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Quarterly CPI data on Thursday should show why RBNZ is on hold for a very long time.

By Nick Parsons

In percentage terms, the New Zealand Dollar had the same trading range against the USD as its Australian cousin this last week. It began on Monday morning at 0.7275 and moved relentlessly higher until Friday lunchtime in Europe, having reached a best level of 0.7395; its highest since February 16th. By the end of the week in New York, the pair had slipped back around half a cent to 0.7345 whilst the AUD/NZD – which on Thursday traded down to a 9-month low of 1.0495 – rebounded more than half a cent to finish around 1.0555.

After a somewhat downbeat Quarterly Survey of Business Optimism last week and a mixed bag of second-tier economic data, the main focus this week will be on Thursday’s CPI report. Given its broad and in-depth coverage of the New Zealand economy, and the detail and colour which it always provides in even the most esoteric data releases, it is still a source of some puzzlement that Statistics New Zealand doesn’t produce monthly inflation data. For an island nation with only 4.6 million people, it really shouldn’t be too difficult to give a more timely snapshot of prices; especially given that its Central Bank is mandated to hit an inflation target. Anyhow, consensus expectations for Q1 are for a 0.5% q/q increase to take the annual rate down from 1.6% to 1.1%, although one of the biggest banks locally, BNZ, has penciled in a quarterly rise of just 0.3%.

In other data to be released this week, Monday brings the performance of services index, Tuesday is the REINZ house sales numbers and on Wednesday there’s the latest GDT dairy auction. Prime Minister Jacinda Ardern is to meet her French counterpart Emmanuel Macron in Paris on Monday and the German chancellor Angela Merkel in Berlin on Tuesday. Ms Ardern said she would be strongly making New Zealand's case for an EU trade deal in both those meetings. "We're one of just a handful of [World Trade Organisation] members who do not have either the beginning of a negotiation or an agreement… There's a real opportunity there to try and move these things along." The New Zealand Dollar opens in Asia this morning having ended last week at USD0.7345 and AUD/NZD1.0555

The Australian Dollar had a pretty good week which would have been even better if it had finished at lunchtime in Europe on Friday. AUD/USD began on Monday morning around 0.7675 but early selling pressure took the pair down to what proved to be the low of the week just above 0.7650. A sharp rally in US equities lifted the AUD on to US 77 cents and from then on it was upwards all the way to a high on Friday of 0.7805; the first time back on 78 cents in just over two weeks. A more defensive tone in equities in the last trading session of the week took around 40 pips off AUD/USD which finished on Friday around 0.7765 for a net gain around one cent.

After a decent NAB Business Survey and a soft-ish Westpac consumer confidence report last week, the month continues its normal rhythm with the Minutes of the March RBA meeting on Tuesday and the latest labour market data on Thursday. Investors might need a thesaurus for more synonyms of the words ‘slow’ and ‘gradual’ but these are likely to be the Central Bank’s main message on the economy and monetary policy for some time to come. Even the employment numbers will be far from conclusive for what matters as much as the number of people in work, is how much they were paid and whether this then translates into higher consumers’ expenditure and more generalized upward pressure on prices. There are many dots to be joined between a rise in employment and a rate hike.

As well as a focus on domestic economic indicators, Tuesday will bring the Q1 GDP report in Australia’s largest trading partner. The Chinese economy is expected to have grown at an annualized pace of 6.8% in the first quarter, whilst we’ll also see monthly data on retail sales, industrial production and fixed investment. The other external unknown will be the performance of asset markets in the wake of the Allied strikes on Syria. Falling equities and higher volatility are generally a drag on the Aussie Dollar, though a rising gold price could help mitigate some of the negative impact. The Aussie Dollar opens in Asia this morning having closed in New York at USD0.7765, with AUD/NZD at 1.0555 and GBP/AUD1.8345.

