USD/CAD hits fresh 2018 high above 1.28 ahead of Friday’s GDP data
Thursday 1 March, 2018
Daily Currency UpdateAfter the Federal Budget, the Canadian Dollar had another poor day on Wednesday. As the US Dollar caught a bid on a weaker stock market and liquidation of long positions in EUR and GBP, so USD/CAD moved up on to a 1.28 ‘big figure’ for the first time since December 20th. The pair reached a high just above 1.2830 and closed in New York within a few pips of the high of the day. Overnight in Asia and this morning in Europe, it has marginally extended these gains to 1.2850; a fresh 10-week high (CAD low).
It’s fair to say that local reaction to the Budget has been at best mixed. The Financial Post says, “Bill Morneau may have passed up his last chance to balance Canada’s budget. Prime Minister Justin Trudeau’s finance chief released his third fiscal plan on Tuesday in circumstances that have hardly been better. Canada’s economy is near full capacity, led the Group of Seven in growth last year and unemployment recently hit a four-decade low - all of which Morneau boasts about. He couldn’t have asked for better conditions to move toward what was once his goal: balance. And yet Morneau’s budget Tuesday plots no such course.” Mr Morneau responded to criticism in a Bloomberg interview, saying, ““We’ve got a really low level of debt to our economy, we can deal with all eventualities and we’re being fiscally responsible along the way.”
On the economic calendar today, we have the Q4 current account balance which will help analysts firm up their estimates for the GDP number tomorrow. In a more timely release, we also have the manufacturing PMI report which – as a reminder – printed at 55.9 in January. For now, the Canadian Dollar opens in North America at USD/CAD1.2765, AUD/CAD0.9965 and GBP/CAD1.7715.
Key MoversThe USD index hit 90 for the first time in 2-weeks in New York on Tuesday evening and yesterday it extended these gains, both as a result of independent concerns about the GBP and EUR and another sharp fall in US equity markets; something which has tended recently to offer the USD some support. The DJIA closed down 382 points whilst the S+P 500 index has just suffered its worst monthly drop since at least January 2016. Overnight in Asia and this morning in Europe, the USD index has been up to 90.40 and is back to where it was before US Treasury Secretary Mnuchin’s remarks in Davos in late January. It has now rallied almost two and a half points from its recent low of 87.95
Wednesday’s US economic data generally came in shy of consensus expectations. Against a median estimate of a small drop to 64.1, Chicago PMI in February dropped from 65.7 to 61.9; lower than any of the 30 economists in a Bloomberg poll had been looking for. None of the seven sub-indices (prices paid, new orders, employment etc) rose on the month and the headline was the lowest since August 2017. Elsewhere, pending home sales fell by 4.7% m/m in January and though this might be simply weather-related, there’s some talk, too, that sharply rising mortgage rates on the back of higher US bond yields might be feeding through more quickly than usual into lower housing market activity.
There’s no doubt that the incoming US economic data have been running somewhat slower than expected over the past few weeks. Citibank produce a very well-regarded “economic surprise index” (scaled from -100 to +100) and this is down from a high over 80 in late-December to just 33.5 today. The Atlanta Fed’s GDPNow model which back in late January was suggesting 5.4% for Q1 GDP has been revised notably lower and after Tuesday’s durable goods numbers, the latest estimate is just 2.6%. This will be updated later today after the release of Personal income and expenditure, the ISM Manufacturing Index, and construction spending. The USD index opens this morning in North America around 90.40.
The euro’s poor week continues. EUR/USD is down more than 2 ½ cents from Monday’s high of 1.2350 and yesterday fell on to a 1.12 ‘big figure’ for the first time since January 18th. Overnight in Asia and this morning in Europe, the pair has been stuck in a very tight trading range from around 1.2180 to 1.210.
In economic data this morning, the final Eurozone Manufacturing PMI eased to a four-month low of 58.6 in February, down from 59.6 in January; better than the earlier flash estimate of 58.5 and well above its long-run average of 51.8. The PMI has remained above the 50.0 no-change mark for the past 56 months. The Press Release for the survey was resolutely upbeat. “The eurozone manufacturing sector continued to expand at a robust pace in February. Although rates of increase in output and new orders eased further from the highs reached before the turn of the year, the sector is still enjoying one of its best growth spells over the past 18 years… National PMI data also highlighted the broad-base of the upturn, with expansions seen in all of the countries covered. Growth was led by the Netherlands (survey record expansion), Germany and Austria. Although rates of increase eased in the latter two, and also in France, Italy and Ireland, growth was robust across the board. Spain and Greece both saw faster expansions, with Greece registering its best pace of improvement for 18 years.”
The one note of caution from around the PMI survey is that, “There are signs, however, that growth could cool further in coming months. A slowdown in growth of new export order inflows to an 11-month low suggests that the appreciation of the euro may be starting to curb export sales. Job creation, while still among the highest seen in the twenty-year survey history, has meanwhile moderated as a result of the slower inflows of orders, adding to suspicions that the manufacturing growth peak is behind us.” The EUR opens in North America this morning at USD1.2185 and EUR/CAD1.5660.
We warned yesterday that “another tricky day lies ahead for the pound”. It did indeed have a very bad day on Wednesday; bottom of our one-day performance table by quite a margin, with losses ranging from -0.6% to -0.9% against the major currencies we follow closely here. GBP/USD lost one and a quarter cents to 1.3785, matching its low back on February 9th. Overnight it has moved lower still, and a move down to 1.3740 leaves the pound at its lowest level since January 17th.
