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AUD/NZD moves to fresh 6-month low below 1.07 on Aussie weakness.

By Nick Parsons

The NZD/USD pair continues to edge slightly lower and has now extended its decline from Friday’s 0.7434 high to more than a full cent. However, the Kiwi’s drop against a very strong US dollar is not the main story. Instead, the big event is the continued decline in the AUD/NZD cross which has fallen below Friday’s 6-month low of 1.0705, and has been down to 1.0665; the lowest since August 4th last year.

The New Zealand Government yesterday published a weighty report on the economic impact of the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP). The 243-page National Interest Analysis (NIA) estimates the economy would grow between 0.3% and 1% more than if TPP had not existed, with exporters enjoying better access to new markets such as Japan, Canada and Mexico. The NIA estimates tariff savings of $222.4 million in savings annually once fully implemented, with $95.1 million of those savings starting as soon as the deal enters into force. The agreement would also help reduce non-tariff barriers, though the potential benefits are harder to quantify. The report estimates they could range between $363 million to $1.2 billion. Trade Minister David Parker said it supported New Zealanders' jobs and income and protected national sovereignty although the National Party said it has yet to formally decide whether to support the newly renegotiated TPP trade deal.

According to the Ministry of Foreign Affairs and Trade's estimates, the less than snappily-named CPTPP is expected to produce between a $1.2b and $4b boost to New Zealand's real GDP. The dairy industry alone is expected to save nearly $86 million in tariffs and the country's exporters would save about $200m in reduced tariffs to just Japan once the reductions are fully implemented. Coming after the latest Global Dairy Trade auction showed the first fall in prices this year, the government report is a reminder of the huge economic importance of that sector. The New Zealand Dollar opens in Asia this morning at USD0.7355 and AUD/NZD1.0670.

Lower stocks, a lower gold price and higher volatility made for a difficult background for the Aussie Dollar even before we factor in the RBA’s pretty dovish set of Minutes earlier in the week. AUD/USD has remained below 0.7900 ever since lunchtime in New York on Tuesday. Yesterday in Asia it broke through Friday’s low, which turned the technical picture much more negative and dragged the AUD/USD pair down to a one-week low of 0.7830. Indeed, by the close of business in the Northern Hemisphere on Wednesday, the AUD was the worst performer of all the major currencies we follow here, even as a surge in equity markets after the FOMC Minutes helped lift AUD/USD almost a quarter of a cent off its lows.

The Australian Bureau of Statistics reported yesterday that its wage price index grew by 0.55% over the December quarter in seasonally adjusted terms, leaving the change on a year earlier at 2.08%. Markets had been expecting a quarterly gain of 0.5%, seeing the year-on-year rate hold steady at 2.0%, so the data was marginally better than consensus. Most of the increase was due to increases in pay for government employees - mainly in the health industry and education - while private sector pay, which accounts for the majority of workers, remained weak at just over 1.9%. Rises through the year in the Public sector ranged from 1.9% for Professional, scientific and technical services to 2.9% for Health care and social assistance and public sector pay has now outpaced that in the private sector for the past four years.

We’ve focused here over the past week on the split of view on interest rates amongst the ‘Big Four’ Aussie banks. From an offshore perspective, albeit a local author, Capital Economics say, “We suspect that wage growth will creep ever so gradually higher as the unemployment rate edges lower and spare capacity is used up, but it may still just be around 2.2 to 2.3% by the end of this year and perhaps only 2.5% by the end of next year… Wage growth is unlikely to significantly boost household income growth or underlying inflation this year at least, [and] until that changes, the RBA isn’t going to raise interest rates.” The Australian Dollar opens in Asia this morning at USD0.7850, with AUD/NZD at 1.0670 and GBP/AUD1.7795.

Tuesday was the day when the GBP fell to the bottom and rose to the top of our table but Wednesday it went from bottom to top then almost all the way back down again, ending the day up only against the friendless Aussie Dollar. GBP/USD hit a low around lunchtime in Europe of just 1.3910 as investors focused on Brexit uncertainties and soft-ish set of UK unemployment figures. As BoE Governor Carney and three MPC colleagues then gave evidence to Parliament on the quarterly Inflation Report, so the GBP recovered to almost 1.3990 as rate-hike headlines hit the newswires. But, on the realisation that none of this was actually fresh news, and reports emerged of further splits between the UK and Brussels, the GBP then shed half a cent into the London close.

In economic news, the UK unemployment rate ticked up to 4.4% in the three months to December, up from 4.3% (a four-decade low) and the number of people out of work rose by 46,000 to 1.47 million. But, the number of people in work also rose, by 88,000 during the quarter, to 32.147 million. The one-tenth rise in the unemployment rate was the first increase in two years but there was a 109,000 fall in the number of people classed as economically inactive, which helped lift the jobless rate. Only a couple of weeks ago, the Bank of England expectation was for an unemployment rate of 4.3%, a slight drop to “around 4.25%” up until Q3 and a further drop to 4.1% by the first quarter of 2021.

Later in the day, newspapers began to publish leaked details of a so-called ‘position paper’ which the UK Government has shared with EU member states. The document appeared to leave open the possibility of an open-ended transition. “The UK believes the period’s duration should be determined simply by how long it will take to prepare and implement the new processes and new systems that will underpin the future relationship,” the draft paper said. “The UK agrees this points to a period of around two years, but wishes to discuss with the EU the assessment that supports its proposed end date”. According to the Financial Times, “The paper contradicts some key EU negotiating principles and raises the risk of failing to reach a transition deal before a March summit of EU leaders… As the fortunes of the GBP are just as closely linked to Brexit as to incoming economic data, the intra-day swings in the British Pound look set to continue for some time. It opens in Asia this morning at USD1.3965, GBP/AUD1.7795 and GBP/NZD1.8990.

