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A week when labour market data will be in focus for the NZD

By Nick Parsons

The New Zealand Dollar had another very poor week and would have finished bottom of the table had it not been for Friday’s collapsed of the GBP which took GBP/NZD back to where it began and meant both currencies shared bottom spot on the week. NZD/USD began at 0.7215 and – like its Aussie cousin – was sold steadily and relentlessly down to a low on Friday morning in Europe of 0.7045; a fresh low for 2018 and its weakest since December 27th. By close of business, the pair had rallied around 40 pips to 0.7085; a net loss of almost 1 ½ cents. The GBP/NZD cross rose from 1.9450 on Monday to 1.9750 on Friday but then collapsed 3 cents on the day to finish back at 1.9450.

The notable feature of the Kiwi decline was that it came without any major news or incoming economic data and nothing of note from the RBNZ although Statistics NZ reported on Friday that New Zealand’s goods trade deficit reached a near 10-year high in Q1. The March 2018 quarter’s deficit was the largest since the June 2008 quarter, and the 16th consecutive quarterly deficit since the March 2014 quarter. The latest ANZ consumer confidence numbers, meantime, showed consumer confidence dipped 7.5 points from 128.0 to 120.5 in April, albeit still within the range prevailing over recent years.

After consumer confidence last Friday, the week ahead begins with the business confidence survey though the major economic theme of the week is likely to be the labour market. On Wednesday, we have the quarterly employment and private sector wage data, whilst Thursday brings April’s job advertisement numbers. The data will be especially interesting in the context of the changed RBNZ mandate which now explicitly references employment as well as an inflation target. The New Zealand Dollar opens in Asia this morning having finished in New York on Friday at USD0.7085 and AUD/NZD1.0700.

In a week which was divided in to two parts by the ANZAC day holiday on Wednesday, the Aussie Dollar fell steadily and persistently against a rampant US Dollar. AUD/USD began at 0.7675 and without any reversal of note, was sold down to a low around 0.7535 on Friday morning in Europe; its weakest since mid-December. The pair then recovered almost half a cent in the Northern Hemisphere day to end the week in New York at 0.7685. The AUD/NZD cross rate rose from 1.0640 on Monday morning to a high of almost 1.0730 on Thursday before finishing at exactly 1.0700. GBP/AUD, meanwhile, rose from 1.8255 to a high of 1.8460 before plunging on Friday to 1.8175.

We reported here last week on data from the Australian Bureau of Statistics which showed that for the first time on record, Sydney’s population grew by more than 100,000 people in one year. Sydney’s population hit 5.1 million at June 2017, an increase of 101,600 people (2 per cent) since June 2016. But it was Melbourne that recorded the largest - and fastest growth - of Australia’s capital cities in 2016-17, increasing by 125,400 (2.7 per cent) to reach 4.9 million. Together, Sydney, Melbourne and Brisbane accounted for over 70 per cent of Australia’s population growth in 2016-17. A deeper dive into the numbers shows that Australia took in 525,000 international students last year, a 12 per cent increase compared to the previous year, which was itself a record. Indeed, there are around 200,000 more foreign students in Australia today than there were a few years ago. The ABS data revealed how the highest concentrations of Australia's newest migrants can be found around university campuses and the inner suburbs in Melbourne and Sydney. Only Melbourne and Parramatta centres attracted more migrants in 2016-17 than the suburb of Clayton in south-east Melbourne, site of Monash University.

The week ahead could be a really busy one in terms of local and international news. The first Tuesday of the month of course brings an RBA Board Meeting, with Governor Phil ‘slow and gradual’ Lowe speaking afterwards at a dinner in Adelaide. The year passes quickly and it’s time already for a new Quarterly Statement of Monetary Policy on Friday with updated forecasts on GDP, inflation and unemployment. Offshore, there’s an FOMC meeting on Wednesday and on Friday we have the US labour market report, with markets anxiously awaiting updates on employment and average earnings. The Aussie Dollar opens in Asia this morning having closed on Friday at USD0.7585, with AUD/NZD at 1.0700 and GBP/AUD1.8175.

