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NZD outperformed AUD last week. QSBO will be the main focus of the week ahead.

By Nick Parsons

The New Zealand Dollar had a much wider trading range than its Australian cousin this last week, even though there wasn’t much headline-grabbing news locally. NZD/USD began the week at 0.7235 and during the dramatic sell-off in US equities on Monday, hit a low for the week just above 0.7200. From then on, it was virtually a non-stop climb all the way up to a best level on Thursday around 0.7320 which at one point pushed the AUD/NZD cross down to a 9-month low of 1.0530. An 80-pip slide in NZD/USD saw it print a low on Friday of 0.7245 before a modest rally into the close at 0.7275 and a net gain on the week a little over a quarter of a cent.

As with Australia, there is a regular pattern to the incoming economic news flow, even if there are fewer Central Bank meetings, with the next RBNZ monetary policy decision not coming until May 10th. The main attention this week will be on the REINZ Quarterly Survey of Business Opinion, usually abbreviated to the QSBO. Begun in 1961, it is New Zealand's longest running and most comprehensive business survey which covers manufacturers, builders, architects, wholesalers and retailers, and service sector firms. Information from these industries provides useful indicators of future investment patterns, and the likely direction and composition of economic growth in coming quarters. The last QSBO back in January had showed a sharp drop in business confidence following the General Election, with a net 11 percent of businesses expecting economic conditions to deteriorate over the first half of 2018 and Tuesday’s update will be watched closely for signs of improvement amongst NZ businesses.

At its last meeting on March 22nd, the RBNZ kept the Official Cash Rate unchanged at 1.75%. It noted that, “GDP was weaker than expected in the fourth quarter, mainly due to weather effects on agricultural production. Growth is expected to strengthen, supported by accommodative monetary policy, a high terms of trade, government spending and population growth. Labour market conditions are projected to tighten further… Monetary policy will remain accommodative for a considerable period. Numerous uncertainties remain and policy may need to adjust accordingly.” For the week ahead, it appears that the uncertainties mostly come from overseas, and in particular what the US may or may not do next in its trade spat with China. The New Zealand Dollar opens in Asia this morning having ended last week at USD0.7275 and AUD/NZD1.0555.

The Australian Dollar had a mixed week which felt more volatile than it actually was. Easter Monday was a holiday locally and across most of Europe but Asian markets were open, as were those in the United States. AUD/USD opened at 0.7685 and hit its low of the week just above 0.7660 around lunchtime in New York as US equity indices plunged. A stunning rally on Tuesday helped lift risk appetite and the AUD to 0.7705, whilst gains extended to a best level for the week of 0.7725 during the Asian morning on Thursday. Having fallen back to 0.7660 by Thursday’s close, the AUD ended the week around 0.7675; almost exactly where it had begun.

For all the great unknowns and uncertainties of the global economy, there is a somehow reassuring predictability to the regular monthly news flow. In Australia, the first Tuesday is the RBA meeting, then it’s the retail sales numbers, the NAB business survey and the third week often brings the employment numbers. There are no official monthly data on wages or inflation and so once a quarter we get a heavier economic data calendar. This second week of April brings the NAB business survey on Tuesday and the Westpac consumer survey on Wednesday morning. During the afternoon on Wednesday, RBA Governor Phil ‘slow and gradual’ Lowe is speaking in Perth on “Regional variation in a National Economy” so the second part of this week will probably see quite a few bank research notes on differences between the States in this geographically-vast country.

Looking at the current state of play amongst the major banks’ interest rate forecasts, the two most aggressive forecasts for 2018 have already been scaled back. At the beginning of the year, both NAB and ANZ had two rate hikes penciled in for H2. Back in early February, ANZ dropped one of these hikes from its forecast profile whilst NAB did the same at the end of that month. Both Westpac and CBA see the RBA on hold throughout 2018, whist Westpac don’t have the first interest rate hike coming until 2020. This week’s scheduled economic data are unlikely to prompt any revisions to the forecasts. The Aussie Dollar opens in Asia this morning having closed in New York on Friday at USD0.7675, with AUD/NZD at 1.0555 and GBP/AUD1.8360.

