NZD can’t quite hold onto 73 US cents

Key Movers

The global ‘risk-on’ mood definitely helped the Australian Dollar in the Asian session on Monday and AUD/USD marginally extended last week’s rally to reach a best level just under 0.7880. After an early mark-up, however, stocks found little fresh buying interest and as US index futures began to give back their gains, so too the AUD slipped back a little. Overall, the trading ranges were not wide and it would be unwise to read too much into the price action but it does seem that the near-term fortunes of the Aussie Dollar are closely aligned to those of the equity market.

Westpac’s analysts have arguably been the most accurate forecasters of the Australian economy recently. They were the first of the ’Big Four’ banks to call for RBA rates to be unchanged until the end of 2019 and though others are becoming less aggressive (and therefore less confident) in their rate hike calls, it does seem like a process of catch-up to the thought leader. Their latest research note reiterates, “a number of key themes that we believe will dominate economic and market developments. Our advice to customers throughout 2017 has been to expect Australia’s growth rate to likely be anchored below trend in both 2018 (2.7%) and slowing to 2.5% in 2019. That has contrasted with official forecasts (Reserve Bank and Treasury) which anticipate growth picking up to 3.25% in both 2018 and 2019. We have recognised a solid ongoing boost to growth from non– residential construction; government investment (especially at the state level) and exports. However, we are much more cautious than official forecasts on the consumer; residential construction and equipment investment.”

On a day when the NAB will grab most of the headlines with their very well-respected monthly business survey, Westpac note that back in August 2017, they had been forecasting that AUD cash rates would fall below the US Federal Funds Rate by around 40 basis points by end 2018. That, in turn, would drive the 10-year bond spread to zero, from around 60 basis points. At that time markets were priced for the US rate to be around 35 basis points below Australia. They now expect RBA rates to be even lower than Federal Funds at minus 63 basis points by end 2018 and minus 112 basis points by mid-2019. The likely result, their view, is that AUD 10-year bonds will trade around 30 basis points below US bond rates by mid-2019; something which they see will push AUD/USD to 74 cents by end-2018. The Australian Dollar opens in Asia this morning at USD0.7870, with AUD/NZD at 1.0790 and GBP/AUD1.7655.


The British Pound finished on Monday as the top performer of the day, just edging the Australian Dollar into second place on our one-day table. GBP/USD had traded sideways in a very narrow range during the Asian session and was initially knocked lower by a pretty downbeat set of UK credit card numbers from Visa which warned that the first quarter of 2018 was on track to be the “worst on record” and that spending by consumers had fallen in nine out the past 10 months. From a low just above USD 1.3840, however, the GBP was then boosted by talk of an agreement on a post-Brexit transition deal and GBP/USD hit 1.39 at the end of the London afternoon.


Speaking at the Institute of Directors in London, junior Brexit minister Robin Walker said, “We recognise how important it is to secure the deal on the implementation period as soon as possible. I want to stress that we are very close to a deal at this time.” Britain has said it will adhere to EU regulations for a time-limited period after it leaves the European Union in March 2019, and hopes the details of this transition, or implementation, period, will be finalised at a summit with the EU on March 22-24. Britain has said it expects the transition period to last around two years after its departure date, although the European Union has said it should end earlier, on December 31st 2020.


Thoughts turn today to the Chancellor of the Exchequer’s Spring Statement. 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. There are no longer any changes to taxes announced in March as the UK tax year begins on April 6th and the Chancellor has said he prefers to make these announcements in the Autumn to give time for consultation on detailed implementation. The OBR’s numbers, then, will likely take centre-stage in this new set-piece event. The GBP opens in Asia this morning at USD1.3900, GBP/AUD1.7655 and GBP/NZD1.9060.


The US Dollar fell modestly on Monday; a day which brought no fresh incoming economic news and little further developments in the trade tariff saga. Its index against a basket of major currencies had ended last week around 89.70 and by close of business in New York it had slipped just a couple of tenths to 89.50. The USD was down against the GBP and EUR, as well as the Antipodeans, but finished up against the CAD. In stock markets, meantime, the DJIA managed to turn a 150-point gain into a 100-point loss by late afternoon in New York.


