Home Daily Commentaries Q1 GDP released today in both the UK and the US. Expect some volatility after recent strong USD run.

Q1 GDP released today in both the UK and the US. Expect some volatility after recent strong USD run.

Daily Currency Update

The British Pound fell below USD1.40 on Monday and has stayed there ever since. This was all about the US Dollar rather than the Pound, however, and the GBP is up against all the other major currencies. In the European morning yesterday, GBP/USD was sold down to a 6-week low just above 1.3905 but after a squeeze to 1.3995 during the ECB Press Conference when it was initially dragged higher with the EUR, the pound subsequently lost more than half a cent in to the New York close at a 6-week 1.3915. Overnight in Asia, the so-called ‘cable’ rate has stabilized at this lower level and the GBP is modestly higher on all its crosses.

According to the trade association UK Finance, British banks approved fewer mortgages for home-buyers last month than they did a year ago while credit card lending growth held broadly steady. Banks approved 37,567 mortgages for house purchase last month, down from 38,035 in February and 10 percent less than in March 2017. There was a rising trend in mortgage approvals for the first three months of 2018 although the number is slightly lower than the same period in 2017. Seasonally adjusted net credit card lending increased by just 10 million pounds on the month - the smallest rise since April 2016 - though the annual growth rate was little changed at 5.8 percent.

Today brings the UK first quarter GDP figures. Two weeks ago, the well-respected and often very accurate NIESR model said that GDP rose just 0.2% in Q1, largely due to severe weather in March which disrupted activity in all major sectors. The two big questions now are whether this is a permanent loss of output which will rebound in Q2 and the extent to which a bad number is now fully discounted by the market. It could well be that a +0.2% q/q outturn will provide a dip-buying opportunity for the GBP if weather-related weakness is seen as temporary. Certainly, the release of the data at 9.30am will prove a good guide to underlying GBP sentiment. The Pound opens in Europe this morning with GBP/USD at 1.3925 with GBP/EUR at 1.15.

Key Movers

The US Dollar powered ahead again on Thursday, rebounding impressively from an initial sell-off during the ECB Press Conference. Its index against a basket of major currencies opened around 90.80, fell to just below 90.60 in the European afternoon, then surged to a high of 91.20; its best level since way back on January 12th. It has broken above its 100-day moving average and now eyes the 200-day measure at 92.00, though it might now need a round of stronger economic data if it to extend from a short-covering rally into a more durable phase of USD strength.

After a lull in the US economic calendar, there were plenty of numbers released Thursday with initial jobless claims, wholesale inventories, trade and the durable goods orders. The weekly jobless claims were far better than had been anticipated, tumbling by 24k to just 209k; the lowest in 49 years. The Labor Department said some of the decline was due to education workers returning after Spring break, but they do this every year! March durable goods orders rose 2.6%, although the core ex-transport number (which smooths out the lumpy impact of aircraft) was unchanged on the month. In a bit of good news for the President’s mood, The March deficit in goods trade fell to $68bn from $75.9bn as imports fell 2.1% m/m whilst exports rose 2.5%. Making America Great Again!

Adding up the impact of all the various bits of incoming economic data, the Atlanta Fed left its estimate of Q1 GDP unchanged at 2.0%. This is the last update before the official Q1 numbers are published later today so we’ll get a good cross-check on how accurate their statistically fiendish model actually is. The USD index opens in Europe this morning at 91.20.

The Single European Currency had an ultimately very poor day on Thursday, finishing lower against every major currency, even though at one point during ECB President Draghi’s Press Conference, it caught quite a bid lifting EUR/USD half a cent from 1.2155 to 1.2205. It was only after the event was over that the EUR then fell sharply, tumbling all the way to a low in New York of 1.2100; its weakest since January 12th. Overnight in Asia, the pair has briefly traded on a 1.20 ‘big figure’ but trading ranges have been very narrow compared to recent price action.

Commenting about the European Central Bank’s interpretation of the recent softer than expected run of 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.” He pointed to temporary factors such as bad weather, the early Easter timing and strikes but had to acknowledge the slowdown was widespread across EU countries and sectors. “The interesting thing is that we didn’t discuss monetary policy per se,” he said. “It’s quite clear that since our last meeting, broadly all countries experienced, in a different extent of course, some moderation in growth or some loss of momentum.”

Draghi’s comments that exchange rate volatility were not discussed at the Council Meeting were initially taken as a signal to bid the EUR higher. However, and making a mockery of the whole process, the usual anonymous ECB sources were quoted on newswires after the Press Conference had finished saying policymakers were keen not to upset investor expectations for a gradual withdrawal of the ECB’s monetary stimulus, despite some concerns about the state of the economy. Policymakers remained comfortable with the policy path priced in by investors, the sources said. The EUR opens in London this morning at USD1.2105 with GBP/EUR at 1.15.

