USD opens the week on a firm note ahead of Wednesday’s FOMC Statement. UK CPI and MPC meeting will be highlights before EU Summit and Brexit transition deal.
Monday 19 March, 2018
Daily Currency UpdateThe British Pound had a good week, finishing up against a generally well-bid US Dollar and gaining against every one of the major currencies we follow here. Tuesday was the Chancellor’s well-received Spring Statement and by Wednesday in Asia, GBP/USD hit a best level of 1.3995. Trading was quite volatile on Thursday and Friday but the GBP finished only half a cent down from the week’s high and almost a cent up from Monday’s opening level. GBP/AUD hit 1.80 for the first time since June last year, whilst GBP/NZD hit a one-week high of 1.93. Overnight in Asia, the pound has held on to its gains against the Aussie and Kiwi Dollars but has slipped around a quarter of a cent against a generally firm USD.
The UK media is still totally focused on a diplomatic row between the UK and Russia, with the weekend’s political TV talking of little else. According to a somewhat alarmist report in The Guardian newspaper, “Banks, energy and water companies are on maximum alert over the threat of a serious cyber-attack from Moscow as concern continues over the safety of Russian exiles in the UK. Fears that Russia will target Britain’s critical national infrastructure have prompted round-the-clock threat assessments by the UK’s financial sector, energy firms and GCHQ, the UK’s largest intelligence agency, along with the security services MI5 and MI6.”
For the week ahead, two main events look set to dominate financial markets. After its none-too-subtle warnings of a rate hike in May, the voting patterns at Thursday’s Bank of England MPC meeting will be scrutinized for further hints on signaling. Also beginning on Thursday is a two-day EU Summit in Brussels. The European Council is expected to officially sign off an agreement effectively extending Britain’s membership of the EU’s single market and customs union until December 31, 2020. Though there are still plenty of threats coming from both the UK and EU about what would happen in the event of no deal being agreed, many of the differences which existed over the terms of the transition period have been removed by the UK agreeing to all the demands made from Brussels on freedom of movement and citizens’ rights.
Key MoversThe US Dollar fell for 2 ½ days, rallied for 2 ½ days and ended a week of high political drama with its index against a basket of major currencies almost exactly unchanged at 89.75. US CPI figures on Tuesday were supposed to be the highlight of the week but were completely overshadowed by the firing of US Secretary of State Rex Tillerson. This added to a general sense of chaos in the Trump Administration and the USD fell to a low around 89.15. As the revolving door into government turned once more, former Bears Stearns economist and TV pundit Larry Kudlow was announced as the President’s Chief Economic Advisor. As he hit the financial TV studios talking up the USD, so it rallied to a best level of 89.95 before ending the week where it had begun at 89.75. Overnight in Asia, both the GBP and EUR have lost around a quarter of a cent against the USD and its index has edged up to 89.90.
One thing we can say for certain is that nothing is certain any more. As we look at calendars, diaries and schedules and try to pick out the highlights or financial markets, they can be quickly overtaken by events or one short Tweet from President Trump. The economic and political agenda is now more fluid and rapidly changing; something which itself will lead to an increase in volatility across asset classes. With this caveat in mind, the week’s main event that we thus far know of is the two-day FOMC meeting beginning on Tuesday. A new Statement, dot-points and economic projections will be available at 2pm Eastern Time on Wednesday and markets are pricing a 94.4% probability of a 25bp hike in rates; the sixth time rates have been raised since December 2015. Half an hour afterwards will be Jerome Powell’s first post-FOMC Press Conference and he’s sure to be grilled on his views on inflation, growth, tariffs and trade.
It is a long-held tradition that only the Fed speaks about interest rates and only the US Treasury makes official comments on the Dollar. When asked about interest rates last week, however, Karry Kudlow said on TV, “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.” The US Dollar index opens in Europe this morning around 89.90.
