GBP starts Monday on a positive note after a very poor week. Q1 GDP figures in the US and UK on Friday will be the highlight, with an ECB meeting on Thursday.
Monday 23 April, 2018
Daily Currency UpdateThe British Pound begins this Monday morning on a positive note after a very disappointing week in which it was kept off bottom spot in our league table only by the New Zealand Dollar. It began at USD1.4240 and hit a high on Tuesday morning of 1.4375; its best level since the EU referendum back in June 2016. Soft wage numbers, an even softer CPI report on Wednesday and a TV interview from BoE Governor Carney casting doubt on a May rate hike all served to knock the pound lower and it ended the week down at 1.3995; its first time in a fortnight below 1.40. Overnight in Asia, the so-called ‘cable’ rate has clawed back on to 1.40 and the GBP has gained on all its crosses from its very depressed levels on Friday evening.
The question for markets has been whether the soft run of economic activity data in the first quarter of the year, coupled with a sharp fall in the rate of inflation, would be sufficient to deter the Bank of England from raising interest rates at its May MPC meeting. For much of the day on Thursday, investors were still inclined to the view that it would not prevent a hike as this would be too great a loss of face for the Bank and its Governor, Mark Carney. Instead, Mr Carney gave an interview to the BBC news in which he bizarrely claimed that Brexit uncertainties might be a reason for holding off on a rate hike. He said there “will be some differences of view” at May’s Monetary Policy Committee meeting and that he is “conscious that there are other meetings over the course of this year." MPC member Michael Saunders gave a speech on Friday which suggests he has now caught the old BoE disease of deliberate obfuscation. He reiterated the BoE’s position that “any further tightening is likely to be at a gradual pace and to a limited extent” but added that “a key point is that ‘gradual’ need not mean ‘glacial’.”
In terms of economic numbers, this last full week of the month will develop very slowly indeed until the first quarter GDP numbers are released on Friday. There are the comprehensive housing loan data from trade association UK finance on Thursday and other private sector surveys will be published during the week but the GDP data and the market reaction to it could be crucial for expectations of the May 10th BoE MPC meeting. Ten days ago, the well-respected and often very accurate NIESR model said that GDP rose just 0.2% in Q1, largely due to severe weather in March which disrupted activity in all major sectors. The big question is whether this is a permanent loss of output or whether it will rebound in Q2. The Pound opens in Europe this morning with GBP/USD at 1.4020 with GBP/EUR in the low-1.14’s.
Key MoversThe US Dollar opens after a very good week, finishing top of the major currency league table. It wasn’t a linear performance, however. Its index against a basket of major currencies opened on Monday at 89.35 and dipped as low as 88.80 by Tuesday morning in Europe. From then on, a combination of soft economic data in the UK and Eurozone and much higher US bond yields pushed the USD index up to a two-week high of 90.0 before closing in New York on Friday at 89.90.
US bond yields rose sharply last week with 10-year Treasuries hitting a closing high of 2.96% on Friday; the highest since January 10th 2014 after reaching an intra-day high of 2.98%. The two-year yield, meantime, hit 2.461 percent, its highest level since September 8th 2008. Fresh worries about inflation were the main driver of this move. Although the Fed Beige Book reported that price gains were seen as moderate, the Philadelphia Fed Business survey was much less benign. “Price increases for purchased inputs were reported by 59 percent of the manufacturers this month, up notably from 44 percent in March. The prices paid diffusion index increased 14 points to its highest reading since March 2011. The current prices received index, reflecting the manufacturers’ own prices, increased 9 points to a reading of 29.8, its highest reading since May 2008.”
There is an FOMC meeting on Wednesday May 2nd, though financial markets ascribe a very low probability to a rate hike at a meeting for which no Press Conference is scheduled and at which no new economic forecasts will be presented. Futures-derived calculations put just a 1.8% probability of a hike at the upcoming meeting but a 98.4% likelihood of a move on June 13th. Markit’s version of the PMI surveys is usually ignored by investors who prefer to focus on the ISM number. With the current nervousness about inflation, however, the ‘flash estimate’ of the PMI today will be watched closely for any clues it may offer about price pressures. The USD index opens in Europe this morning at 89.90.