The good news for the Aussie Dollar is that on Thursday in Europe, AUD/USD broke Wednesday’s 0.7553 low by only 5 pips before subsequently rebounding. The bad news is that the rebound extended only as far as 0.7585 and heading in to the New York close it was back down once more at a fresh cycle low of 0.7550. Overnight in Asia it has been lower once more, albeit only modestly, and its streak of six consecutive daily declines matches its worst run since May 2015. This leaves the GBP/AUD cross within half a cent of making its highest level since the EU referendum almost 2 years ago.

According to data from the Australian Bureau of Statistics this week, 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. Darwin, Adelaide and Perth on the other hand experienced relatively low rates of population growth, each at 1 per cent or less.

In Melbourne, net overseas migration was the major contributor to population growth, adding 80,000 people in 2016-17 (64 per cent of total population change). Natural increase contributed 29 per cent, while net internal migration accounted for 7.3 per cent of population growth. Net overseas migration was also the major contributor to Sydney's population growth (84,700 people) although, unlike Melbourne, the Harbour City experienced a net internal migration loss (-18,100 people) in 2016-17, meaning more people left Sydney for other parts of Australia than arrived. Sydney lost most people to other parts of New South Wales (40,000 people) and Melbourne (14, 400). These fascinating numbers help explain both the vibrancy of the country and the challenges that lie ahead in terms of infrastructure to service the needs of these rapidly growing urban populations. The Australian Dollar opens this morning in Europe at USD0.7575 with GBP/AUD at 1.84.

The USD/CAD exchange rate is still firmly stuck on a 1.28 ‘big figure’ where it has been for every single minute since mid-morning in North America on Monday, though it is now nearer the upper boundary of its recent trading range at 1.2880. GBP/CAD yesterday spiked a one-week high of 1.7980 but this morning is back down on a 1.78 ‘big figure’ but hasn’t now been back on a 1.80 ‘big figure’ for ten days.

Whilst most attention in bond markets has been in the United States, where ten-year yields of 3.03% are the highest since January 2014, they’ve also been rising in Canada too. Yields on two-year and five-year government debt have reached the highest since 2011, surging 120 basis points since June, keeping the differential with the US broadly stable. The market consensus is for two more rates increases, most likely in July and either in October or December, according to overnight swaps data, although Bank of Canada Governor Stephen Poloz appears in no rush to validate these expectations. “What I don’t want is for people to be spending this entire year asking me what I’m up to because inflation is above target… You need once in a while to remind people that there’s a range and that’s okay, the policy allows for this. We’re not violating our target in some way.”

Stats Canada yesterday released detailed figures on employment and earnings. Average weekly earnings of non-farm payroll employees were $997 in February, little changed from the previous month. Earnings were up 3.4% compared with 12 months earlier, largely the result of gains in the second half of 2017. Compared with 12 months earlier, average weekly earnings increased in 8 of the 10 largest industrial sectors, led by accommodation and food services. At the same time, earnings were little changed in health care and social assistance, as well as in manufacturing. Meantime, non-farm payroll employees worked an average of 32.7 hours per week in February, little changed from the previous month and up from 32.5 hours in February 2017. The Canadian Dollar opens in Europe this morning with USD/CAD in the high-1.28’s and GBP/CAD at 1.7930.

Hold the front page – the big news is that the New Zealand Dollar didn’t finish in bottom place on our one-day performance chart on Thursday! During the Asia session NZD/USD made a fresh low for 2018 just below 0.7060 and then rallied up to 0.7090 before slipping a quarter of a cent in to the New York close. Overnight, the pair is very slightly lower, though AUD/NZD is back down on a 1.06 handle meaning the NZD just pushes AUD into bottom spot early this Friday morning.

In economic news, Statistics NZ reported this morning that New Zealand’s goods trade deficit reached a near 10-year high in the March 2018 quarter. The goods trade shortfall reflects high fuel imports and a fall in dairy, meat, and forestry exports. In the March 2018 quarter, there was a seasonally adjusted goods trade deficit of $1.8 billion. Total seasonally adjusted imports were valued at $15.3 billion, down 0.1 percent in the March 2018 quarter, and total exports were valued at $13.5 billion, down 5.8 percent. 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 show consumer confidence has dipped, although the analysts there note, “ the catalyst is not immediately clear.” The labour market is strong, wages look set to rise, and the housing market is relatively steady. The fall appears to reflect increased wariness of what the future may bring; perceived current conditions remain strongThe ANZ-Roy Morgan Consumer Confidence Index fell 7.5 points from 128.0 to 120.5 in April. This is just above the average of the series since its inception in 2004. The Current Conditions Index fell 5 points to 123.1 in April, while the Future Conditions Index fell 9 points to 118.7. The former is above average, the latter a touch below it, but both remain within the range prevailing over recent years. The Kiwi Dollar opens in London this morning at USD0.7055, with GBP/NZD around 1.9750.

Expected Ranges

  • GBP/USD: 1.3850 - 1.4080 ▲
  • GBP/EUR: 1.1450 - 1.1590 ▲
  • GBP/AUD: 1.8395 - 1.8500 ▲
  • GBP/CAD: 1.7870 - 1.805 ▲
  • GBP/NZD: 1.9690 - 1.9850 ▲