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NZD and AUD end Monday in equal bottom-place on the FX leader board

By Nick Parsons

After its very poor week, finishing down against every one of the major currencies we follow here, the New Zealand dollar did no better on Monday, finishing equal bottom of the table with its Aussie cousin. During the European morning, NZD/USD moved down on to 71 cents for the first time since March 29th and in New York trading the pair extended its decline to a low around 0.7150; its weakest since January 10th.

A bit of a debate is about to get underway after New Zealand’s biggest bank, ANZ, criticized the new Labour Government’s fiscal sustainability rules. In its Coalition agreement, the Government promised to reduce core Crown debt (currently 21.6% of GDP) to 20% of GDP by 2021/22. Finance Minister Grant Robertson has maintained the Government can fund infrastructure projects without breaking the rules and getting debt to 20% is important to safeguard against an economic shock. However, ANZ says it thinks, “an argument can be made for increasing near-term debt targets for the purpose of growth-enhancing infrastructure spending… simple, transparent debt financing would be preferable to workarounds to satisfy an arbitrary target. There is nothing sacrosanct about the essentially arbitrary round-figure target for Crown debt of 20% of GDP in five years.” This looks to be the start of a potentially much bigger debate about infrastructure spending and how to meet the needs of a oulation which has increased by more than 10% in the last three years.

Ahead of the ANZAC day holiday on Wednesday, we have the always fascinating visitor arrivals figures today. As we have seen on many occasions already this year, however, the NZD does not need any domestic economic or news catalysts to be propelled either to the top or the bottom of our daily currency performance table. The New Zealand Dollar opens in Asia this morning at USD0.7150 and AUD/NZD1.0635.

Both Antipodean currencies were hit hard on Monday and finished equal bottom of our one-day performance table. After the big technical signal we highlighted here on Friday morning (a ‘key reversal day’ with a higher high, lower low and lower close than the previous day), AUD/USD continued to come under pressure. Friday’s intra-day low of 0.7655 wasn’t quite the lowest of the year (that came around 0.7645 on March 28th) but the pair fell further in Europe and in New York yesterday to reach a low of 0.7635; the weakest since December 15th.

Given the strength of the US Dollar over the last few days, the commodity price rally which had supported the Australian Dollar last week may be running out of steam, although the picture is quite mixed. Gold is down almost $30 from Thursday’s high of $1354 whilst nickel has tumbled from $16617 to just $14371; an 8% decline in just three trading days. Australia’s largest export commodity is still holding up, however, with both rebar and iron ore futures at one-month highs on Monday after news that Chinese rebar and iron ore inventories continued to decline last week. According to Thomson Reuters, citing data from Mysteel Consultancy, rebar inventories held by Chinese traders fell to 8.252 million tonnes, well below the 8.68 million tonne level reported a week earlier. Other steelmaking raw materials also rose on the Shanghai market. Coke jumped 3.4 percent to 1,922 yuan a tonne, having touched a five-month peak of 1,930 yuan initially, and coking coal increased 1.7 percent to 1,170.50 yuan.

The big news in Australia this week is of course the publication of quarterly CPI numbers today. The consensus is for an increase of between 0.4 and 0.5% in Q1 which would take the annual rate of inflation to between 1.8 and 1.9%. It is very frustrating for investors who have no monthly CPI numbers to find there are four different quarterly measures produced: headline, core, trimmed mean and weighted mean. The RBA target is for core inflation (excluding volatile items) between 2-3% but the Q1 numbers are likely to show only slow and gradual progress towards this goal, with consensus expectations centering on 1.9%. The Aussie Dollar opens in Asia this morning at USD0.7610, with AUD/NZD at 1.0635 and GBP/AUD1.8310.

