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NZD/USD looks comfortable on 72 cents ahead of this week’s GDP numbers

By Nick Parsons

The New Zealand Dollar had by its recent standards a pretty quiet week, with NZD/USD spending all but a few minutes on the same ‘big figure’ of 72 US cents. It opened on Monday morning around 0.7235 and in Tuesday’s US Dollar sell-off reached a best level around 0.7310. The pair then drifted steadily back to a low around 0.7340 on Thursday afternoon in Europe before a ‘risk-friendly’ US labour market report on Friday helped lift the NZD back up to a close around 0.7285.

In economic data, three of the ‘partial data’ which feed in to the calculation of the GDP numbers which are out this coming week have already been released. The total sales value for wholesale trade rose 3.0% in the December 2017 quarter. Building Work Put in Place, total building activity volume was up 1.4% in the quarter whist the total volume of manufacturing sales rose 1.0% in Q4. Analysts have now firmed up their forecasts for the Q4 GDP estimate due on Thursday. ANZ, BNZ and Westpac all pick +0.7% q/q and 3.1% y/y whilst ASB Bank go for +0.8% and 3.2%.

The North Island of New Zealand has spent the weekend worrying about a potential hit from Cyclone Hola on Monday and Tuesday. This caused severe damage in parts of Vanuatu and New Caledonia and is now set to make landfall with a very wet and windy start to a week which – as well as GDP – will bring monthly data on food prices, house prices and manufacturing output. The New Zealand Dollar opens in Asia this morning having closed in New York on Friday at USD0.7290 and AUD/NZD1.0750.

The Australian Dollar finished on Friday on a high note against a USD whose trade weighted index was little changed over the course of the week. It began last Monday morning in Sydney at 0.7760 and held around that level until well after the RBA Board Statement had been fully digested. As the US Dollar sold-off in the European morning on Tuesday on rumours that the President’s chief economic advisor was likely to quit, so AUD/USD jumped over half a cent to a best level of 0.7825. On Thursday it made a marginal fresh high for the week around 0.7835 but then joined in the ‘risk-on’ party after Friday’s US employment report to end the week at a 10-day high around 0.7850.

After an unchanged RBA and a lower-than-expected Q4 GDP print, the only positives for the AUD at present are a continued recovery in global asset prices and a reduction in asset market volatility, most generally measured by the VIX index. Absent either of these two, the case for long or overweight positions in the AUD looks pretty threadbare. In their latest update, the analysts at Westpac are particularly negative on the Australian housing market. They note, “Dwelling investment contracted in 2017 by 5.8%. Based on the downturn in the trend in high rise approvals and a flat outlook for detached housing, we expect this downturn has further to run with the contraction accelerating into 2019. Oversupply and a marked slowdown in sales to foreigners are weighing on the outlook for residential building. House price inflation is disappearing. On a six month annualised basis, prices are now falling in Sydney and Perth and slowing in Melbourne and Brisbane… We expect a long, extended period of flat house prices on a national basis with weakness particularly centred on the Sydney and Melbourne markets. This will represent a considerable change in the “atmospherics” around housing wealth and may weigh further on prospects for consumer spending.”

For the week ahead, NAB’s monthly business survey is out on Tuesday and on Wednesday we have the consumer confidence numbers. Three RBA speeches are also scheduled. The first is from Michele Bullock, Assistant Governor (Financial System), at the Seamless Australia Payments Conference in Sydney on Tuesday, followed by Christopher Kent, Assistant Governor (Financial Markets) speaking at the KangaNews DCM Summit on Wednesday. Deputy Governor Guy Debelle ends the week with a speech on “Risk and return in a low rate environment.” The Australian Dollar opens in Asia this Monday morning having closed on Friday at USD0.7850, with AUD/NZD at 1.0760 and GBP/AUD1.7655.

The British Pound began the week at USD1.3800 and though by Friday lunchtime in London it was exactly unchanged from this level, a late US Dollar sell-off after the February employment report left it almost half a cent higher; albeit down on the week against the Australian and Kiwi Dollars at 1.7650 and 1.9015 respectively. The week was dominated more by Brexit news than incoming economic data, with the EU’s much-anticipated reaction to the Prime Minister’s speech in London on the Friday of the previous week being the key event.

The EU’s updated draft guidelines on the UK’s exit from the EU were presented by European Council President Donald Tusk who said, "The UK will be our closest neighbour, and we want to remain friends and partners after Brexit - partners that are as close as possible, just like we have said from the very first day after the referendum." While the guidelines make clear that the EU wants "as close as possible a partnership" after Brexit, "being outside the customs union and the single market will inevitably lead to frictions… Divergence in external tariffs and internal rules as well as absence of common institutions and a shared legal system, necessitates checks and controls to uphold the integrity of the EU single market as well as of the UK market… This unfortunately will have negative economic consequences."

Away from the daily dose of Brexit, investors’ thoughts now turn to Tuesday’s Spring Statement from the Chancellor of the Exchequer (the traditional Budget has now been moved to Autumn). There is the chance of a rare upgrade to UK economic forecasts after the incoming data over the past few months have shown the Office for Budget Responsibility was too pessimistic in its assumptions on UK productivity. Speaking on TV on Sunday, the Chancellor said Britain's debt mountain was still too high and had to be brought down. "There is light at the end of the tunnel because what we are about to see is debt starting to fall after it has been growing for 17 continuous years. That is a very important moment for us but we are still in the tunnel at the moment… We have a debt of £1.8 trillion - 86.5% of our GDP. All the international organisations recognise that is higher than the safe level." The pound ended last week at USD1.3850, GBP/AUD1.7655 and GBP/NZD1.9020.

