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NZD at the bottom of the FX pile on Tuesday after poor trade figures

By Nick Parsons

Having been the worst performing currency on Friday, the New Zealand Dollar was back at the top of the pile on Monday, even as there was no fresh incoming news or economic data. Instead, it continued to be driven by flows in the AUD/NZD cross rate which then fed through across the majors in what can sometimes be a relatively illiquid currency. On Tuesday, after a worse than expected set of merchandise trade figures, NZD/USD was back on a US 72 cents ‘big figure’ and as it broke down through technical support in the 0.7275-80 area, the Kiwi Dollar again finished as the weakest currency of the day.

Just as New Zealand’s dollar is volatile, so too are some of its economic statistics. In January 2018, New Zealand recorded its largest deficit for a January month since 2007. This deficit contrasts with last month’s surplus, which was the largest ever for a December month. The January 2018 trade balance was a deficit of $566 million. This was larger than January 2017 deficit as imports rose more than exports. Stats NZ noted that, “Both imports and exports reached new highs for January months. Import growth remains strong while export growth didn’t carry on at the same rate as the record-setting December 2017 month.” The official statisticians always provide plenty of fascinating detail and this months report was no exception. They report the $373 million (9.5%) rise in exports was led by milk powder, butter, and cheese – up $101 million. The countries with the largest rises in exports in the milk powder, butter, and cheese group were Algeria (milk powder), Peru (milk powder), and Iran (butter). Values were down $21 million to China, due to lower exports of milk powder. This fall is the first for the milk powder, butter, and cheese group to China since November 2016.

Today we have the ANZ Business survey and on Friday the international travel and migration figures. These will be a stark reminder of the importance of tourism to the NZ economy, which is now New Zealand's largest export earner, overtaking dairy in 2015/16. International tourism expenditure reached $14.5 billion in the year-ended March 2017 and it is estimated that international visitors are delivering $40 million in foreign exchange to the New Zealand economy each day of the year – one in five export dollars. The New Zealand Dollar opens in Asia this morning at USD0.7235 and AUD/NZD1.0770.

From Monday’s high of USD0.7885 - its highest since last Tuesday – the Aussie Dollar has spent the last 36 hours moving lower, with the move accelerating in North America on Tuesday on a combination of stronger USD, much lower gold prices and a pick-up in volatility which has seen the VIX index more than a point higher at 17.4. The AUD/USD pair held on to a 78 cents big figure until lunchtime in New York though for the moment has held above technical support from Thursday’s low around 0.7790.

There’s a very hard-hitting report out from Credit Suisse on Australia. The bank says, “The RBA has become renowned over the years for delivering hawkish and arguably credible narratives, supported by consistent upward inflection points in its growth and inflation forecasts, virtually dismissing near-term undershoots, resulting in consistent over-prediction of real GDP growth and core CPI inflation.” They go on to argue that, “If sluggish wage inflation is a problem for highly leveraged consumers, and RBA forecasting errors are contributing to low wage inflation by allowing growth and inflation expectations to become unhinged, then it stands to reason that officials bear some responsibility for anaemic consumption growth.” The report concludes that, “If the RBA continues on its merry way, lost credibility may become a more significant factor weighing on inflation expectations and bond yields, notwithstanding how global factors evolve… This means that either the Bank materially revises down its forecasts — and adjusts rates accordingly — to win more credibility, or fiscal policy makers need to take on more responsibility to help keep inflation within the target band.”

The GDP figures for Q4 are released next week and the task for analysts until then is to keep one eye on incoming information which shows the progress of the economy in Q1, and the other on the so-called ‘partial data’ for the end of last year which feed directly into the GDP number. So, today and Thursday, we get the official and private sector PMI survey numbers which will be watched closely for any signs of slowdown; albeit against a backdrop of continued global strength whilst Thursday brings the two Australian manufacturing PMI surveys and the Q4 Private Capital Expenditure numbers. The Australian Dollar opens in Asia this morning at USD0.7795, with AUD/NZD at 1.0770 and GBP/AUD1.7850.

The GBP had another lurch lower on Tuesday morning as the implications of Opposition leader Jeremy Corbyn’s Brexit speech – which we discussed here yesterday – began to be more widely recognized. However, by the end of the European day, even though the GBP/USD rate was still down more than half a cent, the pound had recovered against most of the other currencies where long positions versus the US Dollar were being liquidated. EUR/USD fell to its lowest level in 2½ weeks, for example, whilst AUD/USD threatened to break below 78 cents.

The Brexit negotiations are the gift that keeps on giving for political sketch-writers but for businesses and investors the constant twists and turns in the plot are nothing but a major headache. UK International Trade Secretary Liam Fox was yesterday forced to launch a defence of the government’s Brexit trade policy after a former top official in his department dismissed it as the tactics of “a fairy godmother”. In a day of mixed metaphors, Sir Martin Donnelly - who was Dr Fox’s permanent secretary until last year - told the Today programme on BBC Radio 4: “You’re giving up a three-course meal, which is the depth and intensity of our trade relationships across the European Union and partners now, for the promise of a packet of crisps in the future if we manage to do trade deals outside the European Union which aren’t going to compensate for what we’re giving up.”

