Home Daily Commentaries AUD struggling to hold 78 US cents after soft GDP figures

AUD struggling to hold 78 US cents after soft GDP figures

Daily Currency Update

The Australian Dollar couldn’t hold on to Tuesday’s best levels which had seen AUD/USD rise to 0.7835; the highest in exactly a week. After the knee-jerk sell off in reaction to weaker than expected GDP figures, the subsequent recovery took the Aussie in the European afternoon to a high of 0.7825 but by the end of the day it was struggling to hold on to a US 78 cents big figure. Another $10 off the gold price and a modest uptick in the VIX index of equity market volatility did nothing to encourage any buying of the AUD.

Australia’s economy grew at a slower pace than expected in the fourth quarter of last year as a rebound in household consumption was offset by a fall in exports. Gross domestic product grew just 0.4% q/q in the three months through the end of December, slowing from 0.7% growth in the previous quarter, according to the Australian Bureau of Statistics. That was below a median of economists’ estimates compiled by Reuters forecasting 0.6% growth. According to the analysts at Westpac, “Key surprises in these accounts were to the upside on consumer spending, including a significant upward revision to history, and a sharp 10.3% fall in private infrastructure… The drop in private infrastructure work is not cause for concern, it represents further progress in the mining investment wind-down. Consumer spending increased by 1.0% in the quarter, while Q3 was revised up from a very weak 0.1% to 0.5%. Annual consumer spending growth is now 2.9%. That moves the dial on spending momentum from ‘lacklustre’ to ‘slightly below trend’.”

Westpac’s fairly downbeat analysis went on to note, “The detail of this update will provide policy makers with some comfort. Consumer spending growth at close to 3.0% suggests that the economic expansion is more broadly based than previously assessed… That said, going forward, the household sector remains vulnerable at a time of relatively weak wages growth and high debt levels. A likely slowing in employment growth from the current hiring burst will act to reduce consumer spending power.” The Australian Dollar opens in Asia at USD0.7815, with AUD/NZD at 1.0735 and GBP/AUD1.7775.

Key Movers

Having found the air on a US 73 cents handle a bit thin, the New Zealand Dollar has spent the last 24 hours catching its breath in the mid to high-72’s. During the European afternoon, a move lower gathered pace and the pair fell from around 0.7295 to 0.7255 in less than a couple of hours although this wasn’t really independent NZD weakness: the key AUD/NZD cross remained steady throughout around 1.0735.

In economic data, two of the ‘partial data’ which feed in to the calculation of the GDP numbers which are out next week have now been released. The total sales value for wholesale trade rose 3.0% in the December 2017 quarter, after rising 1.4% in the September quarter. The December rise was the seventh-consecutive quarterly rise and the largest since the September 2010 quarter, when the value rose 3.8%. As for Building Work Put in Place, total building activity volume was up 1.4% in the quarter. The volume of activity for hospitals, storage, factories, and other non-residential building rose 4.1% in Q4 whilst for residential building activity, the volume fell 0.4% in the latest quarter, following a 4.1% rise in Q3.

Commenting on the two pieces of economic news, analysts at ANZ said, “Today’s figures have few implications for our views on Q4 GDP growth. Both the building work figures and separate Wholesale Trade figures were close to our expectations. There are a few partial indicators still to be released, but at this stage we are happy with our provisional Q4 GDP estimate of 0.7% q/q (3.1% y/y).” Over at Westpac, meantime, the analysts say, “With a large pipeline of planned work, the level of construction activity is likely to be elevated for some time. However, headwinds in the construction sector mean that future increases in building activity are likely to be more gradual than we have seen in recent years.” The New Zealand Dollar opens in Asia this morning at USD0.7280 and AUD/NZD1.0735.

The British Pound was lower for much of the day on Wednesday but a late afternoon rally left it little changed against a recovering US Dollar and the EUR. It was up around four-tenths of a point against both the AUD and NZD and more than three-quarters of a point higher against the CAD. It would be a mistake to read too much into the price action, however. For ten hours from 7am to 5pm London time, GBP/USD was stuck in just a 40 pip range from 1.3855 to 1.3895 as investors tired of over-interpreting the latest Brexit shadow-boxing.

The EU’s draft guidelines on the UK’s exit from the EU were presented by European Council President Donald Tusk. He struck a conciliatory but realistic tone saying, "The UK will be our closest neighbour and we want to remain friends and partners after Brexit - partners that are as close as possible, just like we have said from the very first day after the referendum." While the guidelines make clear that the EU wants "as close as possible a partnership" after Brexit, it is expected that there will be negative economic consequences. "Being outside the customs union and the single market will inevitably lead to frictions… Divergence in external tariffs and internal rules as well as absence of common institutions and a shared legal system, necessitates checks and controls to uphold the integrity of the EU single market as well as of the UK market… This unfortunately will have negative economic consequences."

The free-trade agreement (FTA) on offer "cannot offer the same benefits as membership and cannot amount to participation in the single market". Mr Tusk said that while Brussels wants an "ambitious" FTA with the UK with zero tariffs on goods but limited access for services, it will "not make trade between the UK and EU frictionless or smoother… It will make it more complicated and costly than today for all of us. This is the essence of Brexit." Responding to the publication of the guidelines, a Downing Street spokesman stressed they were a draft version which had not been formally published.
"We look forward to seeing the final guidelines when published and hope they will provide the flexibility to allow the EU to think creatively and imaginatively about our future economic partnership," they said. The pound opens in Asia this morning at USD1.3890, GBP/AUD1.7770 and GBP/NZD1.9085.

