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End-month, end-quarter and a long weekend… it could be a very volatile day in foreign exchange

By Nick Parsons

We warn persistently here that volatility is a near-permanent feature of the Kiwi Dollar and on Wednesday it was back at the bottom of our one-day performance table having topped the chart earlier in the week. NZD/USD hit a low during the European afternoon around 0.7220; its weakest point since last Friday before then falling further in North America to a low just under 0.7210. The AUD/NZD cross was able to claw its way back on to a 1.06 handle then late in the day move as high as 1.0625.

Yesterday saw the monthly business confidence numbers published by ANZ Bank. Confidence had been picking up after the sharp post-Election drop but the analysts report this month that, “Headline business confidence is treading water. A net 20% of businesses are pessimistic about the year ahead, down 1% versus February. A marked divergence was evident across sectors: retail and agriculture sank significantly, manufacturing and services floated higher, and construction was little changed. In level terms services are most optimistic and agriculture the least. Activity indicators increased pretty much across the board but remain below the levels of six months ago. A net 12% of firms are expecting to lift investment, up 5 points. Employment intentions lifted from +5% to +10%, making a comeback whilst profit expectations increased from -1% to +6%, back in the black.”

Putting all the survey components together, ANZ reckon their composite growth indicator, which combines business and consumer confidence, continues to suggest growth around 2-3% y/y. “The economy is caught in cross-currents, some helpful (terms of trade) and some not (capacity constraints and credit availability). But it’s keeping its head above water and still making steady progress.” On this last day of the month and quarter, we still have data to come on building consents, ahead of which the New Zealand Dollar opens in Asia this morning at USD0.7210 and AUD/NZD1.0625.

After Wednesday’s very poor session, the Aussie Dollar had a more mixed performance on Thursday – rising against the NZD, EUR and GBP but down against the Canadian and US Dollars. AUD/USD reached a high just above 0.7700 in the Asia session but couldn’t sustain its hold on a 77 cents ‘big figure’ for more than an hour. During the European morning, the pair fell below 0.7660 for the first time since December 20th before yo-yoing up and down throughout the North American session to end near the lows of the day.

There’s still quite a split of opinion on the outlook for the Australian Dollar. Most of the local banks retain a bearish stance – largely based on interest differentials and the lack of any urgency on the part of the RBA to raise rates – but there are still a few offshore institutions who have a less negative forecast profile. UOB Bank in Singapore, for example, reckon, “the sluggish local economy, coupled with benign inflationary outlook and slow wage growth does justify the RBA’s decision to stay on hold. Despite a reluctant RBA, we continue to maintain a positive outlook for the AUD/USD. This is mainly driven by support from commodities… We believe that after the recent pullback, further weakness may be limited. Despite recent consolidation, key industrial metals and energy commodities remain supported due to on-going strong synchronized growth recovery. As such, we see mild AUD/USD strength ahead.” UOB’s analysts forecast the AUD/USD rate will rise to 0.79 before the end of June and that it will finish the year back at 0.83.

As the end of the month and quarter approach, as well as the Easter holidays, there are only a couple more bits of economic data due for release locally: the housing credit and job vacancy numbers. So far this week, the AUD has been the worst performer of the major currencies we follow here and it might take a spectacular last-day rally in US stock index futures to rescue it at this late stage. The Aussie Dollar opens in Asia this morning at USD0.7660, with AUD/NZD at 1.0620 and GBP/AUD1.8375.

The British Pound had a decent recovery early on Wednesday morning and at 7am London time when we published our commentary for European clients, it was up against every one of the major currencies we follow closely here. GBP/USD extended Tuesday’s rally from a low of 1.4080 to hit 1.4200 but this was then as good as it got. Given a nudge lower by some poor economic data, the so-called ‘cable’ rate fell a full cent, dragging the pound down against everything except the NZD and EUR.

The Confederation of British Industry’s distributive trades survey showed the retail sales balance fell to -8 from +8 in February, confounding a median forecast of +15 in a Reuters poll of analysts. It’s a joke often aimed at economists that they know 50 ways to make love but don’t actually know any women. It now seems they don’t even bother to look out of the window to see what the weather is doing. The CBI report says, “Against a backdrop of stagnating household incomes and weak consumer confidence, the lengthy cold snap earlier this month has heaped added pressure on retailers… Freezing conditions and transport disruption caused people to avoid the high street. With many forced to work from home, telecoms firms saw record internet traffic, yet on-line shopping slowed sharply given the potential for disrupted deliveries.”

As the Easter weekend looms, we only have the second revisions to Q4 GDP and mortgage lending figures on Thursday. Sadly, the weather forecast for the holiday in the UK looks pretty poor, with the only demand at DIY and hardware stores likely to be for materials to build an Ark! The Bank of England has already lowered its forecast for Q1 GDP as a result of the two bouts of extreme weather in February and March and it seems that Q2 will get off to a very soft start also. The GBP opens in Asia this morning at USD1.4080, GBP/AUD1.8380 and GBP/NZD1.9525.

