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NZD was top performer on Wednesday after S&P credit ratings report

By Nick Parsons

Having fallen after last week’s very soft CPI figures, the New Zealand Dollar has staged quite an impressive comeback; not just against a generally weak US Dollar but also against its Aussie cousin too. For a few hours around lunchtime in Europe on Wednesday, NZD/USD was back on a 74 cents ‘big figure’ whilst the AUDNZD cross (which on Monday hit a 7-week high of 110.70) is down at 1.0935.

After a boost from overseas trade figures on Tuesday, the latest news to help the NZD is an update from credit ratings agency Standard and Poor’s, which reaffirmed its existing high-level sovereign rating for New Zealand, which is AA when borrowing in foreign currency, and AA+ in local currency. S&P said, "The economy is wealthy and resilient, reflecting decades of structural reforms” and that it had incorporated the new Government's ‘more expansionary’ plans into its forecasts, which now have New Zealand growing at an average rate of 2.8 per cent each year over the next three years. "Our ratings reflect solid fiscal performance and our expectation that higher government spending will not materially weaken the country's fiscal profile," S&P said. "New spending measures, including more generous welfare, education, and housing policies, are partly funded through the cancellation of the previous Government's proposed personal income tax cuts… As such, we do not expect the measures to materially affect the Government's fiscal position”

Unsurprisingly, NZ Finance Minister Grant Robertson welcomed the S&P statement. "This decision effectively gives a tick to the policy agenda outlined in the Government's Budget policy statement in December, which confirmed our commitment to the budget responsibility rules, together with the fiscal forecasts presented in the half year economic and fiscal update." Today we have the ANZ job advertising figures, ahead of which the New Zealand Dollar opens in Asia at USD0.7365 and AUD/NZD1.0935.

Over the past 48 hours, the AUD/USD exchange rate has had five moves in excess of half a cent without any obvious correlation to incoming news or economic data. After a decent NAB survey on Tuesday, the Aussie Dollar fell half a cent then recovered. After a softer than expected set of CPI numbers on Wednesday, it managed to fall nearly 50 pips, rally nearly 60 then fall 60. Foreign exchange is always characterized as a ‘zero sum game’; for every winner there is an equal and opposite loser. That still holds true, but for AUD/USD it just felt like one of those days where everyone lost!

The big news in Australia was of course 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 three different quarterly measures all calculated to three decimal places: headline CPI, the core trimmed mean and the core weighted mean. Without getting too bogged down in the detail, all three measures were a bit softer than consensus expectations; albeit not as big a ‘miss’ as we saw in New Zealand last week.

In terms of what the CPI data mean for RBA monetary policy, there’s still a split of views amongst the Australian banks. CBA say, “We expect the RBA will be comfortable with today's outcome as it broadly lines up with their projections for both headline and underlying inflation. All in all, there is nothing in today's outcome or the recent economic data to change our view that the cash rate is on hold until late this year”. ANZ are a bit more hawkish, saying “We continue to look for the first of two rate hikes in May, although this is based on our forecast that the wage price index prints a 0.5% quarterly rise for Q4 [when released in late February].” Writing in the Herald Sun newspaper, veteran RBA-watcher Terry McCrann says, “the RBA will leave its official interest rate unchanged at 1.5% and, more importantly, indicate it has absolutely no intention of changing the rate anytime soon; or indeed even beginning to think about changing it”. The Australian Dollar opens in Asia today at USD0.8055, with AUD/NZD at 1.0935 and GBP/AUD1.7615.

After its roller-coaster ride on Tuesday which saw it dip below 1.4000 then jump 1½ cents, GBP/USD yesterday extended its gains to a high around 1.4220; its best since Friday afternoon. Performance on the crosses was somewhat more mixed; GBP was steady against the CAD, down against a buoyant NZ, up a little against the EUR and up most against the AUD.

We wrote earlier this month about the importance of the car manufacturing sector to the UK economy and it was a disappointment – though not a surprise – to see that car production figures fell last year for the first time since the end of the GFC in 2009. According to the Society of Motor Manufacturers and Traders (SMMT), a total of 1.67m cars rolled off UK production lines in 2017, down 3% compared with 2016, as demand for British-made cars dropped both at home and abroad. The SMMT warned 2018 was likely to be another tough year for the industry, which is facing the prospect of declining investment and zero growth in production volumes. Companies including Toyota, Jaguar Land Rover, and McLaren last year committed to a total of £1.1bn in future investment in the UK, down 34% compared with the £1.66bn committed in 2016 and below the average over the past few years.