The British Pound had a very good week which – like all the other non-US Dollar currencies – would have been even better if it had ended at lunchtime on Friday. GBP/USD opened last Monday around 1.4085 and by Friday morning had added just over two cents to a 10-week high of 1.4290. It did so despite a whole series of disappointing UK economic numbers. Instead, the GBP was driven by a tumble in the EUR which saw GBP/EUR break out of its 2018 range from roughly 1.1200-1.1475 and move on to a 1.15 ‘big figure’ for the first time since June last year. This pushed the GBP higher across the board and it finished the week just behind the CAD as the second-strongest of all the currencies we follow closely here.

The generally downbeat numbers covered the residential property and retail sectors, was well as manufacturing and industrial production. They culminated with an estimate by the well-respected NIESR that UK GDP grew only 0.2% in the first quarter of 2018. Notwithstanding the softness of incoming economic data, Bank of England MPC members continue to argue the case for a rise in interest rates, with markets pricing a more than 50% probability of a hike in May. There is plenty of top-tier economic data scheduled this week. According to the Sunday Times, “figures out on Tuesday are expected to show that average wages in February climbed 3% on a year earlier, the first time pay growth has outpaced the rise in consumer prices since January last year.”

On Wednesday, March CPI figures are expected to show the annual rate of inflation remained unchanged at 2.7%; hence the talk of a rise in ‘real wages’ for the first time since January 2017. It will be fascinating to see what happens should CPI instead fall to 2.6%. In theory, this ought to reduce the likelihood of a rate hike from an inflation-targeting Central Bank, though there will doubtless be calls that an even bigger rise in real wages should be met with a rate hike. On Thursday, we’ll see the impact of the dismal UK weather on retail sales, with consensus looking for a fall of -0.2% on the month. The GBP opens in Asia this morning having ended in New York on Friday at USD1.4240, GBP/AUD1.8345 and GBP/NZD1.9365.

US stock markets continue to gyrate, though the high-low range for the Dow Jones Industrial Average this last week was ‘only’ 540 points with 50 points for the S&P 500 index. Whereas for the whole of last year, the S&P 500 gained or lost more than 1% on a single day only eight times - the least since the mid-'60s - there have already been twenty-nine 1% moves in the first 69 trading days of 2018. Against this background, the performance of the US Dollar looks pretty tame. The USD index against a basket of major currencies opened last Monday at 89.75 and fell slowly but steadily to a low on Wednesday just below 89.00. It then rallied over half a point to a best level on Thursday around 89.50 before ending the week at 89.35. For all the worries about trade, tariffs, China, Russia and Syria, the entire range over the last 3 weeks for the USD index has been barely 1 ½ points.

The external environment for the US Dollar will clearly be dominated by the events in Syria over the weekend and the international reaction to them, both politically and economically. To some extent, the sharp fall in US equity markets in the final session of the week could be seen as a defensive move ahead of an escalation of the military conflict but it remains to be seen whether this will have further to run. And even if stock markets were to take another lurch lower, it is far from clear whether this would have a clear negative impact on the US Dollar. All things equal, the biggest beneficiaries of a sharp reduction in global risk appetite are often the countries which run significant current account surpluses - Japan and the European Union – though the Eurozone is currently going through a relatively soft patch of economic data and its Central Bank is very publicly divided on the outlook for monetary policy. It may well be that the USD does relatively well by default and for want of better alternatives at a time of heightened geo-political uncertainty.

In terms of US economic data, a somewhat quieter week is in prospect. We’ve already had the CPI numbers, the labor market report and the Minutes of the last FOMC meeting. This week we have retail sales on Monday, industrial production on Tuesday and the Philly Fed Survey on Thursday. There is a huge volume of Fed-speak to look forward to, also, with at least eleven scheduled speeches in addition to the release of the Beige Book on Wednesday. The USD index opens in Asia this morning having closed on Friday at 89.35.