The EUR ended last week marginally lower against the USD, having followed the pattern of all the major currencies by rallying for the first half but then falling persistently through Thursday and Friday. EUR/USD opened on Monday at 1.2310 and added exactly once cent to a best level in Asia on Wednesday of 1.2410. As ECB officials took the opportunity talk the currency lower, EUR/USD fell almost three-quarters of a cent on Thursday and on Friday afternoon hit an 8-day low of 1.2260 before then rallying around 30 pips into the New York close. Overnight in Asia, the EUR is back testing Friday’s lows and a move down through technical support around 1.2250 could open the way to the March 1st low at 1.2170.
Figures released on Friday showed the final Eurozone annual inflation rate was 1.1% in February 2018, down from 1.3% in January. This was one-tenth below the provisional estimate. The core rate excluding food and energy prices was unchanged at 1.0%, in line with the consensus and first estimate. Looking at the whole of the European Union rather than just those countries which use the euro currency, annual inflation was 1.3% in February 2018, down from 1.6% in January. The lowest annual rates were registered in Cyprus (-0.4%), Greece (0.4%), Denmark and Italy (both 0.5%). The highest annual rates were recorded in Romania (3.8%), Estonia and Lithuania (both 3.2%). Compared with January, annual inflation fell in eighteen Member States, remained stable in two and rose in seven.
With a still very subdued inflation backdrop, the main data for the week ahead will be survey-based. On Tuesday we have Germany’s ZEW survey of investor expectations, and on Thursday it’s the ifo Survey which has recently been incredibly upbeat in its numbers and commentary. Sandwiched between these are the so-called ‘flash PMI’s’ for manufacturing and service sector activity in France, Germany and the Eurozone. The ECB will publish its monthly Economic Bulletin on Thursday; something to which markets never used to pay attention but will which now be pored over for any signals hinting at a shift in monetary policy settings. The EUR opens in London this morning at USD1.2260 with GBP/EUR in the mid-1.13’s.
The Australian Dollar rose for three days of last week then fell for the final two with a net loss from the previous Friday’s close around 1 ¼ cents. For the early part of the week, the AUD tracked risk sentiment very closely. Indeed, on Wednesday, the high of the US equity market coincided almost exactly (in fact within 10 minutes) with the high of the AUD/USD exchange rate at 0.7905. The AUD managed to stay on a US 79 cents ‘big figure’ for less than two hours, however, and by Thursday afternoon in New York it was trading on a 77 handle. Its closing level on Friday just above 0.7710 was the lowest since Christmas and this morning in Asia it is in the high-76’s for the first time since December 21st.
After the mixed messages from surveys of business activity and the GDP report – explained in part, by the different time periods which they covered – investors will now be focusing solely on Q1 data. The most important of those this week will be the February labour market report on Thursday. Last time around, there was a 16k increase in employment comprised of a 50k drop in full-time employment and a 66k increase in part-time work. The unemployment rate fell one-tenth to 5.5%. For the February numbers, consensus estimates are for a 20k increase in employment which just about keeps pace with demographic change to leave the jobless rate steady at 5.5%. Sadly, we don’t get monthly wage price data from the official statisticians so we’ll get only a partial answer to the question of how household expenditure is likely to be holding up.
Before the labour report, on Tuesday we’ll get to see the Minutes from the latest RBA Board meeting. There’s unlikely to be any great surprise here, as the key message from the Central Bank recently has been one of steady and gradual improvement towards its goals on inflation and economic growth. The currency won’t have been causing any problems, there are no imminent financial stability risks from the housing market and though trade tensions globally are on the rise, Australia is not one of the countries most threatened by them. The Australian Dollar opens this morning at USD0.7680 with GBP/AUD at 1.81.
