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No surprises in the RBA Minutes. AUD/USD trapped in very narrow trading range

By Nick Parsons

After Monday’s poor session in which it finished second from bottom on our one-day performance table, the Kiwi Dollar had an even worse day on Tuesday, sharing bottom spot with the GBP. A high in the Asian session of USD.7270 was as good as it got for the flightless bird which then tumbled to a low just under 0.7230 in the European afternoon before a modest rally to 0.7240. The AUD/NZD cross -which last week was on a 1.04 ‘big figure’ for a couple of hours - almost touched 1.06 before closing in New York around 1.0590.

In economic news, the Real Estate Institute of New Zealand (REINZ) said that the median house price for New Zealand rose 1.8% in March 2018 to reach a new record high of $560,000 up from $550,000 in March 2017. Prices in Auckland fell 2.2% year-on-year to $880,000 but this was compared to March 2017 which saw the region experience the record price of $900,000. The REINZ said, “March was a very strong month from a price perspective with record prices achieved for New Zealand, New Zealand excluding Auckland, Gisborne, the Hawke’s Bay and Wellington. Looking at the whole country, median house prices increased in 13 out of 16 regions.” The number of properties sold in March across the country fell by 9.9% when compared to the same time last year with 7,768 properties sold in comparison to 8,622 in March 2017 which was the highest month for sales volume in 2017.

The International Monetary Fund has criticized New Zealand’s ban on home sales to foreigners, saying it’s unlikely to improve housing affordability. After concluding its annual Article IV mission to New Zealand, the IMF said that, “Foreign buyers seem to have played a minor role in New Zealand’s residential real estate market recently... If the government’s broader housing policy agenda is fully implemented, that would address most of the potential problems associated with foreign buyers on a less discriminatory basis.” Proposed changes to the Overseas Investment Act, which the government says will bring New Zealand into line with neighboring Australia, will classify residential land as “sensitive,” meaning non-residents or non-citizens can’t purchase existing dwellings without the consent of the Overseas Investment Office. While non-resident foreigners will be allowed to invest in new construction, they will be forced to sell once the homes are built. Elsewhere in the report, the IMF notes that economic growth should remain around 3 percent in the near term, with risks broadly balanced and on monetary policy it warns against both precautionary further easing or premature tightening. The New Zealand Dollar opens in Asia this morning at USD0.7340 and AUD/NZD1.0590.

After its choppy start to the week, the Australian Dollar is still struggling to gain traction in either direction, doubtless frustrating many intra-day traders. It closed little changed at USD0.7775 on Monday evening and on Tuesday it was down almost to 0.7760 then up to 0.7790 to be back pretty much where it began. The Aussie appears unsure whether to take its cue from improving sentiment in global equity markets and lower levels of volatility, a somewhat lower gold price, or continued caution from the Reserve Bank on the pace of progress towards its inflation and output goals. AUD/USD has been stuck within a 30 pip ranges for the whole of the last 36 hours, though the AUD/NZD cross has picked up to a recent high just under 1.0600.

The RBA Board Minutes offered no great surprises, though your author was struck by a few phrases which could be interpreted quite dovishly. Most notably, the conclusion that, “In current circumstances, members agreed that it was more likely that the next move in the cash rate would be up, rather than down” is an explicit mention of the possibility of a cut in rates, even if it is the ‘straw man’ to be set up and then knocked over. Certainly, there was no sense of urgency in changing monetary policy. “Forward-looking indicators suggested that spare capacity in the labour market would continue to decline gradually over 2018. Consequently, wages growth was expected to rise gradually from its current low rate. Low growth in labour costs in combination with strong competition in the retail sector suggested that inflation would remain low for some time before also picking up gradually as the economy and labour market strengthen.”

The RBA noted that, “The low level of interest rates had supported growth over 2017, which had reduced the unemployment rate and brought inflation closer to the target. Further progress on these goals was expected in the period ahead, but this progress was likely to be gradual. Over 2018, GDP growth was expected to exceed potential growth and CPI inflation was expected to increase gradually to be a little above 2 per cent. Members noted that an appreciation of the Australian dollar would be expected to result in a slower pick-up in economic activity and inflation than forecast.” Eagle-eyed readers will have spotted the use of the word ‘gradual’ five times in just two paragraphs! It should not be difficult for markets to take the hint, whilst anyone expecting a rate hike any time soon will be left in an even more uncomfortable position now. The Aussie Dollar opens in Asia this morning at USD0.7770, with AUD/NZD at 1.0590 and GBP/AUD1.8395.