The EUR had a week of two halves: rising in the first part until its peak on Wednesday morning local time then slipping back over the next couple of days. EUR/USD opened last Monday at 1.2275 and despite some patchy incoming economic data, reached a best level on Wednesday of 1.2385; its highest in exactly two weeks. A sharp sell-off on Thursday dragged the pair down to 1.2305 before a quarter of a cent rally on Friday saw the EUR end the week around 1.2330.

There was a very public split last week on the ECB, with an anonymous spokesman briefing against Council member Nowotny. The depth of this split became even clearer in its published account of the March Council Meeting. It said, “The view was put forward that the Governing Council’s criteria for a sustained adjustment in the path of inflation could be assessed as close to being satisfied over a medium-term horizon. However, the broadly agreed conclusion was that the evidence for a sustained rise in inflation towards levels consistent with the Governing Council’s inflation aim was still not sufficient.” As for the exchange rate, “Some caution was voiced, as the more recent developments in the euro exchange rate and in financial conditions in part reflected changing perceptions about monetary and fiscal policies, domestically and globally, as well as rising risks of protectionism and heightened market sensitivity to communication, rather than further improvements in domestic economic fundamentals."

The next ECB Council Meeting is on Thursday April 26th so there are only another four days before it goes into self-imposed radio silence on the subject of monetary policy. Incoming economic data this week include Germany’s ZEW survey on Tuesday, Eurozone CPI on Wednesday and then the current account numbers on Thursday. The EUR opens in Asia today having closed on Friday at USD1.2330, AUD/EUR0.6295 and NZD/EUR0.5960.

The Canadian Dollar had another good week, with USD/CAD down a net 1 ½ cents over the whole period but more than 2 ½ cents down from the week’s high to low. It opened last Monday at 1.2775 and amidst the early stock market tumble, moved to a high around 1.2815. By Wednesday afternoon in New York, the pair was down to 1.2565 and on Friday morning it hit a low of 1.2555 - the lowest since mid-February – before rallying more than half a cent into the close of business. AUD/CAD hit a 2-month low around 0.9760 whilst NZD/CAD hit a 6-week low just below 0.9250.

After last week’s very upbeat Bank of Canada’s Quarterly Business Outlook Survey, this week has a Bank of Canada monetary policy meeting on Wednesday. Canada's central bank has hiked rates three times since July 2017, while the U.S. Federal Reserve raised its benchmark rate last month and is due to raise rates twice more this year. The Bank of Canada has said it will be cautious in considering future moves. According to a Reuters poll at the weekend, the BoC is likely to raise interest rates twice more this year as the economy regains momentum in the current quarter but will hold them steady at its April 18th meeting. Twenty-seven of 29 economists surveyed said rates would remain on hold at 1.25 percent. Economists as a group trimmed their first-quarter growth forecast to 1.8% from 2.0% in the previous poll. But the survey concluded that slowdown will be temporary, with expectations for the second quarter bumped up to 2.4% from 2.0%.

The NAFTA trade agreement could be renegotiated in the next few weeks, U.S. Vice President Mike Pence and Canada’s Prime Minister said Saturday in Peru, avoiding new political opposition that could emerge during Congressional and Mexican elections later this year. “I’ll leave this summit very hopeful that we are very close to a renegotiated NAFTA… there is a real possibility that we could arrive at an agreement within the next several weeks,” Pence told reporters at the Summit of the Americas in Lima. Canadian Prime Minister Justin Trudeau said, “There is a desire and a recognition by all three NAFTA partners that the time-lines imposed upon us by both the upcoming, the imminent Mexican elections and the upcoming American midterms, means that we have a certain amount of pressure to try and move forward successfully in the coming weeks.” The Canadian leader will be in London for the Commonwealth heads of government meeting this week. The Canadian Dollar opens in Asia this morning having closed on Friday at USD/CAD1.2615, AUD/CAD0.9790 and GBP/CAD1.7960.