The UK manufacturing PMI survey was released this morning. At 55.2, Purchasing Managers’ Index fell to an eight-month low and lost further ground after hitting a 51-month high last November. Manufacturing production increased at the slowest pace for 11 months in February, with decelerations seen across the consumer, intermediate and investment goods sectors. Brighter news was provided by the trend in new orders, which rose at a faster pace than in January. Companies indicated that domestic demand strengthened, while new export business rose at a solid (albeit slower) pace. Markit commented that, “The February survey provided mixed signals on the health of the UK manufacturing sector. The PMI’s Output Index fell to its second-lowest level since the EU referendum and, based on its past relationship with official ONS data, is consistent with only a subdued 0.4% quarterly pace of growth in production volumes. This would represent a marked downshift from the 1.3% increase signaled for the final quarter of 2017, providing a further brake on the rate of expansion in the wider economy.”
In the ongoing and never-ending Brexit saga, the UK Prime Minister yesterday said that, “the EU’s plan would undermine the UK common market, and threaten the constitutional integrity of the UK by creating a customs and regulatory border down the Irish sea… No UK prime minister could ever agree to it.” There has been a special session of the UK cabinet this morning to agree and finalise details for a major speech which the PM is to make on Friday, in which she is due to outline the government’s plan for a new post-Brexit relationship with the EU. No details have yet emerged from this meeting, but it is certainly keeping currency markets nervous. The British Pound opens in North America at USD1.3735, GBP/EUR1.1270 and GBP/CAD1.7650.
The Aussie Dollar has spent most of this week moving lower against the USD, although from Monday’s opening levels in Sydney it is up against both the EUR and GBP. The combination of lower stock markets, much lower gold prices and a pick-up in volatility is rarely good for the AUD and though yesterday it bounced a couple of times off technical support in the 0.7780-90 area, it has tumbled further overnight. This morning’s low of 0.7715 in Europe is a fresh low for 2018 and the weakest since December 27th.
The fall in the Australian Dollar comes despite a very upbeat survey on manufacturing. The Commonwealth Bank PMI index – a composite indicator designed to measure the performance of the manufacturing economy – edged slightly higher to 55.6 in February, from 55.4 in January, signaling a strong rate of improvement in the health of the manufacturing sector. The headline PMI has recorded above the 50.0 no-change mark in each month since the survey began in May 2016. According to CBA, “Australia’s manufacturing sector continued to improve strongly in February, supported by robust output growth and increased new business inflows. Buoyed by these trends, both business confidence and the rate of job creation reached fresh survey highs. As a result of higher staff levels, backlogs of work increased to a weaker extent. Meanwhile, strong demand led to intense pressures on supply chains, with delivery times rising”.
Also released overnight were the Q4 Capital Expenditure numbers. According to the Australian Bureau of Statistics, CAPEX fell by 0.2% to $29.57 billion in the final quarter of last year, missing forecasts for an increase of 1%. CAPEX in the September quarter of 2017 was revised up from +1.0% to show a gain of 1.9%. Despite the lower than expected headline number, total CAPEX grew by 4% over the year, the strongest increase in five years. Spending on buildings fell by 2.1% to $16.2 billion, partially offset by a 2.2% increase in investment on plant, machinery and equipment which rose to $13.4 billion. It is this last number which feeds directly into Australia’s Q4 GDP report released next week, and will therefore contribute to real GDP growth. The Australian Dollar opens in North America this morning at USD0.7730, with AUD/NZD at 1.0710 and AUD/CAD0.9935.
The extreme weakness of the GBP yesterday was the only thing preventing the NZD from marking a third straight day at the bottom of our one-day performance table. Indeed, it was such a gap from second-bottom to bottom that GBP/NZD actually fell almost one and a quarter cents. At one point in the day, the AUD/NZD cross was up on to a 1.08 ‘big figure’ for the first time in a little over two weeks whilst NZD/USD only just managed to hold on to US 72 cents. Overnight in Asia, the pair has traded down to a 3-week low just below 0.7190 but has subsequently clawed its way back on to a 72 cents handle.
ANZ’s job advertisement data were released earlier today. Job ads fell 1.2% m/m in February giving up some of its strong increase the previous month. Annual growth eased to 5.8%. There was a marked drop in job ads in the construction, utilities, manufacturing and transport sector, which comprises about a third of job ads. The analysts at ANZ said, “We are not surprised to see job ads fall back to their more modest growth trend, with the labour market tight and skilled labour in particular difficult to come by. The labour market is tight, with the unemployment rate at just 4.5%, and both surveys and anecdotes confirming that firms are having difficulty hiring the skills they need. With business confidence improving and firms profitable, workplace relations reforms and minimum wage hikes suggest we will see higher wage growth going forward.”
Tomorrow we’ll get numbers on building permits and consumer confidence and ahead of these, it will be interesting to see if the relatively sharp fall in the NZD so far this week can be followed by some consolidation at these lower levels. The Kiwi Dollar opens this morning in North America at USD0.7215 and NZD/CAD0.9275.
- USD/CAD: 1.2775 - 1.2905 ▼
- CAD/EUR: 0.6370 - 0.6420 ▼
- CAD/GBP: 0.5630 - 0.5680 ▼
- CAD/AUD: 1.0020 - 1.0100 ▼
- CAD/NZD: 1.0705 - 1.0860 ▼