US markets now driven by Twitter and TV. No UK economic data today, but watch for any comments about next week’s Brexit Summit
Friday 16 March, 2018
Daily Currency UpdateThe British Pound rose against all the major currencies apart from the US Dollar on Thursday, with gains extending to more than a full cent against both the Canadian and Australian Dollars. GBP/USD was volatile within a half cent range from 1.3930 to 1.3980 and ended the New York session pretty much near the middle of the day’s trading band. Overnight in Asia it had an early dip to 1.3920 but has subsequently recovered to the 1.3940 area in a session which has seen very little movement across most of the major currency pairs.
With no fresh economic news and the UK media still totally focused on a diplomatic row between the UK and Russia, we can turn instead to a study by the Economist Intelligence Unit and reported in The Guardian which found that British cities have dropped to their cheapest levels internationally since at least the 1990s. It said the sharp fall in the pound after the EU referendum – still more than 6% lower than it was on the eve of the vote – had sent London and Manchester sharply down the rankings.
Analysing a basket of more than 150 goods in 133 cities around the world, the report found London was now almost a third cheaper than Paris to visit, and almost a 10th cheaper than Dublin. The UK capital fell six places to 30th in the rankings for the most expensive city in Europe, while Manchester dropped five places to 56. Singapore retained the title as the world’s most expensive city for a fifth year running, while Paris and Zurich topped the list in Europe.
There is now less than a week until the EU Summit at which decisions will be taken on the next steps in the Brexit negotiations. With politicians focused almost exclusively on Russia over the past few days, this Summit has rather dropped off the radar screens in the UK. As the date approaches, though, do be prepared for comments from either side which have the potential to move the pound suddenly and without any warning. Having orders already in place is one of the best ways to profit from or to mitigate risk as volatility picks up.
Key MoversIt’s been a rare event recently but the US Dollar finished the day on Thursday at the top of our one-day currency performance table. Its index against a basket of major currencies rose more than four-tenths of a point from its early low just below 89.20 to a best level at the end of the London afternoon around 89.62; the highest in just over 48 hours. Overnight in Asia it has held these gains with both GBP/USD and EUR/USD little changed from their New York closing rates.
As Bloomberg reports the Larry Kodlow story, “Within minutes of being named as top White House economic adviser, Kudlow was on the airwaves to push a tough stance toward China and promise a new phase of tax cuts - hitting two of Trump’s favorite talking points and making clear why he was chosen for the job. The economist and CNBC contributor also demonstrated a Trump-like willingness to ignore taboos. In a rare departure for someone about to take a senior government job, he questioned Federal Reserve monetary policy and even offered a trading recommendation ‘I would buy King Dollar and I would sell gold.’” Yesterday morning the former Bear Stearns chief economist was back on TV. He told CNBC that, “I must say as somebody who doesn’t like tariffs, I think China has earned a tough response not only from the United States... A thought that I have is the United States could lead a coalition of large trading partners and allies against China, or to let China know that they’re breaking the rules left and right. That’s the way I’d like to see. You call it a sort of a trade coalition of the willing.”
It may not be a hard and fast rule, but it’s a long-held tradition that only the Fed speaks about interest rates and only the US Treasury makes official comments on the Dollar. It’s something of a game with reporters to try to catch out officials with a question inviting them to stray outside their usual remit. Larry Kudlow does not observe such traditions. Asked about interest rates, he said, “the profit picture is good. It’s looking real good, and growth is not inflationary just let it rip for heaven's sakes. The market is going to take care of itself. The story takes care of itself let it rip. The Fed will do what it has to do, but I hope they don’t overdo it.” With a President on Twitter and his Chief Economic Advisor on financial TV, it’s going to be very hard to keep up with all the breaking news and fresh volatility which markets now face. The US Dollar index opens in Europe this morning around 89.25.
After taking bottom spot on our one-day currency performance table on Wednesday, the EUR fell further on Thursday against the GBP and USD but rose against the three ‘Commonwealth Currencies’; the Australian, New Zealand and Canadian Dollars. Yesterday morning in London, EUR/USD stood around 1.2380 but by the New York afternoon it was struggling to hold on to a 1.23 ‘big figure’. Overnight in Asia, the pair dipped briefly on to 1.22 but has subsequently recovered to the low 1.23’s.
S France’s central bank revised up its 2018 growth forecast from 1.7% to 1.9% after data showed the economy grew 2.0% in 2017; its fastest growth in six years. Its updated economic outlook said that confidence indicators have held up better so far this year than it expected, joining the IMF, OECD and European Commission in raising their forecasts since the start of the year. Next year, the central bank sees growth easing to 1.7%, down from 1.8% previously, as exports are expected to offer less of a tailwind next year due to a lagged impact from the euro’s strength. It left its 2020 growth forecast unchanged at 1.6%. The economy is forecast to create 185,000-200,000 net new jobs annually through the end of the decade, cutting the unemployment rate to 7.9 percent by the end of 2020. That would be the lowest jobless rate since the end of 2008 and would also put President Emmanuel Macron within reach of a promise to cut it to 7 percent by the end of his term in 2022.
