Trade, tariffs and Trump’s tweets will again drive sentiment globally. There are also plenty of Fed and ECB speakers for the FX market to digest.
Monday 9 April, 2018
Daily Currency UpdateA summary of the British Pound last week would have looked very different at lunchtime on Friday than it did by close of business in New York. The GBP had a pretty poor week until a powerful late rally after the US labour market report lifted the so-called ‘cable’ rate by more than a full cent. GBP/USD began at 1.4030 and in often volatile and choppy trading as a result of soft incoming UK economic data, eventually reached a high on Thursday morning around 1.4095. A move lower on Thursday was made worse by a further wave of selling once the technical support level from the previous Friday’s low at 1.4015 was broken and GBP/USD fell to a low for the week of 1.3985. It stayed around this level until lunchtime on Friday then rallied more 100 pips on to a 1.41 ‘big figure’ after the US employment numbers were published. Overnight in Asia, the market has been very quiet, with less than 20 pips separating the high and low in a range just under 1.41.
There were lots of economic surveys released last week. On Tuesday, the UK manufacturing sector posted 55.1 in March, little-changed from 55.0 in February, although the average reading over the opening quarter as a whole (55.1) was the weakest in a year, suggesting that the underlying pace of expansion has been generally slower since the start 2018. On Wednesday, the Construction PMI fell sharply from 51.4 in February to 47.0 in March, to register below the 50.0 no-change threshold for the first time in six months. On Thursday, the UK Services PMI dropped from 54.5 in February to 51.7, to signal the weakest service sector performance since July 2016. Survey respondents noted that snow disruption and unusually bad weather conditions in March had been a key factor holding back business activity growth but there were also reports that heightened economic uncertainty continued to act as a brake on growth during the latest survey period.
There isn’t a meeting of the Bank of England’s Monetary Policy Committee until May 10th. Commenting last week on what the PMI surveys might mean for the Bank of England, CIPS said, “A strong rebound is likely to be needed to ensure the majority of policymakers feel the economy is ready for another hike in interest rates.” For the moment, however, there’s no sign that the MPC is being deflected from what looks like a pre-ordained decision to raise rates another 25bp. We won’t see that latest monthly inflation numbers until April 18th and this week’s scheduled data are on industrial production and overseas trade and so unlikely to shift market expectations very much at all. The GBP/USD opens in Europe this morning in the high-1.40’s with GBP/EUR in the high-1.14’s.
Key MoversAlthough it was an especially wild week for US stock markets, its currency was remarkably stable with the US Dollar’s index against a basket of major currencies contained within a range of less than one percentage point for the entire period. It opened on Monday at 89.65 and hit its low for the week later that day around 89.45. From then on, and despite all the talk of tariffs and trade wars and huge volatility in equity markets, the USD rose gradually to a best level on Friday morning of 90.17; its highest since March 1st. As non-farm payrolls fell short of consensus estimates with a monthly rise of just 103k, the USD lost almost half a point to end the week around 89.75; just one-tenth higher than where it had begun on Easter Monday. Overnight in Asia, it has again been very steady at this level.
With all the focus on tariffs and trade over the past few weeks, last Thursday brought a timely reminder of why President Trump is so agitated about the subject. The US trade deficit grew by 1.6% in February from $56.7bn to $57.6bn and was the highest monthly trade deficit in ten years, going back to the GFC in 2008. Away from trade, there was plenty of other US economic data too. The ADP Survey of private sector payrolls showed an increase of 241k on the month whilst factory orders rose 1.2%. The ISM non-manufacturing index printed at 58.8, which was 0.7 percentage point lower than the February reading of 59.5. On Friday, the labour market report showed just 103k jobs were created in March compared to expectations of a 195k increase. The unemployment rate held steady at 4.1% and though earnings ticked up to 2.7%, this was still below the level which prompted the stock market panic at the start of February. Nonetheless, the DJIA fell more than 500 points on Friday and with a weekly high-low range for DJIA futures of 1,200 points, it was down a net 200 from its pre-Easter close.
