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NZD awaits Q4 GDP figures. Consensus looks for 0.7% q/q

By Nick Parsons

The New Zealand Dollar underperformed its Aussie cousin on Wednesday. The peak of NZD/USD actually came during the Asian session around 0.7350 and at the time of the peak in AUD/USD, it had fallen short of this level by around 10 pips. It’s subsequent decline extended only another 20 pips, however and the Kiwi has now remained on a 73 cents ‘big figure’ ever since late Tuesday morning in the Sydney time zone.

After the Governor of the Reserve Bank of New Zealand’s speech on macroprudential policy, there was always going to be plenty of interest in the REINZ survey of house prices released less than 24 hours later. The median house price for New Zealand rose 6.9% in February to $530,000 up from $496,000 in February 2017 according to the latest data from the Real Estate Institute of New Zealand. The median house price for New Zealand excluding Auckland rose even higher, seeing an 8.4% increase to $450,000 from the same time last year. Prices in Auckland increased at a more moderate 3.7% to $858,000 from the same time last year (up from $827,000) and were up 4.6% month-on-month. REINZ said, ““Median house prices increased in 14 out of 16 regions across New Zealand during February 2018 compared to February 2017, including a record high in the Hawke’s Bay. The only regions not to experience an increase were the West Coast and Gisborne which saw decreases of 10.7% and 3.1% respectively.”

With a very solid start to 2018 for the housing market, the statisticians still have to release one more missing piece of the 2017 economic jigsaw. This comes today with the Q4 GDP numbers. 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 New Zealand Dollar opens in Asia this morning at USD0.7325 and AUD/NZD1.07245.

Yet again, the high of the US equity market on Wednesday coincided almost exactly (in fact within 10 minutes) of the high of the AUD/USD exchange rate. The Aussie Dollar rose steadily through the whole of the Asia day and the European morning to reach a best level at 12.20pm of 0.7910; the first time it had been back on a 79 cents ‘big figure’ since February 20th. From its level at that point of 25,110, the Dow Jones Industrial Average then fell almost 430 points over the next 4 hours, dragging AUD/USD down to a low of 0.7870. Overall, however, the Aussie has been pretty resilient. The US stock market is lower than it was before Friday’s labour market numbers but AUD/USD is almost exactly one cent higher.

RBA Assistant Governor (Financial Markets) Christopher Kent yesterday gave a speech earlier today on developments in the Australian corporate bond market. He noted that, “accommodative monetary policies have encouraged greater risk-taking by both lenders and borrowers. This is one of the important ways in which the monetary transmission mechanism works. It has supported the decline in spreads and other positive developments I've just discussed. At the same time, however, the combination of low interest rates and low volatility in financial markets is of concern to the extent that it can lead to excessive risk-taking via a search for yield. This is something that the Reserve Bank has been noting for a time.” He wasn’t ringing any bells at all, but if credit spreads do widen or volatility picks up again, then the RBA has shown that it is on the case.

As for incoming economic data, Westpac’s Index of Consumer Sentiment rose 0.2% to 103.0 in March from 102.7 in February. Their analysts noted, “Sentiment continues to hold in slightly optimistic territory with March marking the fourth consecutive monthly reading above the 100 level. That followed a year in which pessimism dominated. However, the index is still well below levels typically associated with a robust consumer.” The Australian Dollar opens in Asia this morning at USD0.7875, with AUD/NZD at 1.0745 and GBP/AUD1.7725.

We wondered yesterday morning whether the British Pound could hold onto the gains made on the back of the Chancellor’s Spring Statement. As we noted here, “Rarely has such poor news been so well received; both by backbench MP’s and a usually more skeptical foreign exchange market”. On Wednesday it seems the market had second thoughts and it was only the weakness of the EUR which prevented the GBP from taking bottom spot on our one-day performance table. It’s trading range against the USD was only a little over half a cent from high to low but the pound lost between one and three-tenths against most of the major currencies we follow closely here.

With no official economic data released on Wednesday, the day in London was dominated by a furious row between the UK and Russia which ended with the expulsion of 23 Russian diplomats. This is likely to completely overshadow preparations for next week’s EU Summit and is already showing a fractured response by UK allies in Europe. In contrast to German chancellor Angela Merkel and US president Donald Trump who assured British Prime Minister Theresa May they were taking her government’s views on possible Russian involvement in an alleged assassination attempt extremely seriously, President Emmanuel Macron and other French officials have declined to mention Russia directly.

There is a more serious split potentially between the two major parties in the UK, with the opposition Labour Party being much more hesitant and circumspect in criticizing Russia than the ruling Conservative-led Coalition Government. How all this plays out is impossible to predict, but it serves to show how even in an age of careful news-management, unforeseen events can introduce a huge degree of political and economic uncertainty into financial markets. The GBP opens in Asia this morning at USD1.3960, GBP/AUD1.7730 and GBP/NZD1.9055.

