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Kiwi Dollar volatility continues. AUD/NZD back down on 1.06.

By Nick Parsons

The NZD continues to be the most volatile of all the six major currencies we follow closely here and after twice this week finishing bottom of our one-day performance table, on Thursday it was back in top spot. The all-important AUD/NZD cross continued its drop from Wednesday’s 1.0825 high and late in the North American afternoon traded back on to a 1.06 handle. This helped push NZD/USD from its low in Sydney around 0.7190 back up to 0.7250 before settling around 0.7230.

ANZ’s job advertisement data were released earlier today. Job ads fell 1.2% m/m in February giving up some of its strong increase the previous month. Annual growth eased to 5.8%. There was a marked drop in job ads in the construction, utilities, manufacturing and transport sector, which comprises about a third of job ads. The analysts at ANZ said, “We are not surprised to see job ads fall back to their more modest growth trend, with the labour market tight and skilled labour in particular difficult to come by. The labour market is tight, with the unemployment rate at just 4.5%, and both surveys and anecdotes confirming that firms are having difficulty hiring the skills they need. With business confidence improving and firms profitable, workplace relations reforms and minimum wage hikes suggest we will see higher wage growth going forward.”

Today we’ll get numbers on building permits and consumer confidence but, whatever the data show, it would be difficult to bet against the NZD being either top or bottom of the table by close of business in New York this evening. The New Zealand Dollar opens in Asia this morning at USD0.7230 and AUD/NZD1.0695.

The Aussie Dollar has spent most of this week moving lower against the USD, although from Monday’s opening levels in Sydney it is up against the GBP. The combination of lower stock markets, much lower gold prices and a pick-up in volatility is rarely good for the AUD and once it fell through technical support in the 0.7780-90 area, it tumbled to a low of 0.7715 in the European morning; a fresh low for 2018 and the weakest since December 27th. By the New York afternoon, the AUD managed to rally around half a cent to 0.7760 but it was soon reversed as stock markets headed lower once more on the announcement of US trade tariffs on imported steel.

The fall in the Australian Dollar came despite a very upbeat survey on manufacturing. The Commonwealth Bank PMI index – a composite indicator designed to measure the performance of the manufacturing economy – edged slightly higher to 55.6 in February, from 55.4 in January, signaling a strong rate of improvement in the health of the manufacturing sector. The headline PMI has recorded above the 50.0 no-change mark in each month since the survey began in May 2016. According to CBA, “Australia’s manufacturing sector continued to improve strongly in February, supported by robust output growth and increased new business inflows. Buoyed by these trends, both business confidence and the rate of job creation reached fresh survey highs. As a result of higher staff levels, backlogs of work increased to a weaker extent. Meanwhile, strong demand led to intense pressures on supply chains, with delivery times rising”.

Also released yesterday were the Q4 Capital Expenditure numbers. According to the Australian Bureau of Statistics, CAPEX fell by 0.2% to $29.57 billion in the final quarter of last year, missing forecasts for an increase of 1%. CAPEX in the September quarter of 2017 was revised up from +1.0% to show a gain of 1.9%. Despite the lower than expected headline number, total CAPEX grew by 4% over the year, the strongest increase in five years. Spending on buildings fell by 2.1% to $16.2 billion, partially offset by a 2.2% increase in investment on plant, machinery and equipment which rose to $13.4 billion. It is this last number which feeds directly into Australia’s Q4 GDP report released next week, and will therefore contribute to real GDP growth. The Australian Dollar opens in Asia this morning at USD0.7730, with AUD/NZD at 1.0695 and GBP/AUD1.7765.

The pound’s bad week got even worse on Thursday, though the pace of its losses was much slower than over the previous few days. The GBP/USD exchange rate fell through a well-watched level of technical support from the February 9th low around 1.3785 and it traded all the way down to 1.3720 by lunchtime in New York. It finished the day up against both the Aussie and Canadian Dollars to leave it off the bottom of the table.

The UK manufacturing PMI survey was released yesterday. At 55.2, Purchasing Managers’ Index fell to an eight-month low and lost further ground after hitting a 51-month high last November. Manufacturing production increased at the slowest pace for 11 months in February, with decelerations seen across the consumer, intermediate and investment goods sectors. Brighter news was provided by the trend in new orders, which rose at a faster pace than in January. Companies indicated that domestic demand strengthened, while new export business rose at a solid (albeit slower) pace. Markit commented that, “The February survey provided mixed signals on the health of the UK manufacturing sector. The PMI’s Output Index fell to its second-lowest level since the EU referendum and, based on its past relationship with official ONS data, is consistent with only a subdued 0.4% quarterly pace of growth in production volumes. This would represent a marked downshift from the 1.3% increase signaled for the final quarter of 2017, providing a further brake on the rate of expansion in the wider economy.”

In the ongoing and never-ending Brexit saga, at a meeting of the European parliament’s Brexit steering group, led by the former Belgian prime minister Guy Verhofstadt, MEPs concluded that the UK had not gone far enough with its proposals on immigration. Verhofstadt said in a statement that the UK’s position was unacceptable to the parliament, which will have a right to veto any withdrawal agreement. Prime Minister Theresa May is scheduled to give a major speech on Friday, in which she is due to outline the government’s plan for a new post-Brexit relationship with the EU. It is certainly keeping currency markets nervous. The pound opens in Asia this morning at USD1.3740, GBP/AUD1.7760 and GBP/NZD1.8995.