The US Dollar fell, rallied, then fell again last week and on a trade-weighted basis finished pretty much where it had begun. Its index against a basket of major currencies opened in Sydney last Monday around 89.60. It hit a low on Wednesday morning in London at 89.05 but immediately prior to the latest US employment report had rallied to a best level just above 89.90. The combination of a 312,000 increase in non-farm payrolls but a softening in average earnings to 2.6% from the 2.9% which had spooked equity markets a month ago, was deemed to be ‘risk-positive’ and pushed up equity markets whilst weighing down on the US currency.

The softening of President Trump’s initially very hard line on tariffs was seen as a modest positive for the currency, not least because it might reduce the threat of retaliatory action from other countries. An offer of talks from North Korean leader Kim Jong-Un was also interpreted in some quarters as a diplomatic victory for Mr. Trump which also helped boost the US Dollar and by Friday lunchtime the USD index stood at an 8-day high of 89.90. The February labour market report, as noted above, helped allay some of the recent concerns about a sharp increase in wage pressures and inflation as the US economy approaches full employment. The DJIA once again advanced more than 300 points on Friday.

For the week ahead, the main focus on economic data will be Tuesday’s CPI data. The headline inflation rate is expected to tick up to 2.2% y/y from 2.1% although the core rate excluding food & energy costs is expected to remain unchanged at 1.8%. Bear in mind that unlike the RBA, RBNZ or BoE, the Federal Reserve doesn’t have a CPI target. Instead, it looks at the core PCE deflator which is still some way below its preferred 2.0% level. After the inflation numbers, on Wednesday we have retail sales and then towards the end of the week it’s housing and industrial production data. The USD index ended last week almost exactly where it had begun at 89.65.

The EUR had a week which can best be described as “buy the rumour, sell the fact” or, as your author more rhythmically prefers it, “buy the mystery, sell the history”. The mystery, of course, was the second ECB Council Meeting of 2018 on Thursday, and whether President Draghi would be changing the language around QE and the withdrawal of some degree of monetary stimulus. The EUR had a two-stage reaction to the ECB Council meeting. Initially, EUR/USD spiked almost half a cent higher but by the end of Thursday afternoon it had fallen more than a full cent from the high to just 1.2320 and by Friday morning it was back down on a 1.22 big figure before more general USD weakness helped it climb back on to 1.23.

In its opening Statement, the ECB removed its previous pledge to increase its asset purchase programme (APP) in size or duration should the economic outlook becomes less favourable, taking away what had been its most explicit ‘easing bias’. This signaling prompted a wave of buying for the EUR. We have said many times that Mr Draghi is a master of managing market expectations and this meeting showed him on top form. In his Q+A session, he downplayed the significance of this move, calling it “a backward-looking move without signals for either our expectations or our reaction function.” He also stressed the Statement’s line that an “ample degree of monetary stimulus remains necessary for underlying inflationary pressures to continue to build up to support headline inflation developments over the medium-term.” Traders quickly changed tack, and the EUR more than reversed all its earlier gains. Mr Draghi can certainly look back at the Press Conference as a job very well done: changing the communication in a less dovish direction whilst pushing the EUR simultaneously lower.

For the week ahead, a central bank which claims only to be driven by the inflation outlook will be watching carefully the final German CPI numbers on Wednesday and those for the wider Eurozone on Friday. There are plenty of Central Bank speakers, too, with President Draghi, Vice President Constanciao and Chief Economist Peter Praet all on Wednesday. Often, the week after an ECB Council meeting is one where monetary officials try to recalibrate any unwelcome market movements or policy expectations but this time around there’s no need at all for that. They’ll all be very happy with currency and interest rate movements since last Thursday’s Press Conference. The euro opens in Asia today having ended the week at USD1.2305, AUD/EUR0.6375 and NZD/EUR0.5915.

The Canadian Dollar had quietly been the worst performing major currency of 2018 but it seems the whole world finally noticed the fact early in the week and decided to become very bearish. By the end of the week, many of those investors who sold the currency would have been licking their wounds as it rallied sharply on Thursday and Friday.

USD/CAD opened last week at 1.2880 and went on to hit a high on Monday of 1.2995; its highest since early July whilst GBP/CAD at 1.78 was the highest since late-June. For the Antipodeans, AUD/CAD extended its gains to a 9-month high of 1.0120 whilst NZD/CAD at 0.9435 was the highest since early July. The Canadian Dollar had a good day on Thursday after the US specifically excluded Canada and Mexico from the initial impact of tariffs on steel and aluminium. USD/CAD fell from the mid-1.29’s back on to a 1.28 big figure and the CAD gained more than a cent against both the GBP and AUD. We warned on Friday that, “it’s not clear that all the ‘short’ positions in the CAD have yet been unwound. Its recent rally may have a little further to go if this afternoon’s jobs data don’t hold any nasty surprises.” That is exactly how things turned out, with USD/CAD ending at the week’s low around 1.2815.

The Canadian economy added 15,400 jobs in February after a big loss in January but full-time positions shrank and wage growth decelerated. Statistics Canada said on Friday the unemployment rate dipped to 5.8% from 5.9% in January. Analysts in a Reuters poll had forecast employment would increase by 20,000 after Canada shed 88,000 positions in January, the most in nine years. February’s gains were all in the part-time sector, which added 54,700 positions, while the full-time sector shed 39,300 jobs. Average hourly wages for permanent employees rose by 3.1% y/y, down from the 3.3% y/y increase in January. For the week ahead, BoC Governor Stephen Poloz is due to make a speech on Tuesday evening which will be closely analysed for further clues on monetary policy. The Canadian Dollar opens in Asia this morning having closed on Friday at USD/CAD1.2815, AUD/CAD1.0055 and GBP/CAD1.7745.