The EUR begins this Monday morning after a mixed week in which it fell against a quite buoyant US Dollar but rose against all the other major currencies to take silver medal spot on the league table. It opened on Monday around 1.2330 and reached a high on Tuesday just above 1.2410; its first time back on a 1.24 ‘big figure’ since March 28th. It slipped on Wednesday after lower CPI figures, fell further after the Fed Beige Book then tumbled on Friday after comments from ECB President Draghi sent EUR/USD down to a low of 1.2265; its weakest since Monday April 9th. Overnight in Asia, the EUR has failed to bounce in any meaningful way and from a technical perspective, a break through last week’s low would open up a potential move down to 1.2225.
On Friday afternoon, President Mario Draghi acknowledged the Eurozone slowdown in a statement at the International Monetary Fund meetings in Washington, but maintained his optimism that the expansion will continue. “Notwithstanding the latest economic indicators, which suggest that the growth cycle may have peaked, the growth momentum is expected to continue.” A Bloomberg story citing anonymous ECB officials said, “European Central Bank policy makers see scope to wait until their July meeting to announce how they’ll end their bond-buying program, according to euro-area officials familiar with the matter… Governing Council members want sufficient time to judge if the economy is overcoming its first-quarter slowdown, the officials said, asking not to be identified because the internal deliberations are confidential. That could mean the June meeting, which would have the advantage of linking the decision to updated economic forecasts, might be too soon.”
There is an ECB Council meeting on Thursday this week, which explains why the officials quoted on Friday were ‘off the record’; a policy which does the ECB no credit at all in terms of openness and transparency. Mr Draghi’s comments were limited to the economy and made no mention of monetary policy so technically were within the letter, if not the spirit of established protocols on communication. Ahead of Thursday’s meeting, even more attention than usual will be placed on today’s ‘flash estimates’ of Eurozone PMI and Tuesday’s German ifo business climate index. The EUR opens in London this morning at USD1.2275 with GBP/EUR in the low-1.14’s.
It was mixed week for the Aussie Dollar, which didn’t perform quite as poorly as a simple focus on the AUD/USD exchange rate might suggest. The pair opened on Monday around 0.7770 and traded essentially sideways in a relatively tight range until the close of business on Wednesday. On Thursday, it initially sold off to just below 0.7750 on a softer than expected labour market report but a surge in commodity prices then lifted it back on to 78 US cents for the first time in 6-days before sharply higher US bond yields drove a strong USD recovery. The intra-day low in AUD/USD on Friday of 0.7655 wasn’t quite the lowest of the year (that came around 0.7645 on March 28th) and it will be interesting to see if it can bounce from this area of technical support.
With all the focus on the monthly and quarterly macroeconomic data, it’s often easy to overlook numbers which show what actually reflects people’s day-to-day life and experiences, which is why we often look at credit card spending, housing affordability and the detail of inflation reports. Last week, the Australian Bureau of Statistics published its short-term visitor arrivals data. The February data showed that 115,200 visitors came from China with 113,400 arrivals from New Zealand. On a rolling 12-month basis, the total number of Chinese visitors was just under 1.4 million; overtaking Kiwi tourists for the first time ever. Like in many other places, Chinese tourists spend the most of any group in Australia. Ten years ago, Chinese tourists accounted for less than 5% of global travel spending. Today, the figure is almost 25%.
The highlight for financial markets in Australia this week will be the publication of quarterly CPI numbers on Tuesday. The consensus is for an increase of between 0.4 and 0.5% in Q1 which would take the annual rate of inflation to between 1.8 and 1.9%. It is very frustrating for investors who have no monthly CPI numbers to find there are four different quarterly measures produced: headline, core, trimmed mean and weighted mean. The RBA target is for core inflation (excluding volatile items) between 2-3% but the Q1 numbers are likely to show only slow and gradual progress towards this goal, with consensus expectations centering on 1.9%. The Australian Dollar opens this morning in Europe at USD0.7680 with GBP/AUD in the mid-1.82’s.