The British Pound had an ultimately terrible week which ended on Friday with the biggest one-day fall of the year and sent the GBP into equal bottom place with the Kiwi Dollar. GBP/USD began on Monday around 1.4010 but then slipped below 1.40 and remained there all week. Just before the Q1 GDP numbers on Friday morning, the pair stood at 1.3910 but after a very soft set of data it plunged to a low of 1.3755; its lowest since early-March. The GBP crashed on all its crosses with GBP/AUD and GBP/NZD both down 2 ½ cents on the day.

The Office for National Statistics reported that UK gross domestic product (GDP) was estimated to have increased by just 0.1% in the first quarter of 2018, after rising +0.4% in the fourth quarter of last year. This was the slowest pace of growth since Q4 2012, with construction being the largest downward drag on GDP, falling by 3.3%. The annual rate of growth fell from 1.4% to 1.2%. Most worryingly, the ONS said that, “While some impacts on GDP from the snow in the first quarter of 2018 have been recorded for construction and retail sales, the effects were generally small, with very little impact observed in other areas of the economy.” Details showed production increased by 0.7%, with manufacturing growth slowing to 0.2%; slowing manufacturing was partially offset by an increase in energy production due to the below-average temperatures. The services industries were the largest contributor to GDP growth, increasing by 0.3% in Q1, although the longer-term trend continues to show a weakening in services growth.

The GDP figures cast huge doubt over the Bank of England’s forecasting ability and the prospects of a hike in interest rates at next week’s MPC meeting which it has clearly been communicating for the last few months. Indeed, in the whole period since it was made independent in 1997, it has never raised rates when the latest quarterly GDP reading was less than 0.4%. Only a couple of weeks ago, the market derived probability of a 25bp rise in Bank Rate was a little over 85%. Today, it is barely 20%, with plenty of analysts now saying there’ll be no increase at all during 2018. The GBP opens in Asia this morning having ended the week at USD1.3780, GBP/AUD1.8165 and GBP/NZD1.9450.

The US Dollar had a very good week, despite some signs of the rally beginning to fade on Friday. Its index against a basket of major currencies opened at 89.95 but rose persistently and without interruption to a high on Friday – immediately after the Q1 GDP figures were released – of 91.50. This was its best level since way back on January 12th when the ECB first mooted the idea of changing its communication on monetary policy. The USD finished the week at the top of our performance table, up against every one of the major currencies we follow closely here.

We often comment here on the excellent real-time GDP estimates produced by the Atlanta Fed. Obviously, at the start of each quarter, there is little hard data to go on other than the momentum of the previous three months but as the quarter evolves, and more income data is released, the model becomes increasingly accurate and useful. Ahead of the first quarter GDP report on Friday, the latest iteration of the Atlanta Fed’s model had estimated growth at an annualized pace of 2.0%. The actual number released by the Commerce Department was 2.3% so the actual ‘miss’ by the model was less than one-tenth of a percentage point before annualization. Growth in consumer spending, which accounts for more than two-thirds of U.S. economic activity, slowed to a 1.1 percent rate in the first quarter. That was the slowest pace since the second quarter of 2013 and followed the fourth quarter's robust 4.0% which had been boosted by post-hurricane spending. Business investment slowed to a 4.7% rate in Q1 after double-digit growth in the second half of 2017. There is a distinct seasonal quirk which has led to Q1 numbers being systematically under-reported over the past few years with a sharp bounce higher seen in Q2. Most analysts estimate this effect to be around 0.9% so the reported outturn for Q1 of 2.3% is actually a pretty good number.

