to leave the annual rate at 2.0%; well-below its long-run average around 3¼%. Consensus looks for a similar pace of growth in the Q1 data. The Australian Dollar opens in Asia this Tuesday morning at USD0.7910, with AUD/NZD at 1.0730 and GBP/AUD1.7695.
Key MoversThe New Zealand Dollar last week touched a fresh 2018 high of USD0.7434 before slipping back to close more than a cent lower at 0.7390, which is where it spent most of Monday before then losing almost half a cent against a generally well-bid US Dollar. A sell-off during the European afternoon took the pair down to 0.7355 before a recovery to the 0.7355 area. Against its Aussie cousin, the AUD/NZD cross couldn’t break Friday’s 6-month low of 1.0705 and moved around a quarter of a cent higher as the day progressed.
The Bank of New Zealand-Business NZ’s performance of services index (PSI) was published on Monday. It showed growth in New Zealand’s services sector eased in January and new orders fell to their lowest in 10 months. The headline index edged down to 55.8 from 56 in the previous month whilst the sub-index measuring new orders and business fell to 57.6, the first time it had slipped below 60 since April 2017. The authors of the report noted that, “While the PSI is relatively robust, combined with the Performance of Manufacturing Index it nonetheless signals something of a slowing in GDP growth for the near term.”
Today is another day of inflation numbers. As well as the quarterly PPI data, there’s RBNZ survey of household inflation expectations. This survey often runs higher than the business numbers, and is calculated to only one rather than two decimal points. In the December quarter, household expectations of inflation in one year’s time rose from 2.5% to 3.0%; well above comparable survey results from businesses and professional forecasters. The New Zealand Dollar opens in Asia this morning at USD0.7370 and AUD/NZD1.0730.
The GBP had a bit of a wobble on Monday and ended up sharing bottom spot in our one-day performance table with the NZD, having at one point been on its own way below the rest of the pack, before a rally during the North American morning. GBP/USD stood around 1.4030 at lunchtime in Europe but then took a dive to the low 1.3960’s as the initial 100-point gain for DJIA futures turned into a near 100-point loss. As stocks recovered, so too did the ‘cable’ rate, even though it struggled to hold on to a USD 1.40 handle.
On Sunday, in an interview for the BBC's Andrew Marr Show, Guy Verhofstadt, the EU Parliament's Brexit chief, said that Britain cannot cherry pick the areas where it wants to make bespoke deals, and that any deal should ensure there "should be no competitive advantage for either the UK or EU. What will be in that part of the agreement, we will see. Passporting will not be there, you have to be part of the Single Market," he said. UK Ministers David Davis and Liam Fox are said to be preparing speeches for delivery this week but no amount of internet searches actually throws up any details of where and when these might be.
A fascinating analysis by The Guardian newspaper claims that Britain will move beyond “peak cash” this year, with debit cards set to overtake cash as the most frequently used payment method in the UK later this year. In 2006, 62% of all payments in the UK were made using cash; in 2016 the proportion had fallen to 40%. By 2026, it is predicted cash will be used for just 21%, according to figures from UK Finance. ATM data show that in 2016, there were 2.7bn withdrawals from the country’s 70,000 cash machines; the lowest number of transactions since 2010. The total amount of money withdrawn at ATMs has fallen steeply in the last few years; in 2016, people withdrew more than £6bn less than they did in 2015. Bank of England figures meanwhile show that while the volume of cash in the economy typically increases every year, it is now doing so at the slowest rate since 1972. It is not just the world of cross-border currency transactions which is being transformed by new technology and smarter companies! The pound opens in Asia this morning at USD1.4005, GBP/AUD1.7700 and GBP/NZD1.9000.
The US Dollar had another good day on Monday, albeit closing below its best levels seen during the European afternoon. Its index against a basket of major currencies rose on Friday from a low of 87.95 to close around 88.75. Yesterday, it extended these gains up to 89.10 before slipping back to 88.85 as stock index futures lost 100 points then rallied back to flat at the end of the European day. It’s not clear what is the direction of causality here: whether the currency is driving stocks or vice-versa. If the causality isn’t clear, though, the correlation most definitely is and will be something to watch closely as the US returns today from the Presidents’ Day holiday and Chinese investors come back to the market later in the week.