The Canadian Dollar started last week pretty well ahead of the Bank of Canada Meeting but finished it on a downbeat note after softer than expected economic data on Friday. Overall it gained against the GBP and NZD, was little changed against the AUD but lost out to the EUR and US Dollar. It opened the week with USD/CAD at 1.2605 and moved to a low of 1.2535 on Tuesday; its lowest level (CAD stronger) since mid-February. Unchanged interest rates from the Bank of Canada on Wednesday lifted the pair to 1.2650 and after soft local data in a strong USD environment on Friday, USD/CAD ended the week up at 1.2765 which is pretty much where it has remained after a very quiet overnight session in Asia.
Last week, Canadian Foreign Minister Chrystia Freeland said Canadian, Mexican and US ministers seeking to revamp the North American Free Trade Agreement (NAFTA) had made good progress on the key question of autos. Asked about a report that the United States wanted a deal in the next three weeks, she said, “Our commitment is to get a really good win-win-win outcome as quickly as possible and... we’ll work as long as it takes to get a great deal”. Speaking at the Canadian High Commission in London, her boss and Primee Minister Justin Trudeau told reporters, “So we’ve seen an opportunity to make significant progress on the NAFTA file… We’re making sure that we’re engaging in a way that is as fulsome and comprehensive as possible.”
The Bank of Canada Statement last week concluded that, “higher interest rates will be warranted over time… but the Governing Council will remain cautious with respect to future policy adjustments, guided by incoming data.” The first of that new data came on Friday and was softer than consensus expectations. Core retail sales were unchanged in March against forecasts of a +0.3% increase whilst headline inflation edged up only to 2.3% versus the 2.4% which had been expected. Governor Stephen Poloz will today appear before the House of Commons Standing Committee on Finance. He will be accompanied by Senior Deputy Governor Carolyn A. Wilkins and is sure to be questioned on progress and risks around NAFTA talks, as well as last week’s interest rate decision. The Canadian Dollar opens in Europe this morning with USD/CAD in the mid-1.27’s and GBP/CAD in the high-1.78’s.
The New Zealand Dollar had a very poor week, finishing down against every one of the major currencies we follow here. It was a story of persistent weakness rather than a single dramatic sell-off: for the first four days of this week it finished second from bottom, bottom, third-last and in second-last place on our one-day performance table. NZD/USD began the week around 0.7355 but at no point got higher than 0.7370 and by Friday’s close in New York it was struggling to hold on to a US 72 cents big figure. Overnight in Asia it has twice tested this level but failed to break lower and still hasn’t been on 71 cents since March 29th.
Across the Tasman Sea, a growing number of conduct issues are being uncovered by Australia’s Royal Commission into the major banks. In line with his pledge to communicate better with the public, RBNZ Governor Adrian Orr was on TV on Sunday. He said, ““The true problem and challenge going on in Australia is cultural… New Zealand bank culture is infinitely better than some of the activity you’ve seen in Australia.” Orr said the RBNZ, which is the nation’s banking regulator, is watching the progress of the inquiry because Australia’s four biggest banks together hold about 90 percent of deposits in the New Zealand financial system, although he doesn’t see the need for a similar inquiry in New Zealand. Showing a gift for a quotable quote, the RBNZ chief then said, “Boards attesting and signing off on issues comes down to the moral fiber of the institution… Market discipline and self-discipline are critical. That’s sunlight coming in, and hopefully disinfectant.”
The week ahead has the ANZAC day holiday on Wednesday and after the excitement (for economists at least!) of last week’s CPI numbers, it will be split into two halves of second-tier data. We have the always fascinating visitor arrivals figures on Tuesday and the merchandise trade data on Friday but as we have seen on many occasions already this year, the NZD does not need any domestic economic or news catalysts to be propelled either to the top or the bottom of our daily currency performance table. The Kiwi Dollar opens in London this morning at USD0.7205, with GBP/NZD around 1.9460.
- GBP/USD: 1.3990 - 1.4090 ▲
- GBP/EUR: 1.1380 - 1.1470 ▲
- GBP/AUD: 1.8185 - 1.8355 ▲
- GBP/CAD: 1.7750 - 1.7950 ▲
- GBP/NZD: 1.9400 - 1.9550 ▲