USD slumps after Fed rate hike. GBP/USD at a 7-week high. EUR awaits ‘flash’ PMI data
Thursday 22 March, 2018
Daily Currency UpdateAlthough on Tuesday GBP/USD couldn’t maintain its hold on a 1.40 handle, yesterday it traded as high as 1.4075 ahead of the FOMC and was up against four of the five other currencies we track closely here. The exception was the Canadian Dollar, with GBP/CAD down more than half a cent to 1.8245. Once the Fed Statement was released and the USD sold off despite a somewhat higher forecast profile for official interest rates in 2019, GBP/USD extended its gains to 1.4150 though slipped back against the Aussie Dollar to be almost three quarters of a cent down from its earlier high near 1.8310. Overnight in Asia, the pound has traded up to a near 3-week high of 1.4170 before easing back to last night’s closing level.
There was arguably something for everyone in the UK labour market report, though on balance the message was definitely a positive one. Unemployment rose by 24,000 in the three months to January to 1.45 million yet there were 32.25 million people in work, 168,000 more than for the previous 3-month period and 402,000 more than for a year earlier. The Office for National Statistics noted the employment rate (the proportion of people aged from 16 to 64 who were in work) was 75.3%; higher than for a year earlier (74.6%) and the joint highest since comparable records began in 1971. The unemployment rate, meantime, was 4.3%, down from 4.7% a year earlier and the joint lowest since 1975.
We wrote here yesterday morning that, “In its February inflation report, the Bank of England suggested that a 4.4% unemployment rate would begin to put upward pressure on wages. If this happens today, then the GBP might well find some more support.” This is exactly what transpired. The new figures show that average weekly earnings for employees in Great Britain in nominal terms (that is, not adjusted for price inflation) increased by 2.6% excluding bonuses, and by 2.8% including bonuses, compared with a year earlier. The squeeze on real earnings hasn’t officially ended as today’s numbers were for January whilst the CPI data are for February. But, if the wage data are repeated next month, then the 12-month run of negative earnings growth will finally come to an end; a relief not just for workers, but also for the UK Government and the Bank of England whose forecasts of a return to real pay growth have lately been consistently too optimistic.
Key MoversLate on Tuesday evening, the USD index against a basket of major currencies was back at 90 for the first time in almost three weeks. Wednesday saw the USD slip around a quarter of a point to 89.75 before the Fed announcement and then extend its losses by a further half-point late in to the New York afternoon despite a somewhat higher forecast profile for official interest rates in 2019. By the close of business, the USD was at the bottom of our one-day performance table.
A very uncontroversial FOMC Statement noted, “the labor market has continued to strengthen and economic activity has been rising at a moderate rate. Job gains have been strong in recent months, and the unemployment rate has stayed low. Recent data suggest that growth rates of household spending and business fixed investment have moderated from their strong fourth-quarter readings. On a 12-month basis, both overall inflation and inflation for items other than food and energy have continued to run below 2 percent. Market-based measures of inflation compensation have increased in recent months but remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.”
There had been some speculation ahead of the FOMC meeting that the Fed would signal a total of four rate hikes in 2018 rather than the three which had previously been forecast. It didn’t do that (which may explain some of the subsequent USD weakness) but it did raise its median estimate for 2019 by 25 basis points. Looked at another way, it was previously penciling-in seven more rate hikes until the end of 2020 but has now added an extra one, with two more to come in 2018, three more in 2018 and another two in 2020. Quite why this should have been taken as a trigger to aggressively sell the USD is something of a mystery but we’d always caution against reading too much into immediate post-FOMC moves which are often prone to re-appraisal and reversal. The US Dollar index opens in Europe this morning around 89.25.
The euro continues its rather lacklustre performance and though on Wednesday it rallied off the Asian lows from USD1.2245, it couldn’t get back on to a 1.23 ‘big figure’ before the Fed announcement; reaching a high of 1.2295 in the European afternoon before then falling around a quarter of a cent immediately pre-FOMC. It fell against the CAD, AUD and GBP, was unchanged against the NZD and rose against the USD. After the Fed Statement and Press Conference, the EUR rallied in line with all the other non-USD currencies, reaching almost 1.2330 by the New York close and overnight in Asia has extended its gains by another 20 pips.