Following the regular monthly rhythm of PMI numbers then the employment report (usually) on the first Friday of the month, next up it’s the inflation figures; an especially market-sensitive subject at present. After PPI figures on Tuesday, Wednesday brings the CPI data. Consensus expectations are for the headline rate to edge up from 2.2% to 2.3% with the core, ex-food & energy, measure seen rising from 1.8% to 2.1%. The Federal Reserve Bank doesn’t have a CPI target – instead it focuses on PCE – but numbers above 2% for both the headline and core will cement expectations of further monetary policy tightening whatever the wild day-to-day fluctuations of the US stock market. The USD index opens in Europe this morning at 89.75.
The EUR didn’t have a great week and though to some extent it was rescued by Friday’s US labour market report, it still finished up as the weakest of the major currencies we follow closely here. EUR/USD began at 1.2325 but this proved to be within just 15 pips of its best level of the week, reached in thin holiday trading conditions on Easter Monday. A succession of economic data disappointments pushed the Single European Currency ever-lower and it reached a low of 1.2220 on Friday morning; its weakest level in more than a month before rallying around half a cent into the New York close. Overnight in Asia, EUR/USD has been stuck in a narrow 20 pip range from 1.2265-85.
In economic data at the beginning of the month, March saw eurozone economic activity expand at the weakest pace since the start of 2017, as rates of increase moderated in both the manufacturing and service sectors. The final PMI Composite Index posted 55.2 in March, down from 57.1 in February and below the earlier flash estimate of 55.3. Manufacturing production rose to the lowest extent since November 2016, whereas service sector business activity increased at the weakest pace since August last year. Markit noted that, “National PMI data indicated that the upturn remained broad-based in nature, with output expanding in all of the countries covered. However, signs of a growth slowdown were also widespread, with the ‘big-four’ nations and Ireland all seeing moderations during the latest survey month. March saw the level of incoming new business rise at the weakest pace for 14 months, with slower increases signaled in Germany, France, Italy and Ireland.”
The next ECB Council Meeting is on April 26th but this won’t be one of the four occasions each year at which updated economic projections are published. Though the main focus at the beginning of the year was how the ECB would signal and/or accelerate the ending of its QE programme, the softness of recent economic data makes this a much less urgent consideration. In any case, President Draghi already dealt with this quite skillfully at the last meeting by signaling that QE would not be increased in size. In a week which is quite light for new incoming data, there are plenty of ECB speakers to listen out for, starting today in Brussels with Vitor Constancio. The EUR opens in London this morning at USD1.2275 with GBP/EUR in the high-1.14’s.
The Australian Dollar had a mixed week which felt more volatile than it actually was. AUD/USD opened at 0.7685 and hit its low of the week on Monday just above 0.7660 around lunchtime in New York as US equity indices plunged. A stunning stock market rally on Tuesday helped lift risk appetite and the AUD to 0.7705, whilst gains extended to a best level for the week of 0.7725 during the Asian morning on Thursday. Having fallen back to 0.7660 by Thursday’s close, the AUD ended the week around 0.7675; almost exactly where it had begun. Overnight in Asia, the AUD is around 20 pips higher but still hasn’t managed to climb back on to a US 77 cents ‘big figure’.
In economic data, this second week of April brings the NAB business survey on Tuesday and the Westpac consumer survey on Wednesday morning. During the afternoon on Wednesday, RBA Governor Phil ‘slow and gradual’ Lowe is speaking in Perth on “Regional variation in a National Economy” so the second part of this week will probably see quite a few bank research notes on differences between the States in this geographically-vast country.
Looking at the current state of play amongst the major banks’ interest rate forecasts, the two most aggressive forecasts for 2018 have already been scaled back. At the beginning of the year, both NAB and ANZ had two rate hikes penciled in for H2. Back in early February, ANZ dropped one of these hikes from its forecast profile whilst NAB did the same at the end of that month. Both Westpac and CBA see the RBA on hold throughout 2018, whist Westpac don’t have the first interest rate hike coming until 2020. This week’s scheduled economic data are unlikely to prompt any revisions to the forecasts. The Australian Dollar opens this morning in Europe in the high-USD 76’s with GBP/AUD in the low-1.83’s.