A summary of the British Pound last week would have looked very different at lunchtime on Friday than it did by close of business. The GBP had a pretty poor week until a powerful late rally after the US labour market report lifted the so-called ‘cable’ rate by more than a full cent. GBP/USD began at 1.4030 and in often volatile and choppy trading as a result of soft incoming UK economic data, eventually reached a high on Thursday morning in Asia around 1.4095. A move lower on Thursday was made worse by a further wave of selling once the technical support level from the previous Friday’s low at 1.4015 was broken and GBP/USD fell to a low for the week of 1.3985. It stayed around this level until lunchtime on Friday then rallied more 100 pips on to a 1.41 ‘big figure’ after the US employment numbers were published before closing more than half a cent up from its level on Easter Monday.

There were lots of economic surveys released last week. On Tuesday, the UK manufacturing sector posted 55.1 in March, little-changed from 55.0 in February, although the average reading over the opening quarter as a whole (55.1) was the weakest in a year, suggesting that the underlying pace of expansion has been generally slower since the start 2018. On Wednesday, the Construction PMI fell sharply from 51.4 in February to 47.0 in March, to register below the 50.0 no-change threshold for the first time in six months. On Thursday, the UK Services PMI dropped from 54.5 in February to 51.7, to signal the weakest service sector performance since July 2016. Survey respondents noted that snow disruption and unusually bad weather conditions in March had been a key factor holding back business activity growth but there were also reports that heightened economic uncertainty continued to act as a brake on growth during the latest survey period.

As in New Zealand, there isn’t a meeting of the Bank of England’s Monetary Policy Committee until May 10th. Commenting last week on what the PMI surveys might mean for the Bank of England, CIPS said, “A strong rebound is likely to be needed to ensure the majority of policymakers feel the economy is ready for another hike in interest rates.” For the moment, however, there’s no sign that the MPC is being deflected from what looks like a pre-ordained decision to raise rates another 25bp. We won’t see that latest monthly inflation numbers until April 18th and this week’s scheduled data are on industrial production and overseas trade and so unlikely to shift market expectations very much at all. The GBP opens in Asia this morning having ended last week at USD1.4090, GBP/AUD1.8360 and GBP/NZD1.9375.

Despite an especially wild week for US stock markets, its currency was remarkably stable last week with the US Dollar’s index against a basket of major currencies contained within a range of less than one percentage point for the entire period. It opened on Monday at 89.65 and hit its low for the week later that day around 89.45. From then on, and despite all the talk of tariffs and trade wars and huge volatility in equity markets, the USD rose gradually to a best level on Friday morning of 90.17; its highest since March 1st. As non-farm payrolls fell short of consensus estimates with a monthly rise of just 103k, the USD lost almost half a point to end the week around 89.75; just one-tenth higher than where it had begun on Easter Monday.

With all the focus on tariffs and trade over the past few weeks, last Thursday brought a timely reminder of why President Trump is so agitated about the subject. The US trade deficit grew by 1.6% in February from $56.7bn to $57.6bn and was the highest monthly trade deficit in ten years, going back to the GFC in 2008. Away from trade, there was plenty of other US economic data too. The ADP Survey of private sector payrolls showed an increase of 241k on the month whilst factory orders rose 1.2%. The ISM non-manufacturing index printed at 58.8, which was 0.7 percentage point lower than the February reading of 59.5. On Friday, the labour market report showed just 103k jobs were created in March compared to expectations of a 195k increase. The unemployment rate held steady at 4.1% and though earnings ticked up to 2.7%, this was still below the level which prompted the stock market panic at the start of February. Nonetheless, the DJIA fell more than 500 points on Friday and with a weekly high-low range for DJIA futures of 1,200 points, it was down a net 200 from its pre-Easter close.

After the regular rhythm of PMI numbers then the employment report (usually) on the first Friday of the month, next up it’s the inflation figures; an especially market-sensitive subject at present. After PPI figures on Tuesday, Wednesday brings the CPI data. Consensus expectations are for the headline rate to edge up from 2.2% to 2.3% with the core, ex-food & energy, measure seen rising from 1.8% to 2.1%. The Federal Reserve Bank doesn’t have a CPI target – instead it focuses on PCE – but numbers above 2% for both the headline and core will cement expectations of further monetary policy tightening whatever the wild day-to-day fluctuations of the US stock market. The USD index opens in Asia this morning having ended last week at 89.75.