The German Council of Economic Experts (GCEE) slightly revised upwards its growth forecast for 2018. The GCEE now expects real gross domestic product (GDP) to grow by 2.3 % in 2018 and 1.8 % in 2019. The main reason for the upward revision is the renewed improvement of the international economic environment. Its new report says, “After the strong growth of recent years, Germany is experiencing an economic boom. In this situation, the continuing expansionary monetary policy of the ECB contributes to the rise in the degree of overutilisation. Even more expansionary impulses will follow if CDU, CSU, and SPD implement the fiscal measures stated in their coalition agreement”. The GCEE has revised upwards its forecast for GDP growth in the euro area to 2.3% in 2018. It expects a growth rate of 1.9 % next year. Despite the upward revisions, the experts warned that, “Positive growth prospects should not obscure the fact that risks to the economic development have risen in recent times. Next to the election result in Italy and uncertainties about the outcome of the Brexit negotiations, the US announcement to increase customs tariffs on steel and aluminum weighs most heavily. A spiral of protectionist measures would have negative consequences both for the world economy and for the German economy.”
Today we have the ifo Survey of businesses which has recently been incredibly upbeat in its numbers and commentary. It is not unusual to see a divergence between the ZEW and ifo surveys but if the ifo repeats the downbeat message from investors on Tuesday, the EUR is likely to remain subdued. Before then, however, there are the ‘flash estimates’ of the PMI Surveys in France, Germany and the Eurozone. The EUR opens in London this morning at USD1.2350 with GBP/EUR in the mid-1.14’s.
As a perfect cocktail for a lower Aussie Dollar, simply mix together higher US short rates, a fall in the gold price, 700 points off the Dow Jones Average and a two-point jump in the VIX. Sprinkle on some weaker local economic data and it makes quite a powerful punch. From a high in Sydney yesterday morning just above 0.7780, AUD/USD fell almost a full cent before lunchtime in New York and was down against every one of the major currencies we follow closely here. AUD/EUR was down around five-tenths of a percent whilst AUD/CAD, AUD/USD and AUD/NZD were all almost seven-tenths lower. Overnight in Asia on this last day of the week, the Australian Dollar has stabilized somewhat as gold has jumped one per cent to $1342, with AUD/USD clawing its way back to a 77 cents ‘big figure’.
A fascinating article on Bloomberg notes that, “Australia finds itself between a rock and a hard place… As a close ally of the U.S. and the most China-dependent economy in the developed world, the $1.3 trillion economy has a lot to lose as the world’s two biggest trading nations lock horns.” It points out that China buys 35 percent of Australian exports, equivalent to about 8 percent of gross domestic product, and dominates iron ore shipments and education. Already, in response to the Turnbull government’s announcement of measures to try to thwart Chinese political influence, Beijing is reportedly seeking to discourage students from studying Down Under by warning about safety risks. Education is a significant export, and it’s not much of a stretch to imagine China could undertake far more disruptive measures in the event Australia sided with the U.S. in a trade war. Education exports to China were worth A$9 billion in the year through June 2017, up 260 percent in a decade. As for tourism, almost 1.4 million Chinese visited Australia in 2017 and pumped a record A$10.4 billion into the economy, up 14 percent from 2016.
As analysts dig deeper into the details of Thursday’s labour market report, they are also finding more reasons to be cautious about the near-term outlook. Commonwealth Bank note a rise in
underemployment and labour force underutilisation in February cast doubt as to whether wage pressures will build sufficiently to help boost inflation and economic growth. “The employment report showed there was still plenty of labour market slack left in the economy… Australia’s underemployment rate edged up 0.1 percentage points to 8.4% in February. This will limit a significant pick up in wages growth and limit upward revisions to Australian interest rate expectations.” The Australian Dollar opens this morning in the low-USD 77’s with GBP/AUD at 1.83.