After Monday’s very good day, the British Pound went from hero to zero on Tuesday, finishing equal bottom of the table with the New Zealand Dollar. In doing so, it nearly completed what technical analysts call an “outside day” on many of its crosses. This occurs when there is a higher high, a lower low and a lower close than the previous trading day and is a strong signal of a trend reversal. If we look at GBP/USD, the pair opened at 1.4335 then raced up to a high of 1.4375; not only higher than the previous day’s high, but the best level since the EU referendum back in June 2016. A sharp sell-off to 1.4290 didn’t complete a perfect bearish pattern (it would have needed to trade below 1.4250 for this) but it does mean that anyone who bought GBP after lunchtime on Monday is now nursing losses.

According to the Sunday Times at the weekend, “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.” It was only half-correct in its view. Average earnings growth did, indeed, exceed inflation but the 2.8% y/y increase in February was only one-tenth above the 2.7% rise in the CPI. The good news is that pay is now growing at its fastest pace since August 2015 but the end of a squeeze on real living standards is still a very different thing to a noticeable and sustained improvement in purchasing power. And, with increases in mandatory pension contributions for many people effective in April, the benefit of higher headline wages will not be matched in take-home pay.

Separate figures on the labour market, meantime, show that the unemployment rate in the UK has hit a 42-year low of 4.2%. The number of people classed as unemployed has dropped by 136,000 over the last year, and now stands at 1.42 million whilst there are now 32.26 million people in work, 427,000 more than a year ago. This means the employment rate has hit 75.4%, the highest since records began in 1971. The Government was quick to highlight the numbers. The Secretary of State for Work and pensions said, “Another milestone for employment has been reached under this Government as employment reaches a record high, up 3.2 million since 2010 - the 16th time the employment record has been broken in the same period. That means on average, over 1,000 people have moved into work every day since 2010.” The GBP opens in Asia this morning at USD1.4300, GBP/AUD1.8400 and GBP/NZD1.9475.

After the first day of the week saw the DJIA up over 200 points and the S&P 500 index more than 20 points higher, the second day brought more of the same with the S&P back above 2700 for the first time since March 22nd and the VIX index of volatility of equity market volatility back down at 15. The USD index against a basket of major currencies initially sold off from 89.00 to a low of 88.80 during the European morning but by mid-afternoon it had rallied up to 89.20 before finally ending unchanged on the day.

The main trigger for the rally in the USD (apart from data disappointments in the UK and Eurozone) was a comment from US Treasury Secretary Mnuchin, who told CNBC that Trump's tweet on Monday about unfair FX competition was not a signal for a weaker dollar but a "warning shot" to Russia and China not to devalue their currency in the future. "They've used a lot of their reserves to actually support the currency. The President wants to make sure they don't change their plans, and he's watching it." On a separate issue, Mnuchin said rising economic growth will help pay for a temporary shortfall in tax receipts. "We're now at a point where we're comfortably within our 3 percent or higher sustained economic growth… The difference between 2.2 and 3 percent will pay for the tax cuts." He went on to claim that, “We're seeing very strong economic growth," he said. "We literally have met with hundreds of executives, small companies, big companies, and thousands of workers. We're beginning to see the impact of the tax cuts, specifically people investing large amounts of money back into the United States."

In Tuesday’s incoming economic news, US industrial production rose a better than expected 0.5% m/m in March which took the y/y rate up to 4.3%; the fastest pace of growth since February 2012. Behind the headlines, however, there was a huge 3.1% m/m jump in energy output – entirely due to the pattern of weather in February and March – and manufacturing production rose a much more subdued 0.1% m/m. With capacity utilization rising three-tenths to 78.0% and housing starts very slightly stronger than expected, the Atlanta Fed nudged its Q1 GDP forecast back up to 2.0%. As well as three Fed speakers, the highlight of the day on Wednesday will be the Federal Reserve’s Beige Book on current economic conditions. The USD index opens in Asia this morning at 89.05.