The Canadian Dollar had a very poor week, the worst performer amongst the six major currencies we follow closely here. After Tuesday’s speech from Bank of Canada Governor Stephen Poloz, USD/CAD jumped more than a full cent to 1.2970 and after a very soft set of housing numbers on Thursday and more talk of US tariffs, it broke 1.30 for the first time since June last year to register its biggest weekly gain since May 2016. GBP/CAD hit 1.82; its best level since the EU referendum 20 months ago whilst AUD/CAD and NZD/CAD registered 9-month highs.
In his major speech which focused on labour market slack, the Governor of the Bank of Canada said the country is at the “sweet spot” of the business cycle where growing demand is actually generating new capacity as companies invest to meet sales, a process he said the BoC has an “obligation” to nurture. On monetary policy, Mr. Poloz said, “It should be clear that there are likely to be significant economic benefits associated with allowing the economy to find its way to a higher, more productive economic equilibrium, if this can happen within our inflation-targeting regime… “We cannot know in advance how far the capacity-building process can go, but we have an obligation to allow it to occur.” It sounds like Mr Kudlow’s comments on the Fed have a very receptive audience north of the border.
Most of the important Canadian events come at the end of this week. On Thursday afternoon Senior Deputy Governor Carolyn Wilkins is scheduled to speak whilst on Friday we have retail sales and CPI numbers; a good chance to see just how much room Mr Poloz has to let the economy run a little hotter without tightening monetary policy. The Canadian Dollar opens in Europe this morning with USD/CAD in the low-1.31’s and GBP/CAD in the mid-1.82’s.
The New Zealand Dollar had very similar price action to its Aussie cousin last week, though its peak on Wednesday came somewhat earlier during the day and the sell-off against the US Dollar on Friday was less marked; allowing the AUD/NZD cross to trade down on to a 1.06 ‘big’ figure by the New York close. Indeed, whilst AUD/USD fell to its lowest since Christmas, NZD/USD only eased back to the lowest in 10 days, closing in New York around 0.7215; around 1 ¼ cents below its midweek peak. This morning is Asia, the Kiwi has struggled to hold on to US 72 cents and a break through technical support around 0.7190 could open the way for a return to the 2018 low at 0.7080.
In economic data released this morning, New Zealand's Performance of Services Index experienced a slight slip in expansion levels during February with a 0.7 point drop to 55.0; but still just above its long-term average of 54.4. The fourth quarter GDP numbers out last week showed the service sector grew around 1.1% but on the evidence of the first two months of 2018, it seems the pace of expansion in Q1 may be somewhat slower. Indeed, local experts BNZ who co-produce the PSI have a preliminary estimate of 0.6% penciled-in for GDP.
On Thursday this week, the RBNZ Board meeting will be the last under the interim leadership of Grant Spencer. Incoming Governor Adrian Orr takes up his post on March 27th and the big focus of attention will be the new Policy Targets Agreement. In an interview last week, Finance Minister Grant Robertson said, “I understand the limits of monetary policy, so we want [the Reserve Bank] to be considering maximizing employment but, unlike a particular inflation target, we would not be seeking a particular employment target through monetary policy.” The current PTA between the Government and Central Bank outlines the RBNZ’s commitment to keep inflation between 1% and 3% on average over the medium term, with a focus on keeping future average inflation near a 2% target midpoint. The 2% target was added when Graeme Wheeler took over in 2012; mainly to signal a symmetry of tolerance around a mid-point but also to underscore that a number persistently just under 3% would not be a desired outcome. Before the RBNZ meeting, on Tuesday we get Westpac’s consumer confidence report and Wednesday brings the net migration numbers. The Kiwi Dollar opens in London this morning at USD 72 cents with GBP/NZD in the low 1.93’s.
- GBP/USD: 1.3850 - 1.3995 ▼
- GBP/EUR: 1.1305 - 1.1390 ▲
- GBP/AUD: 1.8000 - 1.8370 ▲
- GBP/CAD: 1.8200 - 1.8350 ▲
- GBP/NZD: 1.9290 - 1.9400 ▲