The EUR didn’t have a great week and though to some extent it was rescued by Friday’s US labour market report, it still finished up as the weakest of the major currencies we follow closely here. EUR/USD began at 1.2325 but this proved to be within just 15 pips of its best level of the week, reached in thin holiday trading conditions on Easter Monday. A succession of economic data disappointments pushed the Single European Currency ever-lower and it reached a low of 1.2220 on Friday morning; its weakest level in more than a month before rallying around half a cent during the New York session.

In economic data at the beginning of the month, March saw eurozone economic activity expand at the weakest pace since the start of 2017, as rates of increase moderated in both the manufacturing and service sectors. The final PMI Composite Index posted 55.2 in March, down from 57.1 in February and below the earlier flash estimate of 55.3. Manufacturing production rose to the lowest extent since November 2016, whereas service sector business activity increased at the weakest pace since August last year. Markit noted that, “National PMI data indicated that the upturn remained broad-based in nature, with output expanding in all of the countries covered. However, signs of a growth slowdown were also widespread, with the ‘big-four’ nations and Ireland all seeing moderations during the latest survey month. March saw the level of incoming new business rise at the weakest pace for 14 months, with slower increases signaled in Germany, France, Italy and Ireland.”

The next ECB Council Meeting is on April 26th but this won’t be one of the four occasions each year at which updated economic projections are published. Though the main focus at the beginning of the year was how the ECB would signal and/or accelerate the ending of its QE programme, the softness of recent economic data makes this a much less urgent consideration. In any case, President Draghi already dealt with this quite skillfully at the last meeting by signaling that QE would not be increased in size. In a week which is quite light for new incoming data, there are plenty of ECB speakers to listen out for, starting today in Brussels with Vitor Constancio. The EUR opens in Asia today having finished in New York on Friday at USD1.2280, AUD/EUR0.6250 and NZD/EUR0.5920.

The Canadian Dollar had a very good week as optimism grew on a NAFTA agreement and incoming economic data held up pretty well. USD/CAD began on Monday at 1.2900 and though it moved up to 1.2940 on the initial stock market rout, this proved to be the high of the week. The pair fell 1 ½ cents by the close of business on Tuesday then extended the move to a low on Friday around 1.2740; its lowest level since the end of February. GBP/CAD fell below 1.80 for the first time in three weeks whilst AUD/CAD fell below 98 cents.

A Bloomberg story last Tuesday claimed, “The Trump administration is pushing for a preliminary NAFTA deal to announce at a summit in Peru next week, and will host cabinet ministers in Washington to try to achieve a breakthrough, according to three people familiar with the talks.” A spokesman for Canada’s Foreign Affairs Minister, Chrystia Freeland, would not comment on reports other than to say, “Canada is committed to concluding a modern, mutually beneficial NAFTA as soon as possible.” Speaking to reporters outside the White House, Larry Kudlow hinted a U.S.-Canada-Mexico trade deal could be near. “Everybody wants to solve this the best way they can… We don’t want to hurt businesses. We don’t want to hurt districts. We don’t want to hurt congressmen. And I think, at the end … of my mythical rainbow, they’re all going to come out ahead.” On ongoing talks to negotiate the North American Free Trade Agreement, Kudlow said the three countries are “moving in the direction of a NAFTA deal… I think we’re going to see some very positive news on NAFTA, and maintaining NAFTA, and reforming NAFTA. And, heck, the stock market is going to love that.”

Away from NAFTA and back on the economy, the Canadian manufacturing PMI index rose slightly to 55.7; its 25th consecutive month above 50. Markit said, “The headline PMI reading in March was supported by a robust and accelerated rise in production volumes across the manufacturing sector… with sustained pressure on operating capacity as highlighted by another solid rise in backlogs of work. A number of survey respondents noted that sales growth had outstripped production capacity at their plants in recent months.” Friday’s employment report showed Canada's economy added 32,000 new jobs in March, but the jobless rate remained steady at 5.8 per cent. The economy added more than 68,000 full-time jobs last month, but more than 35,000 part-time jobs were lost. The Canadian Dollar opens in Asia this morning having ended last week at USD/CAD1.2780, AUD/CAD0.9810 and GBP/CAD1.8005.