The US Dollar ended Wednesday little changed as a generally weaker EUR offset a stronger CAD on the USD index. Having opened in Asia around 89.25, it fell to a low of 89.05 before rallying up to a high just above 89.40 then closing around the mid-point of its daily trading range.

The US political circus show seems to have many rings, with plenty of action to occupy the spectators in each one. Around lunchtime in New York, it was reported by CNBC that President Donald Trump plans to name Larry Kudlow as his top economic advisor to replace Gary Cohn, who left the White House earlier this month amid disagreements about tariffs on steel and aluminum imports. Separately, it was reported by the New York Times that that Attorney General Jeff Sessions is reviewing a recommendation to fire the former FBI deputy director, Andrew G. McCabe, just days before he is scheduled to retire on Sunday. Rounding out a busy day, in a statement on the USTR website, Trade Representative Robert Lighthizer announced that the United States has requested dispute settlement consultations with the Government of India at the World Trade Organization (WTO) challenging Indian export subsidy programs.

In economic news, US retail sales fell for a third straight month in February as households cut back on purchases of motor vehicles and other big-ticket items. The Commerce Department said retail sales fell 0.1% last month against consensus expectations of a +0.3% monthly rise. It was the first time since April 2012 that retail sales have declined for three straight months. After the numbers were published, the Atlanta Fed yet again slashed its Q1 GDP forecast; this time from 2.5% to just 1.9%. As recently as end-January, the model was signaling a 5.4% pace of growth in Q1. Still to come this week we have housing and industrial production data. The USD index opens in Asia around 89.25.

After an Asian session in which it reached a high of USD1.2410, the EUR came under steady pressure in the Northern Hemisphere on Wednesday, falling to a low in the European afternoon of 1.2350 and taking bottom spot on our one-day currency performance table. AUD/EUR ended the day around 30 pips higher with NZD/EUR up about half that amount.

Speaking to the annual “ECB Watchers” conference in Frankfurt, its President Mario Draghi said the European Central Bank will avoid surprising investors with sudden changes to its stimulus plans, stressing that inflation is still too low and US trade policies and a stronger euro are concerns. “Adjustments to our policy will remain predictable, and they will proceed at a measured pace… We still need to see further evidence that inflation dynamics are moving in the right direction. So monetary policy will remain patient, persistent and prudent.” Speaking about US trade tariffs, he said that while the initial impact is likely to be small, “there are potential second-round effects that could have much more serious consequences. These include the risk of retaliation across other goods and an escalation of trade tensions, and the potential for negative confidence effects which would weigh on business investment in particular.”

In a separate interview in Dublin, Governing Council member Philip Lane who heads Ireland’s Central Bank said the European Central Bank must keep its guard up against the risk of a sudden appreciation in the euro. “There’s no concern about the current level. But if it moves a lot within a short time interval then you have to think about the implications.” Repeating this message, Mr Draghi said that “any further sharp repricing” must be watched carefully. The euro opens in Asia today at USD1.2370, AUD/EUR0.6370 and NZD/EUR0.5925.

As markets continued to digest Tuesday’s speech from Bank of Canada Governor Stephen Poloz, the CAD stabilised after its initial sharp losses. USD/CAD opened around 1.2955 and traded in a relatively tight 40 pip range throughout the Northern Hemisphere day, finishing towards the lower end of its trading band around the 1.2940 mark. AUD/CAD extended its gains by another 20 pips to 1.0200 whilst NZD/CAD was steady around 0.9480.

Analysts are busy revising down their Canadian Dollar forecasts. TD Securities, for example, write that, “CAD is on the cusp of a renewed down-leg. Though there was no new substantive information in Governor Poloz's speech, the market appears to have finally heeded the message that there is no urgency for the Bank to tighten anytime soon. We continue to view July as the earliest hike… We have recently noted that the market needs to curb its enthusiasm in CAD; economic growth should decelerate while Canada's largest trading partner is leaning towards more protectionist policies. NAFTA negotiations remain unresolved and still far apart on the contentious issues.”

Thursday brings existing home sales data in Canada; these fell 14.5% in January from December to the lowest monthly level in three years as tighter mortgage rules hit demand. New and tougher rules on mortgage lending were imposed at the start of January amid fears of a housing bubble, requiring lenders to “stress test” borrowers to ensure they could withstand higher interest rates. The changes mean fewer buyers qualify for loans. The Canadian Dollar opens in Asia this morning at USD/CAD1.2940, AUD/CAD1.0200 and NZD/CAD0.9490.