Even after Friday’s employment report, Chicago Federal Reserve Bank President Charles Evans said he wanted the US central bank to keep interest-rate increases on hold until after March to allow inflation a chance to rise and even exceed the Fed’s 2-percent target. “My own preference would be to wait a little bit longer,” Evans said in a CNBC interview. “We could go midyear and all of a sudden see, ‘wow, inflation continues to move up towards 2 percent, I’m much more confident’ and we continue an upward gradual adjustment of the funds rate.” Evans told both CNBC and Bloomberg that the February jobs report was good news in that it showed more people entering the labor force, with the participation rate rising to a five-month high of 63 percent. But, with strong hiring and an unemployment rate of 4.1 percent, he had hoped that wage growth would be stronger. He also said he would rather wait at least until inflation data for March had been released before raising rates.

For today, the main economic focus will be the 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 opens in Asia around 89.50.


EUR/USD spent most – but not all – of Monday on a 1.23 ‘big figure’ with its best level just under 1.2340 coming early in the European morning. Having dipped to a low just above 1.2290 by lunchtime, the EUR then clawed its way back on to 1.23 to finish mid-table on our one-day performance chart in what was in truth a pretty lacklustre session for most of the major currencies.

US President Trump tweeted on Monday that, “Secretary of Commerce Wilbur Ross will be speaking with representatives of the European Union about eliminating the large Tariffs and Barriers they use against the U.S.A. Not fair to our farmers and manufacturers.” According to Bloomberg, a meeting in Brussels between EU Trade Commissioner Cecilia Malmstrom and her U.S. counterpart Robert Lighthizer on Saturday ended without a breakthrough, as the EU didn’t receive assurances that it will be exempted from the metal tariffs. “If anyone starts throwing stones, it’s better first to make sure he’s not living in a glass house,” European Commission spokesman Enrico Brivio said. Asked to respond to Trump’s accusations that the EU is imposing barriers to U.S. automakers, Malmstrom said that “it’s hard to argue on Twitter over these issues, but the European Union is a very open market.”



Tuesday looks a pretty quiet day in terms of scheduled economic data in the Eurozone, as does much of the rest of the week. The highlight will be 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 Constancio 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. The EUR opens in North America today at USD1.2315 and EUR/CAD1.5790. The euro opens in Asia today at USD1.2335, AUD/EUR0.6380 and NZD/EUR0.5915.


After the sharp rally seen on Thursday and Friday, the Canadian Dollar was back at the bottom of the table on Monday, though we’d repeat our warning not to read too much into currency movements on what was actually a fairly quiet day in the Northern Hemisphere. USD/CAD hit a low of 1.2805 in Asia yesterday and only moved around a quarter of a cent higher over the next 12-15 hours, having hit a high just under 1.2840.




Finance Minister Bill Morneau said during a visit to London on Monday that there are parallels between the way companies in North America and Britain are holding back on investment as they respectively wait for clarity on the re-negotiation of NAFTA and the outcome of talks on a Brexit deal. “There are some businesses that are being cautious in investments because there is an expectation that NAFTA could be slightly different tomorrow than it was yesterday… What’s been clear from the American standpoint is they are anxious to have a conclusion to Nafta as near term as possible - we’re trying to work constructively towards that goal.” On Canada’s future trading partnership with the UK -which is currently under the Comprehensive Economic and Trade Agreement - Morneau said any post-Brexit arrangement would have at least as much trade as the two countries enjoy currently.
“To the extent that we can get a better arrangement with the U.K. in the future, that’s positive.”

BoC Governor Stephen Poloz is due to make a speech on Tuesday which will be closely analysed for further clues on monetary policy. Deputy Governor Tim Lane last week said, “We’ve been balancing the risk of undermining the economic expansion by moving too quickly with the risk of delaying too long and needing to raise rates sharply later to rein in inflation.” The market isn’t fully pricing in the next rate increase - which would be the fourth in the cycle - until July, according to calculations on overnight index swaps. The market expects two to three more hikes during the course of this year. The Canadian Dollar opens in Asia this morning at USD/CAD1.2830, AUD/CAD1.0105 and GBP/CAD1.7840.