On Wednesday, the European Commission is set to publish a detailed draft withdrawal and transition agreement which is said to have more than 120 pages made up of 168 treaty articles and two protocols setting out the EU’s terms for Brexit to be negotiated over the next seven months. Well-sourced leaks suggest it will trigger a new row by designating “the European Court of Justice (ECJ) as the authority for the interpretation and enforcement of the withdrawal agreement”. The pound opens in Asia after another very choppy day at USD1.3915, GBP/AUD1.7845 and GBP/NZD1.9220.

As well as a raft of economic statistics the big highlight of the day on Thursday was new Fed Chair Jerome Powell’s first Congressional monetary policy testimony. Ahead of this, both stock index futures and the US Dollar has traded pretty flat with the DJIA around 26,700 and the USD index at 89.60. The testimony is a two-stage process with the text released around 08.30 Washington time but the hearing not beginning until 10.00am. In many ways, the market reaction was similarly two-staged: stocks and bonds initially decided there was nothing fresh at all in the prepared remarks but by the end of the testimony, markets had decided Mr Powell’s comments were a bit more hawkish. The USD index hit 90 for the first time in 2-weeks whilst 10-year bond yields backed up to 2.92%.

Mr Powell said that, “While many factors shape the economic outlook, some of the headwinds the US economy faced in previous years have turned into tailwinds: In particular, fiscal policy has become more stimulative and foreign demand for US exports is on a firmer trajectory. Despite the recent volatility, financial conditions remain accommodative. At the same time inflation remains below our 2 per cent longer-run objective [although] some of the shortfall in inflation last year likely reflects transitory influences that we do not expect will be repeated. Consistent with this view, some of the monthly readings were a little higher toward the end of the year than in earlier months… The FOMC will continue to strike a balance between avoiding an overheated economy and bringing PCE price inflation to 2 per cent on a sustained basis.”

Though rising long-term interest rates and recent equity market volatility have tightened financial conditions, Powell said, “we do not see these developments as weighing heavily on the outlook for economic activity, the labor market and inflation.” Rather, “the robust job market should continue to support growth in household incomes and consumer spending, solid economic growth among our trading partners should lead to further gains in U.S. exports, and upbeat business sentiment and strong sales growth will likely continue to boost business investment.” By the end of his Congressional appearance, 2-year yields had risen 5bp to 2.27% whilst the number of implied rate hikes this year had risen from 2.8 to 2.9. The USD index opens this morning in Asia at 89.90; up almost half a point from Monday’s opening level.

The euro yesterday initially retraced much, but not all of Monday’s losses and couldn’t get back to the USD1.2350 high, failing around 10 pips below this level in the European morning. By the end of the day, however, it had fallen more than a full cent to a low of 1.2230 as the contrast between ECB and Fed monetary policy paths in 2017 was made clear. We said here yesterday that, “Mr. Draghi has often shown himself to be a master of market expectations… and he might well be actively trying to push the EUR lower ahead of the ECB meeting.” If he was, he’d certainly be happy with yesterday’s price action!

The main contender for Mr Draghi’s job once his term of office ends is Bundesbank President Jens Weidmann. Speaking in Frankfurt yesterday morning, he said that, “I believe it is important to gradually and dependably reduce the degree of monetary policy accommodation when the outlook for price developments in the euro area permits us to do so. If the upswing continues and prices rise accordingly, in my view, there is no reason why the Governing Council should not end the net purchases of securities this year… One thing seems clear to me: monetary normalization in the euro area will take a long time. Monetary policy will remain very expansive even after the end of net bond purchases.”

Ahead of today’s Eurozone CPI figures, German inflation slowed more than expected to hit a 15-month low in February. Harmonised CPI rose by just 1.2% year-on-year after an increase of 1.4% in the previous month, the data showed. That was weaker than the 1.3 percent consensus estimate, the lowest reading since November 2016 and marked the third consecutive fall in the headline figure. The consensus on Eurozone inflation is for the annual rate to edge down to 1.2% in February from 1.3% in January. The EUR opens in Asia this morning at USD1.2235, AUD/EUR0.6375 and NZD/EUR0.5915.

Ahead of the Federal Budget, the Canadian Dollar had another poor day on Tuesday, kept off bottom spot in our one-day performance table only by the weakness of the NZD. As the US Dollar caught a bid on rising money market rates and higher bond yields, USD/CAD moved up through Monday’s 1.2705 high and on to a best level of 1.2755; a fresh high for 2018 and the highest since December 22nd.

As we pointed out here yesterday, if all goes as planned, Canada’s fiscal picture in about five years’ time will be pretty much the same as Harper’s last Conservative budget; a situation which analysts at Bloomberg said “could be a problem if Trudeau has any intentions of seeking re-election on an ambitious second-term agenda”. With this in mind, gender equality – a key priority for Prime Minister Justin Trudeau’s Liberal government - and a national pharmacare plan are expected to be the two main highlights of the Budget, rather than any expensive new economic measures.

A day after the latest round of NAFTA negotiations began in in Mexico City, US President Donald Trump told a meeting of governors at the White House that when it comes to trade, Canada is "very smooth…. We lose a lot with Canada. People don't know it. They have you believe that it's wonderful, and it is - for them. Not wonderful for us, it's wonderful for them." An eighth round of talks is already planned in Washington next month but any statement the President makes at the moment serves only to increase nervousness for the Canadian Dollar which opens in Asia this morning at USD/CAD1.2755, AUD/CAD0.9945 and GBP/CAD1.7750.