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NZD struggling after a poor run this week

By Nick Parsons

The dismal run continues for the New Zealand Dollar. On the first four days of this week it has finished second from bottom, bottom, third-last and in second-last place yesterday. The day started promisingly enough with NZD/USD holding a 0.7310-30 range until mid-morning in London but in the afternoon, it dropped on to a US 72 cents ‘big figure’ and in New York tumbled to 0.7260; its lowest in almost two weeks.

The long-awaited Q1 CPI figures were finally released yesterday. In our preview, we noted BNZ had picked a 0.3% quarterly increase, ANZ had gone for +0.4% and Westpac +0.5%. The prize must go to Westpac who correctly forecast both the quarterly increase and the annual rate of 1.1%; down from 16% in the December quarter. Government-influenced price changes had the biggest impact on the numbers, with higher cigarette and tobacco prices being countered by cheaper tertiary education. The annual tobacco tax increase on 1 January 2018 lifted quarterly inflation, with prices up 10 percent. The average price for packet of 25 cigarettes was $35.14 in March, compared with $31.68 in December. Prices for tertiary education fell 16 percent in the March 2018 quarter. This is the first time this series has fallen since 2003; it was due to the introduction of the Government's fee-free first year policy. The policy applies for all New Zealand secondary students finishing school from 2017 onwards, and adults who previously studied for less than half a full-time year of tertiary education or industry training.

Elsewhere in the comprehensive inflation numbers, higher prices for accommodation services and petrol also contributed to the quarterly CPI rise, but they were slightly offset by seasonal falls for international airfares whilst housing and household utility prices increased 3.1 percent in the March 2018 year, led by construction and rents. Inflation in New Zealand is now close to the bottom of the RBNZ’s 1-3% target range though the Centra l Bank will probably take some comfort from the fact that tradable prices — those largely determined by offshore factors — fell 0.4% over the year, helping to offset a 2.3% increase in non-tradable prices over the same period. Speaking on NZ radio, RBNZ Governor Adrian Orr said he expected, “very benign inflation going forward without doubt, as we’ve forecast”. He added that “what really matters is the confidence and expectation and belief that we are aiming for that midpoint of 2 percent all of the time.” And he pledged that “we are doggedly determined to aim for two percent, but the accuracy around…that is very limited.” The New Zealand Dollar opens in Asia this morning at USD0.7260 and AUD/NZD1.0635.

Thursday was a far more interesting day for the Australian Dollar than the whole of the previous three days of the week. AUD/USD initially fell after a soft-ish labour market report, surged back on to a US 78 cents ‘big figure’ then tumbled to 0.7720 as the US Dollar caught a huge bid on the back of rising US bond yields. In the terminology of technical analysis, it was a classic “key day reversal” with a higher high, lower low and lower close than the previous day and it will be very interesting to see if this relatively rare indicator again proves correct.

The March labour market report was quite a bit softer than had been expected. Total employment rose by just 4,900 against consensus expectations of a 21,000 increase. More disappointingly, February’s initially-reported 17,500 gain was revised to show a drop of 6,300 which brought to an end what had previously been a run of 17 consecutive monthly increases in employment. The main revisions came in full-time jobs which were now estimated to have gained only 20,100 in February, instead of the initial outsized jump of 64,900. March was even worse with full-time positions falling 19,900. The unemployment rate was steady at 5.5 percent, after a downward revision to February. It has hovered between 5.4 percent and 5.6 percent for 11 months now whilst the participation rate dipped to 65.5 percent, having peaked at 65.7 percent in January as more women entered the labour force.

On the Australian stock exchange, the ASX Metals & Mining index hit a three-month high yesterday, driven by sharply higher prices for industrial metals. Aluminium is up 32% so far this month and nickel is 20% up this week alone on Russian sanctions and supply shortage concerns. Three-month nickel on the London Metal Exchange rallied as much as 9.3% to $16,690 a tonne on Thursday, the highest since December, 2014. Australia’s biggest export commodity, iron ore, meantime, is up 8.5% over the last three days. Whether these metals can sustain these gains in the face of a stronger USD and ahead of the weekend remains to be seen. The Aussie Dollar opens in Asia this morning at USD0.7725, with AUD/NZD at 1.0630 and GBP/AUD1.8235.

The Pound has had a very poor week so far, finishing equal bottom of the table with the New Zealand Dollar on Tuesday, second from bottom Wednesday and last on Thursday. Yesterday it again fell victim to more disappointing economic data and doubts as to whether the Bank of England would indeed be raising interest rates in May. GBP/USD reached an overnight high of 1.4215 but after the morning’s UK retail sales numbers and a TV interview with BoE Governor Carney in the evening, the pair fell to a low around 1.4075; its weakest level in almost a fortnight and almost 3 cents below Monday’s 1.4365 high.

UK retail sales were always likely to be negatively impacted by very poor weather in the month of March, but the outturn was far worse than consensus estimates of a -0.5% m/m decline. The actual figure published by the Office for National Statistics was a -1.2% m/m drop which meant that total sales volume in the first quarter of the year fell -0.5% and was up only 1.1% compared to a year ago. The statisticians commented that, “Retail sales fell in the first quarter due to a large decline in March with petrol sales seeing a significant slump as a result of the poor weather keeping many shoppers indoors. However, the snow actually helped boost online spending with department stores in particular seeing growth in their web sales… Various shops also reported increased spending on gifts in the run-up to Easter and Mother's Day, which also helped boost online sales."