The USD index hit 90 for the first time in 2-weeks in New York on Tuesday evening, a high of 90.30 on Wednesday and then 90.50 by Thursday lunchtime in North America as stock markets continued to trade lower and the VIX index of volatility hit a 2-week high of 19.5. Early in the NY afternoon, President Trump announced tariffs of 25% on imported steel and 10% on aluminium products. This surprise move sent stocks plunging once more, with the DJIA down more than 500 points and the VIX index above 20. This time, the USD index gave back around three-tenths of a point to 90.20.

There were plenty of US economic statistics released on Thursday. Personal income rose 04% in line with consensus expectations but spending was weaker at -0.1% m/m. The core PCE deflator which is the Fed’s preferred measure of inflation rose 0.3% m/m to leave the annual rate unchanged at 1.5% whilst the headline rate was also steady at 1.7%. Weekly jobless claims, meantime, fell 10k to just 210k; the lowest since 1969. As for the ISM manufacturing survey, the headline jumped from 59.1 to 60.8; the highest reading since May 2004. Details might not have been quite so spectacular though the stand-out was a 5-point jump in employment to a 4-month high. After all the data, the Atlanta Fed revised up its forecast of Q1 GDP from 2.6% to 3.5%.

Fed Chair Jerome Powell gave the second part of his semi-annual monetary policy testimony amidst suggestions that he might try to rein-in expectations of a more aggressive pace of interest rate increases. Instead, he said that four rate hikes this year comes under the definition of "gradual". Powell said risks are “more two-sided” now than early in the recovery from the financial crisis, adding that “the thing we don’t want to have happen is to get behind the curve.” But he said at this point the Fed could continue “to gradually raise interest rates ... That is the path we have been on and my expectation is that will continue to be the appropriate path.” Reinforcing Powell’s message, New York Fed President William Dudley said at a conference in Sao Paolo that, “If you were to go to four 25-basis-point rate hikes, I think it would still be gradual.” The USD index opens this morning in Asia at 90.20; down three-tenths of a point from Thursday’s high but still up almost three-quarters of a point from Monday’s opening level.

After a very poor week, the euro finally found a bit of support on Thursday. EUR/USD reached a low just above 1.2160 in the European afternoon; the lowest since mid-January but then rallied around half a cent back on to a 1.22 handle and was the best performer of all the FX majors in the immediate aftermath of the US trade tariffs announcement.

In economic data, the final Eurozone Manufacturing PMI eased to a four-month low of 58.6 in February, down from 59.6 in January; better than the earlier flash estimate of 58.5 and well above its long-run average of 51.8. The PMI has remained above the 50.0 no-change mark for the past 56 months. The Press Release for the survey was resolutely upbeat. “The eurozone manufacturing sector continued to expand at a robust pace in February. Although rates of increase in output and new orders eased further from the highs reached before the turn of the year, the sector is still enjoying one of its best growth spells over the past 18 years… National PMI data also highlighted the broad-base of the upturn, with expansions seen in all of the countries covered. Growth was led by the Netherlands (survey record expansion), Germany and Austria. Although rates of increase eased in the latter two, and also in France, Italy and Ireland, growth was robust across the board. Spain and Greece both saw faster expansions, with Greece registering its best pace of improvement for 18 years.”

Markit’s one note of caution from the PMI survey was that, “There are signs, however, that growth could cool further in coming months. A slowdown in growth of new export order inflows to an 11-month low suggests that the appreciation of the euro may be starting to curb export sales. Job creation, while still among the highest seen in the twenty-year survey history, has meanwhile moderated as a result of the slower inflows of orders, adding to suspicions that the manufacturing growth peak is behind us.” The EUR opens in Asia this morning at USD1.2235, AUD/EUR0.6330 and NZD/EUR0.5920.

The Canadian Dollar continues to struggle. On Wednesday afternoon USD/CAD moved up on to a 1.28 ‘big figure’ for the first time since December 20th and yesterday after President Trump’s tariffs announcement (which was seen as a negative for progress on NAFTA) it extended these gains to 1.2890; a fresh 10-week high (CAD low).

Canada’s manufacturing PMI eased only slightly to 55.6 from the 6-month high of 55.9 in January and remained well above the 50.0 no-change threshold. Improving business conditions have been recorded in each month since March 2016. February data pointed to a relatively strong improvement in overall business conditions, which continued the positive start to 2018 for the manufacturing sector. Robust rises in output and new orders contributed to the sharpest pace of job creation for six months. Market noted that, “Canadian manufacturers continue to experience robust growth conditions. Of particular note and a key positive development was the pick-up in export order books in February. The latest increase in new work from abroad was the fastest for just over three years, helped by supportive global economic conditions and rising demand from US markets in particular.”

Friday brings the GDP numbers in Canada and it’s one of the four occasions each year on which we get both a monthly and a quarterly number. Consensus looks for a 0.1% m/m increase which would leave Q4 with an annualized pace of growth of 2.0%, up from 1.7% in Q3. The Canadian Dollar opens in Asia this morning at USD/CAD1.2850, AUD/CAD0.9955 and GBP/CAD1.7690.