UK Prime Minister Theresa May said in Beijing that she is committed to deepening Britain’s relationship with China in light of Brexit and would explore all options for a future trade relationship. She might well need them as European Commission officials are said to have rejected the City of London’s proposal to strike a post-Brexit free trade deal on financial services. According to Bloomberg, while the British government is aiming for a wide-ranging agreement to give financial institutions full EU access, a restricted approach similar to that which Canada enjoys is the only viable option, Commission officials said in a presentation to representatives of the 27 remaining EU nations. The Pound opens in Asia this morning at USD1.4190, GBP/AUD1.7620 and GBP/NZD1.9265.

For global foreign exchange markets, there didn’t seem anything too troubling in either the tone or content of President Trump’s State of the Union address but such is the prevailing negative sentiment amongst analysts that the US Dollar went down anyway. The USD index stood at 88.90 when the President began but it was then downhill all the way until late afternoon in Europe where it finished at 88.52.

Putting two FOMC Statements side by side always feels a bit like the job the Kremlinologists had back in the Soviet-era when they’d look at a photograph of the Politburo and see who had moved a pace or two to the left or right, who was missing and who were the fresh new faces. The Fed said that, “the labor market has continued to strengthen and economic activity has been rising at a solid rate. Gains in employment, household spending, and business fixed investment have been solid, and the unemployment rate has stayed low. On a 12-month basis, both overall inflation and inflation for items other than food and energy have continued to run below 2 percent”. So far, pretty much exactly what was said in December. But, whereas last month inflation was expected to, "remain somewhat below 2 percent in the near term", this line has been dropped and instead, "Inflation on a 12 month basis is expected to move up this year”. For choice, your author interprets this is a slightly more hawkish stance.

The US Dollar had begun to rally in the two hours before the Fed Statement and, as it’s examined in excruciating detail, there might even be enough to sustain the move higher. US 10-year bond yields are up at a fresh cycle high of 2.75% and the USD index opens in Asia today at 88.85.

The EUR managed to extend Tuesday’s gains and reached a best level of USD1.2470 by mid-afternoon Wednesday. It then abruptly turned around to lose a quick 60 pips as traders awaited the Statement from Janet Yellen’s last FOMC meeting and reflected on comments from ECB executive board member Benoit Coeure, in Dublin for the European Financial Forum. In a TV interview he said, “We have agreements that we should not target our exchange rates… we want to see exchange rates that reflect economic conditions in different places. We are not going to change it.”

Mr Coeuré said the ECB has been clear that it expects interest rates to remain at the current level, very low, for an extended period of time, and well past the horizon for asset purchasers. "Well past means well past. So that is not a discussion we are having, and we really expect interest rates to remain very low for an extended period of time." After Germany’s softer than expected CPI on Tuesday, France came to the rescue yesterday with an above-consensus 1.5% y/y increase in inflation, largely driven by an increase in service sector prices. This meant that the Eurozone aggregate numbers showed a very small drop to 1.3% which was higher than the median estimate of 1.2%. The core rate of inflation excluding food and energy rose from 0.9% to 1.0% and though it’s still some way below where the ECB would like, it is at least now moving in the right direction.

With the inflation numbers now behind us, attention at the start of this new month today will be on the manufacturing PMI’s across the Eurozone. The ‘surprise factor’ is limited by the pre-release of flash estimates in France and Germany but we’ll get fresh information on how other Eurozone countries are faring at the start of 2018. The EUR opens in Asia this morning at USD1.2415, AUD/EUR0.6485 and NZD/EUR0.5925.

Having been in a 1.2280-1.2390 range for almost a week, USD/CAD dipped yesterday back on to a 1.22 ‘big figure’ and in the North American morning extended the move down to 1.2263; a level not seen since late-September last year. After watching President Trump’s State of The Union address, the absence of anything inflammatory on trade in general or NAFTA in particular helped improve sentiment towards the CAD earlier in the European day and there was a decent rebound in monthly GDP at 08.30am local time.

Stats Canada reported that real gross domestic product increased 0.4% in November, with widespread growth across industries as 17 of 20 industrial sectors increased. Goods-producing industries rose 0.8% after declining 0.5% in October. November's gain was mainly due to increases in the manufacturing and mining, quarrying and oil and gas extraction sectors, partly as a result of restoration in production capacity. Indeed, the manufacturing sector was up 1.8% in November, the largest monthly increase since February 2014 as the majority of subsectors grew. Separate figures showed prices for products sold by Canadian manufacturers, as measured by the Industrial Product Price Index (IPPI), edged down 0.1% in December, mainly due to lower prices for energy and petroleum products and primary non-ferrous metal products.

There are more Canadian numbers to come Thursday when we get the leading indicator and the manufacturing PMI report. The Canadian Dollar opens in Asia this morning at USD/CAD1.2300, AUD/CAD0.9905 and NZD/CAD0.9050.