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AUD/NZD drops half a cent after good NZ trade numbers

By Nick Parsons

In the wake of last Wednesday’s soft quarterly CPI numbers, the NZD fell around 1¼ cents against the US Dollar, whilst the AUD/NZD cross on Monday hit 110.70; its highest level since December 5th. All the major currencies have experienced high volatility over the past 18 hours and the NZD has been no exception to this trend. As European traders arrived at their desks, NZD/USD fell to 0.7285 but subsequently recovered 70 pips before settling around USD0.7330. Sometimes a good check on NZD performance is to look instead across the Tasman Sea. The AUD/NZD cross is down more than half a cent from its recent high at 110.20; the Kiwi has indeed done quite well.

New Zealand’s monthly trade balance in December 2017 was +$640 million. The surplus was the largest ever in a December month, and the largest in any month since March 2015. According to the official statisticians, exports of milk powder, butter, and cheese lifted total exports to a record $5.6bn in December 2017. Monthly exports were $1.1bn higher than in the same month a year earlier. The previous highest values for both dairy exports and total exports were recorded in the 2013/14 dairy export season, when dairy prices were at a high level. Looking by destination, the largest increase in exports amongst was to China, up $343m (28 percent), led by dairy products (up $230m).

Later this week, on Thursday we have the ANZ job advertising figures and at the end of the week, the always fascinating numbers on net migration and visitor arrivals. The New Zealand Dollar opens this morning in Asia at USD0.7335 and AUD/NZD1.1020.

In the 24-hour period from lunchtime in Sydney on Monday to the same time on Tuesday, AUD/USD was trapped in just a 25 pip range from 0.8078 to 0.8103. Over the past 18 hours, though, it has been much livelier. A break to the downside early in the European morning took AUD/USD down to 0.8045 but six hours later it was up at 0.8110. Barely two hours after that, the AUD had given up half the gains made earlier in the day. The moves followed those in EUR/USD, rather than being driven by any fresh views or insights on the Aussie Dollar itself.

Yesterday brought the monthly NAB Business Survey. Their business confidence index bounced 4pts to +11, the highest level since July 2017 whilst business conditions were unchanged at +13 which is above the long-run trend of +5. We’ve been pointing out recently that the RBA’s monetary policy stance will likely be determined more by growth in wages and household consumption than what’s happening to business conditions. In this respect there was perhaps a bit of disappointment that labour costs rose at an implied quarterly rate of 0.8%; down from 1.2% in the previous month’s survey.

For today, the big news will be the quarterly inflation numbers. To an outsider it always seems a very strange use of professional resources to not produce monthly data but then to produce a whole range of different quarterly measures. There’ll be headline CPI, the core trimmed mean and the core weighted mean for statistics geeks to pore over. The market consensus is for the headline rate to rise 0.7% q/q with an annual rate of 2.0%. The Australian Dollar opens in Asia today at USD0.8085, with AUD/NZD at 1.1020 and GBP/AUD1.7505.

Monday saw the first ‘down day’ for GBP/USD for the first time in 11 trading days, and at one stage early in the European morning on Tuesday, the pair dipped below 1.40 for the first time in a week. On a day which saw some large intra-day swings in both directions for all the major currencies, the GBP was the most volatile of all. GBP/USD fell 85 pips then rose 175 to be back where it opened on Monday morning in Asia around 1.4150.

Bank of England Governor Mark Carney appeared Tuesday afternoon before the House of Lords Select Committee on the economy. He refused to comment on the confidential government analysis of the economic impact of Brexit which was reported to have been shown to Cabinet Ministers over the weekend. These had suggested growth would be between 2-8 percent lower over the next 15 years. Instead, he repeated his view that the 2016 Brexit vote had, so far, effectively knocked 1 percent of GDP off the UK, relative to where it would otherwise have been, through weaker corporate investment and damage to household consumption due to higher inflation. He also hinted that the Bank is actually preparing to upgrade its forecasts at its Inflation Report next month. “I would expect that in 2019 we will see a pick-up in this economy all things being equal – strong global growth, greater certainty... A disorderly Brexit, not a likely scenario at all, is less likely than at the time we did the assessment in the fall.”

After Mr Carney’s remarks, a strong rebound in the GBP took it to the top of our one-day performance table; up against all the major currencies we follow closely here, not just the US Dollar. With no top-tier UK economic statistics on Wednesday, the Pound opens in Asia this morning at USD1.4150, GBP/AUD1.7505 and GBP/NZD1.9290.