With the first day of the new month on Tuesday, the week ahead is an especially busy one in terms of top-tier economic data releases. Monday brings the personal income and income expenditure figures, as well as the deflator numbers which are the Fed’s targeted measure of inflation. On Tuesday we have the ISM manufacturing report with the service sector version released on Thursday. Finishing the week Friday, we have the US labour market report, with markets anxiously awaiting updates on employment and average earnings. In between all this, there’s an FOMC meeting on Wednesday, albeit there are no new economic projections and no Press Conference scheduled. Market-derived probabilities show only a 6% chance of a rate hike at the May 2nd meeting, though a June 13th hike is more than fully discounted; at 93% chance of a 25bp move and a 7% chance of 50bp. The USD index opens this morning in Asia around 91.10.

The EUR had a fairly poor week which was made less bad by its rally on Friday against the US Dollar and British Pound. EUR/USD opened on Monday at 1.2280 and steadily lost a full cent ahead of the ECB Meeting on Thursday. It fell a net 75 pips on the day after Mario Draghi’s Press Conference and reached a low on Friday afternoon of 1.2065; its weakest since January 12th. A subsequent rally of just over half a cent saw the pair end the week at 1.2130 for a loss over the period of 1½ cents. AUD/EUR ended the week unchanged at 0.6250 having been at 0.6195 on Wednesday, whilst NZD/EUR finished 25 pips lower at 0.5840.

There has been quite a lot of soft activity survey evidence over the past few months, both at the individual country level and in aggregate across the Eurozone. Whether it’s the ifo, GfK, Markit or INSEE, the reports have all indicated a slower pace of economic activity after the buoyant end to 2017 and the strong start to 2018 seen in January. Commenting about the European Central Bank’s interpretation of the economic data, Mr Draghi said, “The bottom line of this discussion is in my view, it’s basically caution in reading these developments, caution tempered by an unchanged confidence in the convergence of inflation to our inflation aim.”

The week ahead will provide a good test of whether the ECB’s cautious optimism is, indeed, the correct assessment. On Wednesday, we have the Q1 GDP figures. The fourth quarter of 2017 had shown the strongest growth in around 6 years, with a +0.6% q/q increase. Consensus expectations for the first quarter are for a more modest +0.4% q/q pace of growth with the annual rate easing a touch from 2.7% to 2.6%. On Thursday, the final April CPI figures are released. The so-called ‘flash estimate’ had shown the headline rate at 1.3% with the core just 0.9%. The EUR opens in Asia today having ended last week at USD1.2130, AUD/EUR0.6250 and NZD/EUR0.5840.

The Canadian Dollar pretty much kept pace with the buoyant US Dollar last week. USD/CAD opened on Monday at 1.2760 and at the start of trading in North America that day moved on to a 1.28 ‘big figure’. Quite remarkably, that is where it stayed for the entire week with a low of 1.2820 on Tuesday and a high on Friday morning of 1.2895 before closing in New York at 1.2830. This amazingly steady performance dragged AUD/CAD down half a cent to 0.9725 with NZD/CAD down more than a cent to 0.9080.

As talks on renegotiating the NAFTA agreement head towards their denoument, Ms Rona Ambrose, a member of Canada’s NAFTA Advisory Council, spoke on TV this weekend. She said, “A great deal of progress has been made, specifically around rules of origin for automotives and I think that bodes very, very well for the negotiations… The rules of origin around automotives and making more parts and cars in North America, has always been the sweet spot to get to Donald Trump. It’s a difficult part to get through, and if we can get through this, which it looks like we have, I think it’s a very good sign... If he can say, 'We've reached some kind of an agreement or framework where we can build more cars, build more American parts in North America, in the United States,' that’s a great sign to his voters about more jobs.”

Although the US labour market report will be released on the first Friday of the month of May, Canada’s employment numbers won’t be out until Friday 11th. Instead, the economic highlight locally will be the monthly GDP figures for February which are published on Tuesday. This will come an hour or so before Aprils manufacturing PMI survey and ahead of a speech by Bank of Canada Governor Stephen Poloz at 2.30pm local time. He’ll be speaking to the Yellowknife Chamber of Commerce on the topic “Canada’s Economy and Household Debt: How Big Is the Problem?”. The Canadian Dollar opens in Asia this morning having ended last week at USD/CAD1.2830, AUD/CAD0.9725 and GBP/CAD1.7680.