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NZD very slightly softer but generally calm ahead of retail sales data later in the week.

By Nick Parsons

The New Zealand Dollar continued to edge slightly weaker on Tuesday. NZD/USD extended its decline from Friday’s 0.7434 high and at its weakest point during the European afternoon was down almost a full cent from this level. AUD/NZD, meantime, continued to find some buying interest and is now almost 30 pips above Friday’s 6-month low of 1.0705.

Statistics NZ reported that producer output prices rose 1.0% q/q in the fourth quarter of 2017, in line with expectations and unchanged from the previous three months. Higher output prices were up mainly due to dairy product manufacturing and higher oil prices. Producer input prices were up 0.9% q/q, shy of expectations for 1.0%, which would have been the same rate as Q3. The statisticians noted "Higher crude oil prices led to increased costs for many industries, including petroleum, forestry and logging, transport, construction, and farming." In the year to December 2017, producer output prices increased 4.7% and producer input prices 4.4%. The farm expenses price index increased 2.5%, while the capital goods price index increased 2.6%.

A separate survey from ASB Bank yesterday showed expectations that house prices will rise are at a six-and-a-half year low. Nationally, expectations that house prices would rise were a net 16% for the three months to December, down from 17% in the three months to October. Details showed expectations that house prices would rise in the South Island had lifted to a net 30% from 29%, led by Canterbury at net 11% up from 8 % previously. Price expectations continued to ease in the North Island to net 20%, down from 23% in the previous survey. The New Zealand Dollar opens in Asia this morning at USD0.7345 and AUD/NZD1.0730.

The Aussie Dollar continues to be extremely sensitive to moves in global stock markets, as well as to more local influences such as the RBA Minutes. Whilst on Monday it was able to hold onto a US 79 cents handle and thus remain above Friday’s 0.7895 low, yesterday the AUD appeared far more fragile. From a high in the Sydney session of 0.7925, AUD/USD lost almost half a cent as US equities remained in the red; with a headline-grabbing decline of almost 10% for Walmart during the New York morning. The pair did climb briefly back on to 79 cents later in the day but with gold down more than 1% to $1331, the AUD is now beginning to face into some headwinds and closed in the high 78’s.

After leaving interest rates unchanged for 16 consecutive months, the Minutes of the February RBA Board signaled more of the same ahead. Business conditions remained at a relatively high level and prospects for non-mining investment “were more positive than they had been for some time” but strong retail competition has exerted downward pressure on consumer goods and food for some time and was expected to persist “in the next few years”. Indeed, “members noted that food prices, excluding fruit and vegetables, had been little changed for nearly a decade”. After all the warnings from the Governor and Deputy Governor in recent speeches, the Minutes reiterated that, “There was still a risk that growth in consumption might turn out to be weaker than forecast if household income growth were to increase by less than expected. In an environment of high household indebtedness, consumption might be particularly sensitive to adverse developments in household income or wealth”.

We’ve mentioned here previously the split of views on rates this year between CBA and NAB. The standout call on Australian interest rates, though, is still the one from Westpac which notes, “Given our long-held view that rates would remain on hold in 2018, we were encouraged to note that the minutes point out financial market pricing suggested that market participants expected the cash rate to remain unchanged during 2018 but had priced in a 25bps increase by early 2019. Neither the Bank nor the markets are onside with our call for steady policy in 2019 as well, but a continuation of this benign inflation environment, weak consumer and softening housing markets could easily convince the Bank of our case.” Today’s quarterly wage prices are now hugely important. The last set of numbers in November showed a +0.5% q/q increase to leave the annual rate at 2.0%; well-below its long-run average around 3¼%. Consensus looks for a similar pace of growth in the Q1 data. The Australian Dollar opens in Asia this morning at USD0.7890, with AUD/NZD at 1.0730 and GBP/AUD1.7735.

The GBP began the day as the weakest of all the currencies we follow here but ended up as the strongest on what the US financial news channels might call ’Turnaround Tuesday’. On a day of no official economic statistics (though we did get the CBI monthly survey) GBP/USD initially fell to 1.3940 as nervous investors braced for a speech in Vienna from UK Minister for Exiting the EU, David Davis. By the afternoon, a magazine story claiming the EU Parliament favoured a special deal for a post-Brexit Britain helped push ‘cable’ back up to a high around 1.4020 with gains between half and three quarters of a cent against the AUD and NZD.

Speaking to Austrian business leaders, Mr. Davis said, “We will continue our track record of meeting high standards after we leave the European Union. Now, I know that for one reason or another there are some people who have sought to question that our intentions. They fear that Brexit could lead to an Anglo-Saxon race to the bottom, with Britain plunged into a Mad Max-style world borrowed from dystopian fiction. … these fears about a race to the bottom are based on nothing – not history, not intention nor interest.” In a totally separate event, after a speech to manufacturers’ organisation the EEF, Opposition Labour party leader Jeremy Corbyn said: “We have to have access to European markets, we have to have a customs union that makes sure we can continue that trade, particularly between Northern Ireland and the Republic of Ireland. That is key to it.”