After a rare top spot on our one-day performance table on Monday, the USD very marginally extended its gains early in Europe on Tuesday with its index reaching a high of 89.28; its best level since last Wednesday. As the EUR found bids after some solid Q4 growth numbers, however, the USD index quickly shed nearly three-quarters of a point to 88.60 before then rallying up to 88.95 on the Treasury Secretary’s latest currency comments.

Treasury Secretary Mnuchin told the Senate Banking Committee that he "absolutely supports a strong dollar over the long term… I strongly support we have a free currency market that we don’t intervene in." He also said also said that his comments on the dollar in Davos "were blown out of proportion by the media and were in no way intended to talk down the dollar." The latest figures on US consumer confidence also helped support the Dollar. The confidence index rose to a higher than expected 125.4 from an upwardly revised 123.1 in December and though the p resent conditions measure decreased to 155.3 from 156.5, the future expectations gauge increased to 105.5 from 100.8. The Conference Board statement said, “Consumers remain quite confident that the solid pace of growth seen in late 2017 will continue into 2018.”

The big event of the day will be President Trump’s State of the Union address at 9pm EST. The speech is titled, “Building a safe, strong and proud America”. A senior administration official told reporters earlier this week that Mr Trump will be laying out future plans and reflecting on his first year in office, “speaking from the heart” to discuss jobs and the economy, infrastructure, immigration, trade and national security. With US 10-year bond yields up at a fresh cycle high of 2.73% despite a sharp fall on the stock market, the USD index opens in Asia today at 88.90.

The EUR did not escape the volatility which was the feature of all the major currencies on Tuesday in the Northern Hemisphere. Early in the European morning, it very briefly broke below Monday’s 1.2345 low and just as it looked as though the market was set for a technically-driven drop, the pair reversed to be 110 pips higher at 1.2450 by lunchtime. During the afternoon it was then down and back on to a 1.23 handle before finally stabilizing in New York around 1.2405.

In economic news, real GDP in the Eurozone rose 0.6% q/q in Q4, slowing slightly from an upwardly-revised 0.7% in Q3, in line with the consensus. As it’s the preliminary report, there was no detailed breakdown of the various components: consumption, investment, government spending and net trade. It was the 19th consecutive quarter of growth in GDP and put the euro region’s 2017 expansion at 2.5%. That’s better than had been anticipated by the European Central Bank, and it’s a pace the region hasn’t seen since before the financial crisis in 2008. A separate release showed Eurozone economic confidence remained close to a 17-year high in January, dipping slightly to 114.7 in January from 115.3. Industrial sentiment held at a record at the start of the year. Confidence slipped among services providers and increased among consumers and construction firms.

Today we’ll see the CPI figures for the whole Eurozone area. These come after Tuesday’s surprisingly soft German numbers where a -1.0% m/m fall in January took the annual rate down from 1.6% to just 1.4%. Lower energy inflation made the largest contribution to the weaker headline figure while food inflation picked up. Expectations for Eurozone CPI are for the annual rate to dip to 1.3% from 1.4%. The EUR opens in Asia this morning at USD1.2405, AUD/EUR0.6515 and NZD/EUR0.5910.

Over the last few days, USD/CAD has settled in a 1.2280-1.2390 range with investors keen to get a sense of how the NAFTA uncertainties might be resolved. Having reached a high around 1.2375 around the end of the Asia session, USD/CAD then fell around half a cent during the European morning on Tuesday before settling around 1.2320.

There has been little incentive or desire to push the Canadian Dollar one way or another until at least we see what tone President Trump will strike in his State of The Union address. At Davos last week he was in a conciliatory mood, with a speech generally summed up as “America First but Not Alone”. However, we saw on his Asia trip last year that what he says and how he says it can vary from one audience to the next and he might decide that a more aggressive tone on trade might strike a chord with blue-collar voters in America. Ahead of all this, trade in the CAD has been very quiet.

Once Trump’s speech has been analysed ad nauseum, investors can look forward to the monthly GDP and industrial production numbers later on Wednesday and the manufacturing PMI survey on Thursday. It should impress an Antipodean audience waiting for quarterly CPI figures that Canada can even produce GDP figures every month, let alone inflation numbers! The Canadian Dollar opens in Asia this morning at USD/CAD1.2325, AUD/CAD0.9965and NZD/CAD0.9040.