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NZD decline continues, with NZD/USD hitting a fresh 2018 low

By Nick Parsons

The New Zealand Dollar has had a totally dismal run over the past 10 days and on both Tuesday and Wednesday it once again finished bottom of our one-day performance table. Indeed, over the past five trading days, NZD/USD has traded on ‘big figures’ of 73, 72, 71 and now 70 US cents. Yesterday’s collapse to a low of just 0.7060 marked a fresh 2018 low and was the weakest for the pair since back on December 27th last year.

We highlighted yesterday the New Zealand visitor arrivals figures which showed the top source of inbound visitors in March 2018 was Australia, at 37% of all visitor arrivals followed by China and the US with 11% and the UK with 7%. The data showed 3.82 million visitors arrived in New Zealand in the year to March 2018; an increase of 276,200 (8 percent) from the previous year. Speaking in India this week, Tourism New Zealand regional manager, South and South-East Asia, Steven Dixon said, "In 2017-18, ending February, we hosted 62,000 travellers from India, which was 16.05 percent growth over the previous year. So, looking at the trend this year, which began in March, we expect the growth to be in double digit as well." New Zealand government has set a target of 1,00,000 visitors from India by 2023, and if the growth continues at the current rate it will be achieved earlier. It’s time to look up the NZD/INR cross rate!

After yesterday’s ANZAC day holiday, the next focus of attention locally in New Zealand will be the trade figures on Friday as well as the April consumer confidence numbers. The New Zealand Dollar opens in Asia this morning at USD0.7060 and AUD/NZD1.0710.

With local markets closed in observance of the ANZAC commemorations, the last few days have been pretty brutal for the Aussie Dollar. AUD/USD fell from a high of 0.7680 on Monday morning in Europe to a low on Wednesday afternoon just above 0.7650; its lowest level since December 12th, whilst GBP/AUD at 1.8425 is within half a cent of what would a fresh high for 2018. The only consolation for our Australian clients is that the currency has outperformed its Kiwi neighbour. AUD/NZD is up on a 1.07 ‘big figure’ for the first time in almost 5-weeks.

According to what is billed as an exclusive in the Sydney Morning Herald, “The European Union is preparing to launch trade talks with Australia in June to strike a deal that would add $15 billion to both economies, including a push for more rights to geographic names such as parmesan cheese and Parma ham that are essential to European food brands. The EU’s lead trade negotiator, Cecilia Malmstrom, said she hoped to visit Australia within weeks to start talks on a free trade agreement, which are likely to be authorised to proceed on May 20. Ms Malmstrom told Fairfax Media the agreement would serve a “strategic” purpose by creating a “circle” of allies to remove barriers at a time when US President Donald Trump has imposed steel tariffs that could trigger a trade war. “The most important thing right now, with growing protectionism in the world and uncertainties coming from traditional allies, is to expand this circle of friends,” the EU trade commissioner said in an exclusive interview.

Back to work locally this Thursday, we have the quarterly export price numbers and the NAB Quarterly SME Survey but it’s an otherwise quiet end to the week for official economic statistics. Analysts will be poring over the detail of Tuesday’s CPI release to write their monthly updates, though there was probably not enough fresh news to make anyone change their well-established views on RBA monetary policy and interest rates. The Aussie Dollar opens in Asia this morning at USD0.7610, with AUD/NZD at 1.0715 and GBP/AUD1.8415.

The British Pound fell below USD1.40 on Monday morning in Europe and has stayed there ever since, reaching a low yesterday of 1.3930; its weakest since March 12th. This was all about the US Dollar rather than the Pound, however, and the GBP is up against all the other major currencies this week, even though it lost a bit of ground on Wednesday to the Canadian Dollar as well as the USD. GBP/CAD is within half a cent of its 2018 high whilst GBP/NZD is at levels not seen since early-December.

David Davis, the Brexit secretary, gave evidence to the House of Commons Brexit Committee yesterday. Mr. Davis said he wants the political agreement on trade in the autumn to be very detailed and that it should be possible to turn that into a treaty within six months. He said it is not the government’s intention to allow the trade negotiations to spill over into the transition period post-March 2019. According to the UK Press Association, “The motion put before parliament this autumn on the final Brexit agreement will be amendable by MPs and its outcome will be binding on the government. The Brexit secretary said the motion - which Prime Minister Theresa May has previously described as a “take it or leave it” choice - will relate to a political agreement expected to be reached with Brussels, rather than a full legal treaty. But he said it remains the government’s intention to have a treaty ready for signing immediately after the formal date of Brexit on March 29 2019.”

On Thursday afternoon, it was the turn of the Chancellor of the Exchequer, Philip Hammond, to give gives evidence to the House of Commons Treasury Committee. He appeared in quite a confident mood after news that UK public sector borrowing had totalled just £42.6bn in 2017/18, well below the Office for Budget Responsibility (OBR) forecast of £45.2bn March given in the Spring statement last month. He told the Committee that, the UK is not yet in any substantive discussions with the European Union about a future relationship in financial services. “We’ve only just got past the agreement on the implementation period, we haven’t yet come to substantive discussions on the future partnership. But we are in the preliminary foothills of exploring what might be possible in financial services.” The GBP opens in Asia this morning at USD1.3930, GBP/AUD1.8425 and GBP/NZD1.9730.