The Canadian Dollar had a very good week as optimism grew on a NAFTA agreement and incoming economic data held up pretty well. USD/CAD began on Monday at 1.2900 and though it moved up to 1.2940 on the initial stock market rout, this proved to be the high of the week. The pair fell 1 ½ cents by the close of business on Tuesday then extended the move to a low on Friday around 1.2740; its lowest level since the end of February before ending the week at 1.2770. GBP/CAD fell below 1.80 for the first time in three weeks whilst AUD/CAD fell below 98 cents. Overnight in Asia, trading in the Canadian Dollar has been pretty subdued and it is little changed from Friday’s closing levels.
According to CBC News, China's ambassador to Canada says he hopes Canada will side with his country as "strong defenders of free trade" in the escalating trade battle between his country and the United States. "China hopes that Canada will hold the justice, stand at the right side of history and work with China to safeguard the multilateral trading system," said Ambassador Lu Shaye on TV over the weekend. "I think Canada [taking] a neutral position is a help to China… We know the U.S. is the unique, only neighbour of Canada, and Canada has many problems with the U.S. We have noted that the position of the Canadian government is objective ... It's very good. Naturally, we hope Canada can do more. But we respect the Canadian position. Confronted with the current wave of protectionism set off by the United States, Canada and China should further work together to promote the FTA process between our two sides, and resist trade protectionism with concrete actions. China is willing to initiate the process with Canada at any time."
Away from NAFTA, Friday’s employment report showed Canada's economy added 32,000 new jobs in March, but the jobless rate remained steady at 5.8 per cent. The economy added more than 68,000 full-time jobs last month, but more than 35,000 part-time jobs were lost. For the week ahead, the data focus is mostly on the housing market. Tuesday brings building permits, Thursday is new home prices and Friday is nationwide home sales. The Canadian Dollar opens in Europe this morning with USD/CAD in the high-1.27’s and GBP/CAD at 1.80.
The New Zealand Dollar had a much wider trading range than its Australian cousin last week, even though there wasn’t much headline-grabbing news locally. From Monday’s low just above 0.7200, it was virtually a non-stop climb all the way up to a best level on Thursday around 0.7320 which at one point pushed the AUD/NZD cross down to a 9-month low of 1.0530. An 80-pip slide in NZD/USD saw it print a low on Friday of 0.7245 before a modest rally into the close at 0.7275 and a net gain on the week a little over a quarter of a cent. Given the continued volatility in the NZD, it should come as no great surprise to see it topping our one-day chart so far today, even though there has been no fresh news. NZD/USD is back at US 73 cents with GBP/NZD in the low 1.83’s.
The main attention in New Zealand this week will be on the REINZ Quarterly Survey of Business Opinion, usually abbreviated to the QSBO. Begun in 1961, it is New Zealand's longest running and most comprehensive business survey which covers manufacturers, builders, architects, wholesalers and retailers, and service sector firms. Information from these industries provides useful indicators of future investment patterns, and the likely direction and composition of economic growth in coming quarters. The last QSBO back in January had showed a sharp drop in business confidence following the General Election, with a net 11 percent of businesses expecting economic conditions to deteriorate over the first half of 2018 and Tuesday’s update will be watched closely for signs of improvement amongst NZ businesses.
As with the Bank of England, the next RBNZ monetary policy decision doesn’t come until May 10th. At its last meeting on March 22nd, the RBNZ kept the Official Cash Rate unchanged at 1.75%. It noted that, “GDP was weaker than expected in the fourth quarter, mainly due to weather effects on agricultural production. Growth is expected to strengthen, supported by accommodative monetary policy, a high terms of trade, government spending and population growth. Labour market conditions are projected to tighten further… Monetary policy will remain accommodative for a considerable period. Numerous uncertainties remain and policy may need to adjust accordingly.” For the week ahead, it appears that the uncertainties mostly come from overseas, and in particular what the US may or may not do next in its trade spat with China. The Kiwi Dollar opens in London this morning at 73 US cents with GBP/NZD at 1.93.
- GBP/USD: 1.3975 - 1.4150 ▼
- GBP/EUR: 1.1400 - 1.1495 ▼
- GBP/AUD: 1.8250 - 1.8370 ▼
- GBP/CAD: 1.7890 - 1.8070 ▼
- GBP/NZD: 1.9210 - 1.9415 ▼