Looking just at the GBP/USD exchange rate, it seems the British Pound had a terrible day on Monday. In fact, it finished in second place on our one-day performance table, rising against every currency except the buoyant US Dollar. Having finished on Friday at USD1.3995 - its first time in a fortnight below 1.40 – the GBP was stead throughout the Asian session but then succumbed to more general USD strength and traded as low as 1.3940; its lowest level since March 19th. Against both the NZD and AUD, however, the pound gained around four-tenths of a point to 1.9490 and 1.8325 respectively.

With the Easter holidays and a parliamentary recess, we haven’t heard much on Brexit for several weeks, even as the clock ticks down to Britain’s formal withdrawal from the EU on March 29th next year. The House of Lords last week voted in favour of staying in the customs union post-Brexit though a Downing Street spokesperson yesterday morning said, “The position remains very clear: we don’t think staying in a customs union is the right thing to do and it isn’t government policy to do so.” On Thursday this week, there will be a non-binding vote in the House of Commons on a motion which urges the Government to remain in a customs union. According to a report in The Time, “Theresa May will face calls from senior Brexit-supporting ministers to ditch her favoured option for a customs deal with the EU at a meeting this week… as fears grow that she is paving the way for a compromise on the issue.”

There is a bit of a lull in the UK economic data calendar ahead of Friday’s GDP data, though there will be some interest in today’s public sector borrowing numbers for March as they will be the last monthly number of the financial year. They will be the trigger/excuse for a lot of heat, and not much light, to be generated by another unedifying debate about government finances and the relative merits of spending and further deficit reduction. The GBP opens in Asia this morning at USD1.3940, GBP/AUD1.8325 and GBP/NZD1.9490.

The US Dollar was all-conquering on Monday, driven by a potent cocktail of higher bond yields, worries over inflation and near-record short positions in the currency. Its index against a basket of major currencies rose for a fifth consecutive day, rallying from an opening level in Asia of 89.95 to an intra-day high of almost 90.55; its highest since January 12th. The move has been so dramatic because it was largely unanticipated and flies in the face of many (indeed most) bank strategists who have been calling the USD relentlessly lower all year. It is doubtful that many people who bought dollars yesterday did so with a smile on their face. Instead, they were more likely closing out loss-making short positions.

US 10-year bond yields have risen 16bp over the past month to a four-year high of 2.98% with 2-year yields up 22bp to 2.47%, their highest level since September 8th 2008. Fresh worries about inflation and the outlook for Fed monetary policy have been the main driver of this move and as long as equities have not crumbled in the face of tighter financial conditions, so the move up in yields has gathered pace. Nevertheless, we’d note that the S+P 500 index is now down 50 points over the last week and the DJIA has fallen 500 points over the same period. So far, 17% of the companies in the S&P 500 index have reported their numbers but this week 179 are scheduled to give earnings releases. If equities take a sudden lurch lower, then the rally in bonds and the USD might well run into some resistance.

Markit’s version of the PMI surveys is usually ignored by investors who prefer to focus on the ISM number but the ‘flash estimate’ of the PMI on Monday was studied closely for its reading on price pressures. The composite PMI index rose from 54.2 in March to 54.8, driven by accelerated growth at both manufacturing and service sector firms. Markit noted that, “Average cost burdens continued to rise in April, with the rate of input price inflation edging up slightly... Average prices charged meanwhile increased at a pace broadly in line with that seen in March, albeit one that was weaker than seen for input costs”. The USD index opens in Asia this morning at 90.45.

On Friday afternoon, EUR/USD tumbled after comments from ECB President Draghi sent the pair down to a low of 1.2265; its weakest since Monday April 9th. Overnight in Asia on Monday and then in Europe, the EUR failed to bounce in any meaningful way. From a technical perspective, the break through last week’s low opened up a swift move down to 1.2230 and then down further in New York to a test of its 100-day moving at 1.2206. If it can’t find support at current levels, the next downside target will be the March 1st low around 1.2170.