Of course, what still matters most for ECB monetary policy is the outlook for prices. The Banque de France forecasts that inflation will average 1.6% this year, then ease to 1.4% in 2019 before picking back up to 1.8% in 2020. Final February CPI figures for the Eurozone are released later this morning. The EUR opens in London at USD1.2320 with GBP/EUR in the low-1.13’s.
In his first TV appearance since being appointed chief economic adviser to US President Donald Trump, Larry Kudlow said, “I would buy King Dollar and I would sell gold.” Someone certainly listened to that advice as less than 24 hours later, the USD was up a quarter of a point and gold was down $6; neither of which helped the Australian Dollar on Thursday. AUD/USD was trading around 0.7870 during the London morning but by the New York afternoon had fallen to a low of just 0.7795; just a few pips above where it stood just before Friday’s US labour market report. Overnight in Asia saw a further dip to 0.7775 but the pair has subsequently recovered on to a 78 cents handle.
We mentioned last week that NAB scrapped one of the two RBA rate hikes in its forecast profile for 2018. Macquarie Bank is the latest local name to push back its forecast for the RBA’s first rate increase since late 2010, now seeing this in early 2019 rather than its previous forecast for August of this year. “The primary reason for pushing back our RBA call is that the Bank can err on the side of growing the economy faster for longer to erode spare capacity and have confidence that inflation is firmly moving back into the 2-3% target… After two years of below-target inflation, and at least another one to come, there seems little danger of generating a meaningful pick-up in inflation expectations from keeping interest rates low for longer.” Looking at short-term market interest rates, the implied probability that the RBA will deliver a 25 basis point rate increase by the end of this year is roughly 45%, a view that Macquarie describes as “about right.”
Deputy Governor of the Reserve Bank of Australia, Guy Debelle, said in a speech in Sydney this morning that investors are underpricing the risk of higher interest rates globally and need to seek adequate compensation for that risk. “Equity prices embody a view of the future that robust growth can continue without generating a material increase in inflation… there is little priced in for the risk that this may not turn out to be true.” Debelle said that spike in volatility in February was only “a small example of what could happen following a larger and more sustained shift upwards in the rate structure.” The Australian Dollar opens this morning at 78 US cents with GBP/AUD in the high 1.78’s.
The Canadian Dollar fell sharply on Thursday, with the whole of its decline coming during the North American time zone after a hardening of the US stance on trade and some very weak local housing market data. USD/CAD had traded pretty much sideways for 36 hours after its initial jump on the Poloz speech on Tuesday and by midday London time yesterday still stood at 1.2960. Within just a few hours it was a full cent higher, having moved on to a 1.30 ‘big figure’ for the first time since July 4th last year. GBP/CAD made fresh 20-month highs just above 1.8230.
Thursday brought existing home sales data in Canada. Recall these fell 14.5% in January from December to the lowest monthly level in three years as tighter mortgage rules hit demand. New and tougher rules on mortgage lending were imposed at the start of January amid fears of a housing bubble, requiring lenders to “stress test” borrowers to ensure they could withstand higher interest rates. The changes meant fewer buyers qualify for loans. Far from rebounding in February, home sales fell another 6.5% during the month and were down 16.9% in year-on-year terms. Sales were down from the previous month in almost three-quarters of all local housing markets, with large monthly declines in and around Greater Vancouver and Greater Toronto. Despite an 8.1% monthly increase in February, new listings nationally were still lower than monthly levels recorded in every month last year except January, and came in 6.4% below the 10-year monthly average and 14.6% below the peak reached in December 2017.
After the twin hits from the Poloz speech and these very weak housing market numbers, Friday brings the manufacturing sales data. The Canadian Dollar opens in Europe this morning with USD/CAD in the mid-1.30’s and GBP/CAD at 1.82.
The New Zealand Dollar outperformed its Aussie counterpart on Thursday with AUD/NZD falling from around 1.0775 to a low around 1.0720 late in the European afternoon. NZD/USD couldn’t hold on to a U73 cents ‘big figure’ and fell to 0.7275 which – like the AUD – takes it back to where it was just before last Friday’s US labour market report. Overnight in Asia on this last day of the week, the NZD has given back around half the gains it made yesterday.
In economic data released this morning, New Zealand's level of manufacturing expansion decreased slightly in February. The PMI for February was 53.4; one point lower than January, and the second lowest expansion value in the last 13 months. The February result was also exactly on par with the overall average PMI value since the survey began. BNZ who co-produced the PMI report said, “But the 53.0 average over the past three months is a clear slowing from the 57.6 average of the three months before that… New orders, while still positive, have cooled, raising questions about the sustainability of demand strength seen last year. Meanwhile, production expansion has slowed. The generally slower PMI suggests we shouldn’t expect Q1 manufacturing GDP to be much different from the flat result recorded in yesterday’s official figures for Q4.”
It has been very much a week of two equal halves for NZD/USD which peaked during Wednesday’s Asia session around 0.7350 and has now given up all the gains it had registered until then. The Kiwi Dollar opens in London this morning in the mid-USD 72’s with GBP/NZD in the low 1.92’s.
- GBP/USD: 1.3880 - 1.3995 ▼
- GBP/EUR: 1.1265 - 1.1380 ▲
- GBP/AUD: 1.7790 - 1.7950 ▲
- GBP/CAD: 1.8120 - 1.8300 ▲
- GBP/NZD: 1.9150 - 1.9390 ▲