Though US stocks and the currency seem well-correlated (negatively) the USD still isn’t getting any support from higher bond yields or the expectation of much higher short-term interest rates over the course of this year. Fed funds futures are fully pricing three 25bp rate hikes and put the probability of the Fed raising rates four times this year at 25 percent versus just 17 percent immediately before last week’s US CPI release. The overwhelming narrative amongst bank strategists is that the US Dollar is headed lower, if for no better reason than that is the prevailing trend.
The highlight of the week ahead will probably be Wednesday’s release of the Minutes of the January 31st FOMC; just two days before the 666-point drop for the Dow Jones Industrial Average and the subsequent surge in volatility. Of course, the further 2,000-point drop and similar-scale rally seen over the last two weeks should make any conclusions from the Minutes even more conditional and unreliable as policy signals than they usually are. But, as we’ve said before, there’s a whole army of Fed-watchers who have to earn their living trying to sort the wheat from the chaff on every sackful of words from the Eccles Building. The USD index opens this morning around 88.85; almost a full point above its recent 3-year low of 87.95.
The euro had a pretty quiet Monday in Asia but EUR/USD then fell more than half a point either side of lunchtime in Europe, moving from 1.2425 to 1.2370 before rebounding back on to a 1.24 ‘big figure’ as US stock index futures recovered their losses.
We mentioned last week that German politics were becoming less of a tail-risk for the euro, but there are some signs that it is again growing as a source of concern. Two developments are worth noting. The first is that the 463,723 Social Democratic party members still have to decide whether to enter another grand coalition under Chancellor Angela Merkel. They have until March 2 to submit their votes, and the result is expected to be announced the following day. At a special SPD conference in January, only 60 percent of delegates voted to authorise their leaders to hold coalition talks with the conservatives. “I am convinced we will get a majority,” Andrea Nahles, who senior SPD officials this week endorsed as the party’s future leader, told Der Spiegel magazine in comments published on Saturday. “I don’t have a Plan B.” The second concern is that even if a coalition is approved, a poll published on Monday by the newspaper Bild put the Alternative for Germany (AfD) on 16 percent, showing that they are currently more popular than the Social Democrats (SPD). They entered the Bundestag for the first time in September after winning 12.6 percent of the vote. The party was set up in 2013 and fought the election of that year on an anti-Euro platform. Don’t be surprised to hear much more from AfD over the coming months.
Tuesday brings Germany’s ZEW Survey of professional forecasters and the so-called ‘flash PMI’s’ are published on Wednesday. The EUR opens in Asia this morning at USD1.2410, AUD/EUR0.6375 and NZD/EUR0.5940.
There’s been lots to digest in the last few weeks for the Canadian Dollar, not least because the world’s second and fourth largest countries by area are facing huge uncertainty over the future of the Free Trade Agreement which has been in place for almost thirty years. With the USD on a weaker trajectory and a huge increase in stock market volatility, the CAD has not been unscathed. Over the past week it ended on net firmer against the US Dollar around 1.2550 but weaker against all the other FX majors with AUD/CAD, for example, up a full cent to 0.9930 and now just 60 pips away from parity.
Canadian Finance Minister Bill Morneau met on Friday with private-sector economists in Toronto ahead of his upcoming February 27th budget. According to Bloomberg, he said they discussed the impact of US tax changes, as well as ongoing talks to revamp the North American Free Trade Agreement. He declined to say if corporate tax cuts were on the table on this side of the border in the wake of the Trump administration’s tax overhaul. In a letter to Morneau, the Business Council of Canada – which represents chief executives from dozens of major companies – last week said the country “must move quickly to shore up its business tax competitiveness.” They would say that, wouldn’t they…
The Bank of Canada has raised rates three times since July 2017 and its next monetary policy meeting is on March 8th; two days after the RBA and the same day as the ECB. Money markets are indicating around a 70% probability of another hike by May, but it is not expected to come before then. This week brings official data on retail sales on Thursday then on Friday it’s earning, hours worked and the CPI numbers. Before then, wholesale trade numbers are released today. The Canadian Dollar opens in Asia this morning at USD/CAD1.2560, AUD/CAD0.9940 and NZD/CAD0.9260.
- AUD/NZD: 1.0705 - 1.0810 ▼
- GBP/AUD: 1.7620 - 1.7805 ▼
- AUD/USD: 0.7840 - 0.7980 ▼
- AUD/EUR: 0.6330 - 0.6405 ▼
- AUD/CAD: 0.9890 - 1.0000 ▼