The Canadian Dollar yesterday came very close to achieving three consecutive days at the top of our one-day performance table but a late sell-off on Thursday afternoon prevented it from doing so. During the European morning, USD/CAD dropped to a low around 1.2835 – its lowest level in more than a week – before clawing its way back on to 1.29 late in the New York afternoon. GBP/CAD fell two-tenths whilst AUD/CAD fell six-tenths of a point to 0.9955; its lowest level in almost three weeks. Overnight in Asia it has traded in a fairly tight range though we’d note that GBP/CAD is now down almost 2 cents from Wednesday’s 1.8360 high.
During testimony to the Senate Finance Committee, US Trade Representative Robert Lighthizer confirmed a list of countries which will be exempt from tariffs on steel and aluminium: Canada, Mexico, EU, Brazil, Australia, Argentina and South Korea. Lighthizer told senators that Trump agreed, “based on a certain set of criteria, there are some countries with whom we're negotiating and the question becomes the obvious one that you think, as a matter of business, how does this work? So what he has decided to do is to pause the imposition of the tariffs with respect to those countries."
The global impact of the steel and aluminium tariffs is now only 30% of the original announcement. The exemptions for Canada were already known so the direct impact was minimal but, to the extent that it might indicate a willingness on the part of President Trump to continue to negotiate and do deals, there was a mild sense of relief for the Canadian Dollar.
In her speech at the University of Toronto’s Rotman School of Management, Bank of Canada Senior Deputy Governor Carolyn Wilkins said that while much has been accomplished to make the financial system more resilient, the job is not done. “We have accomplished much over the past decade, and we are now reaping the benefits… They might not be durable, though, unless we focus on some unfinished business: refining our understanding of the role of monetary policy in supporting financial stability, keeping regulatory and supervisory policies current as risks evolve, and planning for recovery and resolution when things go wrong.” As for the immediate pressures on monetary policy, we may get more of a clue later today when CPI inflation data for February is published. Consensus expectations are for annual CPI to rise from 1.7% to 2.0%. The Canadian Dollar opens in Europe this morning with USD/CAD at 1.29 and GBP/CAD in the low-1.82’s.
For a currency which has recently been very volatile, the most surprising feature of the New Zealand Dollar over the past few days has been how little it has actually moved. Having risen to almost 0.7240 after the FOMC announcement, NZD/USD went on to a best level in Europe yesterday morning just under 0.7260. This was as good as it got but even as we saw a more broad-based dollar rally during the Northern Hemisphere day, NZD/USD still managed to hold on to a 72 cents ‘big figure’. AUD/NZD fell around 70 pips whilst NZD/EUR and NZD/GBP both finished higher on the day.
The weekend has already started in New Zealand and although a new policy targets agreement (PTA) between the Government and Central Bank was said to be imminent, this will now come next week when the new RBNZ Governor Adrian Orr takes up his position. The central bank is presently mandated to keep inflation within a 1 percent to 3 percent target range, with a focus on the midpoint. The new government has said it wants the central bank to target maximizing employment along with price stability. It is also pushing for other changes, including shifting to a committee structure as opposed to a sole-decision maker, and a wider review of the Reserve Bank Act is currently underway. A press conference has been scheduled for 9am Monday morning where Finance Minister Grant Robertson and Mr. Orr, will reveal the new Policy Targets Agreement (PTA) they have signed, along with the outcomes of phase-1 of the RBNZ Act review.
A change of Central Bank Governor is always a chance to focus on style as well as substance. Analysts will be watching to see what changes the new man introduces to communication, both in formal Press Conferences around RBNZ policy meetings and also in speeches up and down the country. As a former Deputy Governor of the Reserve Bank where he headed up the economics division, he’ll certainly already know his way around the building. The Kiwi Dollar opens in London this morning at USD 72 cents with GBP/NZD in the low-1.95’s.
- GBP/USD: 1.4080 - 1.4200 ▼
- GBP/EUR: 1.1420 - 1.1510 ▼
- GBP/AUD: 1.8190 - 1.8345 ▼
- GBP/CAD: 1.8115 - 1.8300 ▼
- GBP/NZD: 1.9405 - 1.9580 ▼