The US Dollar had a very good day on Wednesday, rising against all of the currencies we follow here. Its index against a basket of major currencies opened in Asia around 88.90 and having been little changed for the first 8 hours of the trading day, the USD began to climb in early European time and went on to reach a high of 89.70; its best level since Wednesday of last week. e

Incoming economic data were a mix of second-tier numbers: the second revision to Q4 GDP, pending home sales and wholesale inventories. Gross domestic product expanded at a 2.9% annual rate in the final three months of 2017, up from the previously reported 2.5% and only a slight moderation from the third quarter's 3.2% pace. This meant that overall in 2017, the US economy grew 2.3% after the 1.5% seen in 2016. Growth in consumer spending, which accounts for more than two-thirds of US economic activity, was revised up to 4.0% in the fourth quarter from the 3.8% reported last month. That was the quickest pace since the fourth quarter of 2014 and followed a 2.2% rate of growth in the July-September period. Looking forward in to the first quarter of 2018, the Commerce Department reported that retail and wholesale inventories were up 0.4% and 1.1% respectively in February. Whilst rising inventories can always be interpreted in two ways (is it due to confidence in the future or a lack of current demand?) they do count as a positive in the calculation of GDP.

Thursday brings the personal income and expenditure numbers as well as the Fed’s preferred measure of inflation: the PCE deflator. Once all these data are released, the Atlanta Fed will also update its GDPNow forecast of GDP for Q1. This currently stands at an annualized pace of 1.8%; well down from the 5%+ readings it was indicating back in early February. The USD index opens in Asia this morning at 89.70.

The euro was only kept off bottom place in our table on Wednesday by the New Zealand Dollar. It fell against every other major currency we follow closely here. Having tumbled on Tuesday from 1.2470 to 1.2375, EUR/USD could only rally in Asia yesterday to a best level of 1.2420 before drifting lower during the European morning and then falling hard to almost 1.2310 during the New York session. AUD/EUR climbed back on to a 0.62 handle though NZD/EUR edged slightly lower to 0.5850.

Away from the economic outlook and monetary policy, ECB officials may soon face pressure from a wholly different source. After the UK exits the European Union, so the EU will face a shortfall in its funding. The EU Commission’s ruling college is discussing ways to find new sources of revenue including proposals for a plastics tax and a €50 billion raid on European Central Bank profits. One of the measures under discussion is a plan to divert profits made by the euro zone’s 19 national central banks from printing banknotes straight into EU coffers. The commission estimates the revenue stream could generate €56 billion during the seven-year span of the next EU budget. More than 90 per cent of the so-called seigniorage profits are distributed by the ECB to the euro zone’s 19 central banks that often then pass a portion on to their national treasuries. ECB officials are said to believe the proposals from Brussels are a threat to their much-cherished independence.

The quarter ends in the Eurozone with a first estimate of German CPI for March. Due to favourable base effects from a year ago, it looks as though the annual rate of inflation might jump from 1.2% to 1.6%; certainly a step in the right direction in terms of progress towards the ECB’s target for Inflation across the Eurozone as a whole but not really marking a real acceleration in recent months. The numbers are released at 2pm Frankfurt time but some individual states report during the course of the morning which could inject an extra element of volatility into trading. The EUR opens in Asia today at USD1.2315, AUD/EUR0.6225 and NZD/EUR0.5855.

We mentioned here yesterday that, “traders in the Canadian Dollar market are struggling to get traction in either direction.” Over the past 12 hours, the USD/CAD pair has had five moves of more than a quarter of a cent yet is net little changed during the period. Three times it has moved back on to a 1.29 ‘big figure’ but twice has fallen back below 1.2875. It really is a frustrating time for traders and it would be unwise to draw any directional conclusions from the price action. Overall, however, the Canadian Dollar has held in pretty well and took silver medal position in our one-day table on Thursday.

According to a Reuters report yesterday, U.S. Trade Representative Robert Lighthizer on Wednesday expressed optimism that talks to modify NAFTA could be wrapped up quickly but a top Canadian official was more downbeat, saying much work remained. Lighthizer told CNBC television, “I’d say I’m hopeful — I think we are making progress. I think that all three parties want to move forward, we have a short window, because of elections and things beyond our control… But if there’s a real effort made to try to close out and to compromise and do some of the things we all know we should do ... I’m optimistic that we can get something done in principle in the next little bit.” Chief Canadian negotiator Steve Verheul, asked by reporters whether a deal was close, replied: “No, we’ve got quite a bit of work do yet”. Asked whether a deal could be done in April, he replied “That would be a bit of a challenge.”

In economic data, today we have the monthly GDP data as well as industrial raw materials prices. RBC is predicting 1.9% annualized GDP growth for the first quarter of 2018, while TD is predicting an even smaller 1.4% rise. That’s in comparison to the 4% increase recorded in the first quarter of 2017. As for the January numbers (Canada is to be congratulated for being the only country in G7 to produce official monthly GDP statistics), the consensus is a rise of just 0.1% m/m. The Canadian Dollar opens in Asia this morning at USD/CAD1.2910, AUD/CAD0.9895 and NZD/CAD0.9310.