In yet another relatively disappointing piece of economic news, the ‘flash estimate’ of Markit’s Composite Eurozone PMI held steady at 55.2 in April, according survey data based on approximately 80% of final responses. The unchanged reading indicated the joint-weakest expansion of business output since the start of 2017, but remained well above the average of 53.8 seen over the past five years. Manufacturing again led the upturn, albeit with the rate of factory output growth slowing to a 17-month low. Service sector activity meanwhile rose at a rate only marginally faster than March’s seven-month low. Markit’s downbeat Press Release titled “Eurozone economy stays in lower gear” noted, “Output growth across the two sectors has fallen sharply since an 11 ½ year peak at the start of the year, in line with a slowdown in order book growth. Inflows of new orders rose at the weakest rate for 15 months in April. Factories reported the smallest gains in both total goods orders and export orders for a year-and-a half during April, the latter in part dampened by the recent strength of the euro, notably against the US dollar. New business inflows in the service sector meanwhile slipped to an eight-month low, adding to signs of a broad-based waning of demand growth both at home and in export markets.”

Away from the regular economic data flow, French President Emmanuel Macron arrived in Washington on Monday for a three-day visit as Donald Trump hosts the first official state visit of his presidency. shortly after arriving at Joint Base Andrews in Maryland, Macron said, ““This state visit is very important for our people and very important for us… We will have the opportunity to discuss of a lot of bilateral issues and to discuss about our security, about trade, and a lot of military issues that are important for our countries and beyond our two countries. This is a great honor and I think a very important state visit given the moment of our current environment.” White House press secretary Sarah Huckabee Sanders told reporters, "I think we can expect this to be a very productive and very positive state visit for both countries." The EUR opens in Asia today at USD1.2210, AUD/EUR0.6225 and NZD/EUR0.5855.

The Canadian Dollar couldn’t keep up with a buoyant US Dollar on Monday, but it still ended the day higher against the EUR, AUD and NZD. USD/CAD opened around 1.2760 and after a very quiet session in Asia (not unusual for the CAD) it began to move higher during the European morning, eventually reaching a high in the New York afternoon of 1.2855; its highest since April 3rd. Nevertheless, both AUD/CAD and NZD/CAD both fell around a quarter of a point from Friday’s closing levels.

Foreign ministers from the G7 industrialized nations have been meeting in Toronto. Among many topics for discussion, the ministers are exchanging views on possible ways to bring stability to Syria. Canadian Foreign Minister Chrystia Freeland told a closing news conference, “We spent a considerable amount of time talking about Russia ... we all share deep concerns about what we agree is unacceptable behavior including the despicable nerve agent attack in the UK. The countries of the G7 are united in our resolve to work together to respond to this continued flaunting of international laws,” she said, adding that a new working group would help democracies from being undermined. German Foreign Minister Heiko Maas also said the leaders of France and Germany would urge U.S. President Donald Trump not to pull out of an Iran nuclear deal with major powers.

Bank of Canada Governor Stephen Poloz yesterday appeared before the House of Commons Standing Committee on Finance, though this wasn’t until 3.30pm local time; only half an hour before the close of North American markets. His published Statement largely repeated what had been said after the BoC meeting last week. “After a lacklustre start to 2018, we project a strong rebound in the second quarter. All told, we expect that the economy will grow by 2 per cent this year, and at a rate slightly above its potential over the next three years, supported by both monetary and fiscal policies. The composition of growth should shift over the period, with a decline in the contribution from household spending and a larger contribution from business investment and exports. Inflation should remain somewhat above the 2 per cent target this year, boosted by temporary factors. These factors include higher gasoline prices and increases to the minimum wage in some provinces. Their impact should naturally unwind over time, returning inflation to 2 per cent in 2019. Of course, this outlook is subject to several important risks, and a number of key uncertainties continue to cloud the future, as was the case in October.” The Canadian Dollar opens in Asia this morning at USD/CAD1.2765, AUD/CAD0.9790 and GBP/CAD1.7870.