The US Dollar continues to trade pretty much inversely to stock markets, with its 3-day winning street since Friday coming as the DJIA moved from a high of 25,370 down to a low on Wednesday morning of 24,910. Over this period, the USD index against a basket of major currencies rose from 88.00 to a high yesterday just over 89.60. After the release of the Minutes of the January 31st FOMC meeting, the DJIA jumped 250 points and it was thus no great surprise to see the USD give back some of its gains with the index down around half a point from its earlier highs.

There had been some talk that the Minutes might be used to steer the market towards expecting four rate hikes this year, rather than the median of three which had been signaled in the December ‘dot-points’ and the 2.82 hikes which were reflected in interest rate pricing. This didn’t really happen. For sure, “A majority of participants noted that a stronger outlook for economic growth raised the likelihood that further gradual policy firming would be appropriate" and FOMC voters agreed to add word "further'' in front of gradual increases because of the stronger economic outlook. A number of FOMC participants indicated that they had raised their forecasts for economic growth in the near-term vs their December estimates and the impact of recent tax cuts "might be somewhat larger in the near term than previously thought''. Nevertheless, "Participants generally noted few signs of a broad-based pickup in wage growth in available data" and some participants saw “an appreciable risk that inflation would continue to fall short of the committee's objective'' and judged the FOMC "could afford to be patient".

As ever, there’s something for everyone in the Minutes and you can nearly always find what you’re looking for to support any particular view. On the whole, however, there’s nothing too scary for asset markets and nothing to suggest that either the pace or scale of future rate hikes is to be accelerated. As equity markets took on board this message from the Minutes, the USD index opens this morning around 89.35; down almost half a point from its high but back only to where it was at this time on Wednesday.

Having been bottom of our one-day performance table on Tuesday, the EUR edged further lower on Wednesday with EUR/USD falling to a one-week low just a few pips above 1.2300 ahead of the release of the FOMC Minutes. The EUR was unchanged against the CAD and GBP, fell against the USD and NZD but rose against the AUD.

In economic data, Eurozone business activity continued to rise at a decent pace in February, albeit with the rate of expansion cooling from the near 12-year high recorded in January. Price pressures and employment growth also remained elevated, though likewise saw rates of increase ease slightly. Business optimism about the coming year meanwhile ticked higher. The headline Markit Eurozone PMI fell from 58.8 in January to 57.5 in February, according to the flash estimate, which is based on approximately 85% of usual final replies. Markit noted that, “By country, growth in Germany came in at a three-month low, while in France the composite PMI moderated to the weakest for four months. However, in both cases the PMI readings remained at levels indicative of strong growth, close to recent seven-year highs. Business activity growth meanwhile also slowed across the rest of the eurozone, though still registered the second-largest expansion in nearly 12 years… At the eurozone level, the goods-producing sector continued to record a faster pace of expansion than the service sector, though growth of output and new orders slowed in both cases. However, both sectors continued to enjoy the best periods of expansion seen for seven years.”

Currency markets have historically never been bothered with Minutes of the ECB Council Meetings but it was the last set of Minutes published on January 11th which dropped the bombshell about the need to change the language around monetary policy. EUR/USD was trading down at 1.1950 at the time and it was this – rather than anything Mr. Mnuchin said at Davos – which really sent the euro soaring. Today’s Minutes of the January24-25th meeting will be very closely watched this time around ahead of Friday’s Eurozone CPI numbers. The EUR opens in Asia this morning at USD1.2325, AUD/EUR0.6360 and NZD/EUR0.5970.

The Canadian Dollar has spent the whole of the last 24 hours on a USD/CAD1.26 ‘big figure’ on the combination of Tuesday’s disappointing wholesale trade numbers and a generally stronger US Dollar. Indeed, yesterday morning in North America, USD/CAD traded as high as 1.2680; a fresh high for 2018 and the best level since December 27th last year.

Away from the regular round of incoming economic statistics, some of which sometimes seem to generate more noise than genuine insight, Statistics Canada have released the preliminary year-end tourism figures for 2017. The results show last year was the best-ever year on record for international visitors to Canada. During the year of Canada 150 celebrations, international tourists made 20.8 million trips of one or more nights to Canada, up 4.4% from 2016 and a new annual record, surpassing the previous record of 20.1 million set in 2002. The number of US tourists rose 3.1% in 2017 to reach 14.3 million, the highest figure since 2005. There were also a record 6.5 million tourists from overseas countries, up 7.2% from 2016. Compared with the previous 2002 record, a greater share of tourists to Canada in 2017 were from countries other than the United States, the result both of declines in tourism from the United States and an increase in the number of tourists from overseas.

According to an official Press release, “The Government of Canada is committed to growing Canadian tourism. This includes making key investments through Budget 2017 and launching Canada's New Tourism Vision. The Vision aims to increase the number of international tourists to Canada by 30 percent by 2021, double the number of Chinese visitors by the same year, and position Canada to compete for a top 10 destination ranking by 2025. It also includes actions to grow culinary tourism and support Indigenous tourism.” Back to the regular round of economic data, we have official data on retail sales today then on Friday it’s earnings, hours worked and the CPI numbers. The Canadian Dollar opens in Asia this morning at USD/CAD1.2655, AUD/CAD0.9930 and NZD/CAD0.9310.