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After a quiet start on Monday, EUR/USD began a rally which took it up more than half a cent to 1.2390; just above last Wednesday’s high and the best level in 2½ weeks. During the European morning on Tuesday, the euro extended its gains to 1.2410; the first time it had been on a 1.24 ‘big figure’ since March 28th. It subsequently gave back more than three-quarters of a cent to a low of USD1.2340 which helped lift the AUD/EUR cross to an intra-day high of 0.6295.

In economic news, the ZEW Indicator of Economic Sentiment for Germany once again fell sharply, dropping by 13.3 points compared to March and a huge 26.0 points when compared to February. The April indicator stands at minus 8.2 points, falling far below the long-term average of 23.5 points. The assessment of the current economic situation in Germany decreased by 2.8 points, with the corresponding indicator currently standing at 87.9 points. Commenting on their survey, the ZEW said, “The reasons for this downturn in expectations can mainly be found in the international trade conflict with the United States and the current situation in the Syrian war. The significant decline in production, exports and retail sales in Germany in the first quarter of 2018 is also having a negative effect on the future economic development.” The financial market experts’ expectations regarding economic development in the Eurozone also decreased considerably, with the indicator falling by 11.5 points to a current reading of just 1.9 points. The indicator for the current economic situation in the Eurozone improved slightly in April by 1.5 points to 57.7.

According to the latest Reuters poll, Eurozone economic growth, already moderating in part from a stronger currency, will take a further hit from the ongoing trade dispute between the United States and China. While the consensus for growth in the latest poll of over 100 economists taken April 6-16 was little changed from a poll last month, the dispersion has increased and the range of forecasts shows lower highs and lower lows for growth in the region compared with last month. Full-year GDP growth is expected to average 2.3 percent this year and 2.0 percent next whilst inflation is predicted to average 1.5 percent this year, 1.6 percent next and 1.7 percent in 2020. The EUR opens in Asia today at USD1.2365, AUD/EUR0.6285 and NZD/EUR0.5935.

There’s no stopping the Canadian Dollar at the moment as it improved one place on Monday’s finish to end on Tuesday at the top of our one-day performance table and up against all the major currencies we follow closely here. USD/CAD opened around 1.2565 and really began to accelerate to the downside in the New York afternoon, reaching a low of 1.2530; its lowest point in just over two months. AUD/CAD was down two-tenths with NZD/CAD down half a percent to 0.9210.

The International Monetary Fund yesterday released its latest World Economic Outlook to coincide with its Spring Meeting in Washington which takes place in April every year. It kept its global growth forecasts for both 2018 and 2019 unchanged at 3.9% but warned that, “The prospect of trade restrictions and counter-restrictions threatens to undermine confidence and derail growth prematurely. The IMF projects moderate economic growth for Canada this year and next, albeit at a pace slower than last year and significantly behind that in the United States. The IMF sees GDP growth in Canada of 2.1% this year and 2.0% next year. That represents a slight downgrade from January's outlook of 2.3% forecast for this year, and is noticeably less than the strong three per cent growth Canada experienced in 2017.

The Bank of Canada holds its monetary policy meeting today having already hiked rates three times since July 2017. Economists from 10 of the 11 primary dealers of Canadian government securities told the Wall Street Journal they anticipate the BoC will keep its key rate at 1.25% this week. Morgan Stanley is one of the dissenting voices saying “We expect the Bank of Canada (BoC) to raise interest rates at its April meeting by 25 basis points, to 1.5 per cent… Data on economic activity have thus far come broadly in line with the BoC’s expectations, opening a window for the governing council to deliver a second rate hike this year. We expect the data will soon begin to disappoint relative the BoC’s expectations and, as such, we look for the BoC to pause on hikes thereafter in order to assess the effects of policy tightening, and we continue to expect no further rate hikes until next year.” So, even though, they are forecasting a rise in rates, this is what in currently-fashionable terminology might be termed a ‘dovish hike’. The Canadian Dollar opens in Asia this morning at USD/CAD1.2555, AUD/CAD0.9755 and NZD/CAD0.9210.