According to an ‘exclusive’ report in Business Insider magazine, the European Parliament is putting together a 60-paragraph document outlining its desire for an "association agreement" with post-Brexit Britain, in a break from the position of the chief EU negotiator Michel Barnier. The European Parliament is pushing for a future relationship with the United Kingdom which could allow for Britain to retain "privileged" access to the single market. This marks a break from the direction previously taken by the EU's negotiating team, which has instead suggested that Theresa May's negotiating red lines mean Britain may only have access to a Canada-style free trade deal. It is claimed the EU Parliament currently plans to put the resolution to its Brexit Steering Group around March 8, before it is adopted at a meeting of all MEPs, also known as a plenary, in mid-March. This report lifted the GBP almost three-quarters of a cent from its morning, though we might not have to wait long until it is completely disowned or contradicted by official EU sources. The pound opens in Asia this morning at USD1.3995, GBP/AUD1.7735 and GBP/NZD1.9040.

The US Dollar had another pretty good day on Tuesday, its movements largely mirroring those of the main US equity indices. At times when stock markets are rallying, the USD has had an observable tendency to sell-off, whilst any sign of stress in equities has had the opposite effect, leading to something of a safe-haven bid. It would be both a huge exaggeration and a mistake to suggest that yesterday’s stock market moves were on the scale of those seen a couple of weeks ago, but that is what currency traders were largely focused on. The USD index against a basket of major currencies rose half a point from 88.90 to an intra-day best level of 89.40, before giving back some of these gains as Wall Street clawed back earlier losses in the NY afternoon.

The main attention in US markets was in rates and fixed-income as the US has to sell a record amount of debt with three days of auctions of T-bills and notes totaling $258 billion. The 3 and 6-month bill auctions, came at record amounts of $51bn and $45bn respectively but the market had no problems absorbing the massive supply: the 3-month yielded 1.63%, below the 1.64% when-issued price and the 6-month yielded 1.82%, also 1bp below the when-issued price. The 2-year auction, meantime, priced at 2.255%; the highest yield since August 2008, one month before the Lehman bankruptcy. Fed funds futures are fully pricing three 25bp rate hikes and put the probability of the Fed raising rates four times this year at 25 percent versus just 17 percent immediately before last week’s US CPI release.

The highlight for Wednesday will be the release of the Minutes of the January 31st FOMC; just two days before the 666-point drop for the Dow Jones Industrial Average and the subsequent surge in volatility. Of course, the further 2,000-point drop and similar-scale rally seen over the last two weeks should make any conclusions from the Minutes even more conditional and unreliable as policy signals than they usually are. The USD index opens this morning around 89.35; well above its recent 3-year low of 87.95.

The euro made a recently-rare appearance at the bottom of our one-day performance table on Tuesday as investors began to note the German political concerns we first highlighted here yesterday. EUR/USD opened in Sydney around 1.2410 but it was a one-way street all the way down to a low around lunchtime in Europe of 1.2325; the lowest since Wednesday last week.

In economic news, the ZEW survey of the current economic situation in the eurozone’s largest economy slipped more than expected this month to 92.3, although the latest assessment of Germany’s performance is still the second-highest reading on record. The ZEW indicator is compiled from a survey of banks, insurance companies and in-house finance teams who are asked about their assessments and forecasts for interest rates, stock markets and exchange rates across a clutch of major global economies. It is obviously more prone to influence from short-term market developments and the fall in stock prices during the survey period may well explain much of this month’s decline.

In a very hard-hitting article for Handelsblatt, former ECB Executive Board Member Jurgen Stark writes that, “the ECB’s policy interest rate has lost its steering and signaling functions. Another is that risks are no longer appropriately priced, leading to the misallocation of resources and zombification of banks and companies, which has delayed deleveraging. Yet another is that bond markets are completely distorted, and fiscal consolidation in highly indebted countries has been postponed. So, the benefits of the ECB’s policy are questionable, and its costs indisputable. The current ECB policy is thus simply irresponsible, as is the utter lack of any plan for changing it”. For Wednesday, the so-called ‘flash PMI’s’ for services and manufacturing are published for France, Germany and the Eurozone. The EUR opens in Asia this morning at USD1.2340, AUD/EUR0.6395 and NZD/EUR0.5955.

Having spent the whole European morning on a 1.25 ‘big figure’, USD/CAD then spent the whole of the North American day on 1.26 after a disappointing set of wholesale trade numbers and as nerves begin to grow ahead of next Tuesday’s Federal Budget. By the end of the day, it was a close-run thing at the bottom of the one-day table, and only a few pips on the CAD/EUR exchange rate kept the Canadian Dollar off bottom spot.

Statistics Canada reported the value of Canadian wholesale trade dipped 0.5% in December, compared to consensus expectations in a Reuters poll for a monthly increase of 0.4%. Lower sales were recorded in five of the seven subsectors, representing 65 percent of wholesale trade in December, while volumes declined 0.9%. The personal and household goods subsector dropped 3.3% to its lowest level since April 2017 while sales in the miscellaneous subsector fell 2.4% on weakness in the agricultural supplies industry. Taking the calendar year as a whole, wholesale trade in 2017 rose for the eighth year in a row, jumping 9.4%to a new record. The year-over-year increase was the biggest advance since the 13.7% jump in 1997.

For the rest of this week, we have official data on retail sales on Thursday then on Friday it’s earnings, hours worked and the CPI numbers. The Canadian Dollar opens in Asia this morning at USD/CAD1.2635, AUD/CAD0.9970 and NZD/CAD0.9280.