The question for markets was whether the soft run of economic activity data in the first quarter of the year, coupled with a sharp fall in the rate of inflation, would be sufficient to deter the Bank of England from raising interest rates at its May MPC meeting. For much of the day on Thursday, investors were still inclined to the view that it would not prevent a hike as this would be too great a loss of face for the Bank and its Governor, Mark Carney. Instead, Mr Carney gave an interview to the BBC news in which he bizarrely claimed that Brexit uncertainties might be a reason for holding off on a rate hike. He said there “will be some differences of view” at May’s Monetary Policy Committee meeting and that he is “conscious that there are other meetings over the course of this year." The pound duly plunged. The GBP opens in Asia this morning at USD1.4075, GBP/AUD1.8230 and GBP/NZD1.9380.

US equity markets gave back all of the last two days’ gains on Thursday and the Dow Jones Industrials Average turned negative for the year as US 10-year bond yields rose above 2.90% and 2-year notes jumped a massive 12 basis points to 2.43% leaving the spread between 2 and 10 years at just 47bp. The US Dollar finally began to gather some support from higher interest rates and the USD index against a basket of major currencies rose from 89.10 to a best level of 89.55; its highest in almost 10 days.

President Trump clearly enjoyed his time on the golf course at Mar-a-lago with Japanese Prime Minister Shinzo Abe and his Twitter feed has been fulsome in its praise of the friendship and co-operation between the two nations. “Great meeting with Prime Minister Abe of Japan, who has just left Florida. Talked in depth about North Korea, Military and Trade. Good things will happen!” For the moment, at least, there has been no time for distractions on Russia, Syria, China, tariffs or trade.

Economic yesterday was limited to weekly jobless claims which fell 1k to 232k but are probably still being distorted by the timing of the Easter vacation, and the Philadelphia Fed Business Survey. This rose very slightly from 22.3 to 23.2 though the details were much less rosy with the new-orders index tumbling by 17 points to 18.4 while the workweek jumped by 8.8 points. Given the recent focus on inflation and what it might mean for the Fed, the prices sub-indices make interesting reading. “Price increases for purchased inputs were reported by 59 percent of the manufacturers this month, up notably from 44 percent in March. The prices paid diffusion index increased 14 points to its highest reading since March 2011. The current prices received index, reflecting the manufacturers’ own prices, increased 9 points to a reading of 29.8, its highest reading since May 2008.” The USD index opens in Asia this morning at 89.50.

The Single European Currency had a very mixed day on Thursday. After a pretty quiet session in Asia overnight, European traders bid up EUR/USD from 1.2365 to just under 1.2400 but the pair quickly reversed its gains and within an hour was back down at the low of the day around 1.2660. It remained there until late afternoon when the USD found a lot of buying interest, sending the EUR down to a low of 1.2335; its lowest since Monday. Despite this drop, the euro rose against every other major currency and finished in second place on our one-day table.

Eurozone current account data are rarely a market mover and neither Reuters nor Bloomberg even publish consensus estimates for the numbers. Nonetheless, they are an important reminder of why the currency finds solid investor demand, particularly at times of higher volatility and uncertainty in global asset markets. Figures out this morning showed that in February, the Eurozone registered a €35.1bn current account surplus after an upwardly-revised €39.0bn in January. In the 12 months to the end of February, the surplus rose to 3.7% of GDP, up from 3.4% in the same period last year. The ECB expects this trend to continue, pushing the surplus higher to above 4% of GDP later this year and in 2019.

Research published last week by investment bank Jefferies and reported in the Financial Times showed that Eurozone investors have been the biggest overseas net buyers of US debt securities in the past half-decade. Euro area holdings of US corporate and Treasury bonds reached $2.75tn at the end of last year, an 80 per cent increase since the start of 2012. By contrast the volume of US debt held by investors in Japan and China remained flat over the period, while investors in the UK increased their holdings by 40 per cent to $700bn. According to the authors of the report, “European Central Bank quantitative easing has resulted in the recycling of the euro area’s current account surplus into US debt securities.” The EUR opens in Asia today at USD1.2345, AUD/EUR0.6260 and NZD/EUR0.5885.

Having slumped to the bottom of our one-day performance table on Wednesday, the Canadian Dollar had quite a good day on Thursday, finishing in third place behind a buoyant US Dollar and a strong euro. USD/CAD opened around 1.2625 and moved down to a low at lunchtime in Europe of 1.2595 before then jumping to 1.2690 as the USD surged. Nonetheless, AUD/CAD moved back on to a 97 cents ‘big figure’ with NZD/CAD on 91 cents.

We’ve already seen the march labour market report in Canada, but this didn’t prevent investors reacting favourably to the private sector ADP employment report. This showed a 42,800 rise in employment, led by a 22,300 increase in the construction sector. ADP’s Press release noted, “Overall, Canada experienced robust hiring in the month of March despite a tepid performance in some industries… While there were losses in finance, information and education, they were outpaced by significant growth in the construction industry.”

Much more significant than the private sector jobs report was another rise in oil prices. The price of oil, one of Canada's major exports, rose to its highest since late 2014 as U.S. crude inventories declined and after sources told Reuters that top exporter Saudi Arabia aims to push prices even higher and wanted to see $100 per barrel. Brent crude rose 1.7% to $74.74 on Thursday, the highest level since November 2014 whilst West Texas Intermediate hit a high around $69.42. The Canadian Dollar opens in Asia this morning at USD/CAD1.2660, AUD/CAD0.9790 and NZD/CAD0.9200.