US stocks and its currency have been out of favour ever since President Trump’s proposed steel tariffs announced last week. The DJIA had already fallen 700 points in a couple of days but then fell another 400 points on Thursday and almost 300 more to Friday’s low around 24,270. A 750-point rally off the lows took the index back on to a 25k handle on Tuesday but it is now back down almost 500 points since then. The USD index, meantime, peaked last Thursday morning at 90.50 and has subsequently been back down to 89.00 - its lowest level in just over two weeks. – before a modest rally yesterday to 89.25.

In economic news, the US trade deficit increased to a more than nine-year high in January, with the shortfall with China widening sharply. The Commerce Department said the trade gap jumped 5.0% to $56.6 billion. That was the highest level since October 2008 and exceeded economists’ expectations of an increase to $55.1 billion. The politically sensitive trade deficit with China surged 16.7% to $36.0 billion, the highest since September 2015. The deficit with Canada soared 65% to a three-year high of $3.6 billion. President Trump in late January imposed broad tariffs on imported solar panels and large washing machines, even before last week’s announcement of import tariffs of 25% on steel and 10% on imported aluminum.

After the international trade numbers were released, the Atlanta Fed updated its Q1 GDP forecast. From an annualized pace of 3.5% prior to the data, it now has just 2.8% as the contribution of net exports is even more negative than it had previously assumed. Improving global growth and a weaker dollar have been supporting overseas sales of American-made goods, though not enough to outpace inbound shipments and the Atlanta Fed model currently has trade subtracting -0.59 percentage points from Q1 growth. The US Dollar index opens in Asia this morning around 89.25.

On Tuesday, the Single European Currency put the Italian concerns firmly behind it to reach a best level around USD1.2410; the first time it had been back a 1.24 big figure in two weeks. On Wednesday, the EUR extended its gains to a high just under 1.2440 at lunchtime in Europe before then slipping back to the high 1.23’s in the New York afternoon session.

In crafting its response to the US President, The Times reports that, “Cecilia Malmström, the European Union commissioner for trade, warned Mr Trump that tariffs on EU steel and aluminium would prompt retaliation. The EU has identified an array of US products for potential countermeasure tariffs, including orange juice from the politically influential swing state of Florida; bourbon from Kentucky, the home state of Mitch McConnell, the senior Republican in the Senate; and Harley Davidson motorcycles, which are headquartered in Wisconsin, the home of Paul Ryan, the Republican Speaker of the House.” Tariffs on EU steel would “put thousands of European jobs in jeopardy, and it has to be met by a firm and proportionate response,” said Ms Malmström.

Back to Italy, where for the currency and stock markets, the worst possible outcome still remains a coalition between the Five Star Movement and the Northern League. It is feared that a government formed by the two populist parties would lead to a surge in public spending, adding to Italy’s record public debt and violating deficit rules set down by the EU. The markets are also worried by the League’s threats to pull the country out of the euro. For the moment, these two parties are busy trading insults with each other so it seems an unlikely outturn. Keep an eye on it though, as any change in sentiment could quickly turn into a negative for the euro which opens in Asia this morning at USD1.2395, AUD/EUR0.6300 and NZD/EUR0.5870.

The Canadian Dollar on Wednesday was by quite some margin the worst performer of all the major currencies we monitor closely here. USD/CAD reached an 8-month high just below 1.30, whilst GBP/CAD has hit 1.80 for the first time in 20 months. For the Antipodeans, AUD/CAD extended its gains to a 9-month high of 1.0120 whilst NZD/CAD at 0.9435 is the highest since early July.

As unanimously expected, the Bank of Canada left its target for overnight interest rates unchanged at 1.25%. Its Statement noted that, “Global growth remains solid and broad-based. In the United States, new government spending and previously-announced tax cuts are anticipated to boost growth in 2018 and 2019. However, trade policy developments are an important and growing source of uncertainty for the global and Canadian outlooks… While the economic outlook is expected to warrant higher interest rates over time, some continued monetary policy accommodation will likely be needed to keep the economy operating close to potential and inflation on target. Governing Council will remain cautious in considering future policy adjustments, guided by incoming data in assessing the economy’s sensitivity to interest rates, the evolution of economic capacity, and the dynamics of both wage growth and inflation.”

The Bank of Canada statement didn’t directly mention NAFTA, it is clear that concerns about trade are a growing negative. Looking at interest rate markets, they aren’t fully pricing in the next rate increase - which would be the fourth in the cycle - until July whereas a month ago, overnight index swaps were pricing in at least one increase by May, with a good chance of an April hike. The Canadian Dollar has been the worst performing major currency so far in 2018 and it opens in Asia this morning at USD/CAD1.2920, AUD/CAD1.0105 and GBP/CAD1.7950.

Expected Ranges

  • AUD/NZD: 1.0670 - 1.0760 ▼
  • GBP/AUD: 1.7685 - 1.7870 ▼
  • AUD/USD: 0.7760 - 0.7885 ▼
  • AUD/EUR: 0.6265 - 0.6360 ▼
  • AUD/CAD: 1.0065 - 1.0180 ▼