The US Dollar continues what has been a virtually uninterrupted advance over the past 10 days. Yesterday its index against a basket of major currencies opened around 90.40 and reached a high late in the London afternoon of 90.80; its best level since January 12th. It has broken above its 100-day moving average and now eyes the 200-day measure at 92.00. 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. Indeed, a cynic might observe that its only when we start to see a run of upgraded forecasts from the major banks that its time to call a halt to the current USD rally.

The yield on US 10-year Treasuries on Tuesday broke above 3.0% for the first time since January 2014 yesterday rose to 3.03%, although it is worth noting that 30-year yields are actually around 15bp lower than their highs earlier this year. There is nothing magical about the 3% threshold, other than a change of ‘big figure’ which of itself draws plenty of media interest. Overall, yields are up 62bp since the beginning of this year as the bond market faces the prospect of higher inflation, much greater supply from an increase in government borrowing, and a US Central Bank which is reducing the amount of bonds it bought during the period of Quantitative Easing.

US President Donald Trump and French President Emmanuel Macron continue their mutual love-in with the President tweeting enthusiastically about their great relationship. This is the sixth time the two presidents have met, with the most notable being Trump’s trip to Paris for the Bastille Day parade on 14 July last year. Since Macron came to power, the two presidents have had about 20 phone calls together, according to the Elysée Palace. In his address to the US Congress, Mr. Macron denounced protectionism and nationalism and said the United States should step up its engagement with the world - a direct challenge to Trump’s calls for withdrawal from the Paris climate pact and international trade agreements. “The United States is the one who invented this multilateralism. You are the one now who has to help preserve and reinvent it,” he said. The USD index opens this morning in North America around 90.75.

The Single European Currency hasn’t had a great week, with EUR/USD down 2 ½ cents from last Thursday’s high just above 1.2410. It had a modest rally into Tuesday’s New York close at 1.2240 but was then sold again yesterday, hitting a low of 1.2170; matching its low back on March 1st. Nonetheless, the EUR has outperformed both the Aussie and Kiwi Dollars over this period, with AUD/EUR falling on to a 61 cents handle for the first time in 9 weeks.

Ahead of the ECB meeting in Frankfurt today, it was very surprising to hear Council members quoted yesterday morning about the monetary policy outlook. The normal convention – though not a legally binding one – is for a black-out period of one week during which no clues are offered about the immediate or future decisions. This convention was broken not once, but several times today, although Lithuanian policymaker Vitas Vasiliauskas might argue in his defence that comments came in a published magazine article. He said, “The (bond) purchases will be ended gradually rather than abruptly, ensuring a smooth transition of sufficient length. Any further policy steps will be well-discussed, data-based and gradual, providing sufficient time for markets to adjust… We should be ready for an increase in market volatility, which has been exhibiting unnaturally low levels.”

Mr Vasiliauskas’ colleague, Yves Mersch, might offer a similar defence after his comments appeared on the website of Eurofi, which is convening a meeting of financial regulators. “Confidence has recently risen and convergence is being confirmed --partly because the temporary decline in the inflation rate has been weaker than our internal calculations had predicted… More resilience will follow eventually. Still, patience and persistence with respect to our monetary policy is required.” These are two words which are very likely to be repeated by ECB President Draghi at his Press Conference. The EUR opens in Asia today at USD1.2175, AUD/EUR0.6210 and NZD/EUR0.5800.

Despite some big moves in global foreign exchange markets, the USD/CAD exchange rate has been firmly stuck on a 1.28 ‘big figure’ for every single minute since mid-afternoon in Europe on Monday. Optimism around a possible NAFTA agreement has helped cap the upside even as a sharp decline in oil prices has been seen over the past two days. WTI crude is down from a high of $69.25 on Tuesday afternoon to just $67.55 yesterday.

US President Donald Trump said on Tuesday a new North American Free Trade Agreement could be agreed on quickly, as Canada hailed progress on forging new rules for the auto industry. Ministers from the United States, Canada and Mexico met in Washington to try to narrow differences on regional content rules for autos in the hope of tying up a deal in the coming days. “NAFTA, as you know, is moving along. They (Mexico) have an election coming up very soon,” Trump said at a Cabinet meeting briefly attended by reporters. “But we’re doing very nicely with NAFTA. I could make a deal really quickly, but I’m not sure that’s in the best interests of the United States. But we’ll see what happens.” Canadian Foreign Minister Chrystia Freeland, left a 3½ hour meeting with US Trade Representative Robert Lighthizer, saying there was progress on autos, which she described as “the heart” of NAFTA.

After his appearance on Monday afternoon before House of Commons Standing Committee on Finance, Bank of Canada Governor Stephen Poloz has to do it all again today with the Committee on Banking, Trade and Commerce. It isn’t scheduled until 4.15pm local time, just after financial markets close for the day and this commentary is published. There are no other economic statistics released for the rest of this week. The Canadian Dollar opens in Asia this morning at USD/CAD1.2845, AUD/CAD0.9720 and GBP/CAD1.7910.