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USD was Thursday’s top performer but has slipped a little this morning against GBP and EUR

By Nick Parsons

It’s been a rare event recently but the US Dollar finished the day on Thursday at the top of our one-day currency performance table. Its index against a basket of major currencies rose more than four-tenths of a point from its early low just below 89.20 to a best level at the end of the London afternoon around 89.62; the highest in just over 48 hours. Overnight in Asia and this morning in Europe, it has slipped a little with both GBP/USD and EUR/USD down around 20 pips from their New York closing rates.

Yesterday morning the President’s new chief economic advisor Larry Kudlow was back on TV. He told CNBC that, “I must say as somebody who doesn’t like tariffs, I think China has earned a tough response not only from the United States... A thought that I have is the United States could lead a coalition of large trading partners and allies against China, or to let China know that they’re breaking the rules left and right. That’s the way I’d like to see. You call it a sort of a trade coalition of the willing.”

It may not be a hard and fast rule, but it’s a long-held tradition that only the Fed speaks about interest rates and only the US Treasury makes official comments on the Dollar. It’s something of a game with reporters to try to catch out officials with a question inviting them to stray outside their usual remit. Larry Kudlow does not observe such traditions. Asked about interest rates, he said, “the profit picture is good. It’s looking real good, and growth is not inflationary just let it rip for heaven's sakes. The market is going to take care of itself. The story takes care of itself let it rip. The Fed will do what it has to do, but I hope they don’t overdo it.” With a President on Twitter and his Chief Economic Advisor on financial TV, it’s going to be very hard to keep up with all the breaking news and fresh volatility which markets now face. The USD index opens this morning in North America around 89.50.

The Canadian Dollar fell sharply on Thursday, with the whole of its decline coming during the North American time zone after a hardening of the US stance on trade and some very weak local housing market data. USD/CAD had traded pretty much sideways for 36 hours after its initial jump on the Poloz speech on Tuesday and by midday London time yesterday still stood at 1.2960. Within just a few hours it was a full cent higher, having moved on to a 1.30 ‘big figure’ for the first time since July 4th last year. GBP/CAD has this morning made fresh 20-month highs just above 1.8250.

Yesterday brought existing home sales data in Canada. Recall these fell 14.5% in January from December to the lowest monthly level in three years as tighter mortgage rules hit demand. New and tougher rules on mortgage lending were imposed at the start of January amid fears of a housing bubble, requiring lenders to “stress test” borrowers to ensure they could withstand higher interest rates. The changes meant fewer buyers qualify for loans. Far from rebounding in February, home sales fell another 6.5% during the month and were down 16.9% in year-on-year terms. Sales were down from the previous month in almost three-quarters of all local housing markets, with large monthly declines in and around Greater Vancouver and Greater Toronto. Despite an 8.1% monthly increase in February, new listings nationally were still lower than monthly levels recorded in every month last year except January, and came in 6.4% below the 10-year monthly average and 14.6% below the peak reached in December 2017.

After the twin hits from the Poloz speech and these very weak housing market numbers, Friday brings the manufacturing sales data. The Canadian Dollar opens in North America at USD/CAD1.3080, AUD/CAD1.0175 and GBP/CAD1.8265.

After taking bottom spot on our one-day currency performance table on Wednesday, the EUR fell further on Thursday against the GBP and USD but rose against the three ‘Commonwealth Currencies’; the Australian, New Zealand and Canadian Dollars. By the New York afternoon, EUR/USD was struggling to hold on to a 1.23 ‘big figure’ and in Asia this morning the pair dipped briefly on to 1.22. It has subsequently recovered to settle around 1.2325.

Figures released by Eurostat this morning showed the final Eurozone annual inflation rate was 1.1% in February 2018, down from 1.3% in January. This was one-tenth below the provisional estimate. The core rate excluding food and energy prices was unchanged at 1.0%, in line with the consensus and first estimate. The highest contribution to the annual euro area inflation rate came from services (+0.57 percentage point), followed by food, alcohol & tobacco and energy (+0.21 pp each), and non-energy industrial goods (+0.14 pp). Looking at the whole of the European Union rather than just those countries which use the euro currency, annual inflation was 1.3% in February 2018, down from 1.6% in January. The lowest annual rates were registered in Cyprus (-0.4%), Greece (0.4%), Denmark and Italy (both 0.5%). The highest annual rates were recorded in Romania (3.8%), Estonia and Lithuania (both 3.2%). Compared with January, annual inflation fell in eighteen Member States, remained stable in two and rose in seven.

After a week in which it has risen from a low just above 1.2290 on Monday to a best level of 1.2410 in Asia on Wednesday, the EUR opens in North America today at USD1.2330 and EUR/CAD1.6120.

The British Pound rose against all the major currencies apart from the US Dollar on Thursday, with gains extending to more than a full cent against both the Canadian and Australian Dollars. GBP/USD was volatile within a half cent range from 1.3930 to 1.3980 and ended the New York session pretty much near the middle of the day’s trading band. From an overnight low in Asia of 1.3920, the pound has recovered almost half a cent during the European morning and is up against everything except the EUR.

The 2017 figures from the Association of Leading Visitor Attractions (ALVA) show that London continues to dominate UK tourism, despite a combination of terrorist atrocities and unreliable rail links. The top 10 tourist spots are once again in the capital, while Edinburgh now takes 11th and 12th places. The British Museum is the outright UK winner, with 5.9 million visitors last year. Tate Modern took over second place from the National Gallery, and is now only four per cent behind the British Museum. Visitors to the National Gallery fell by one-sixth over the year. The Natural History Museum recorded four per cent fewer visits, but remains in fourth place. The V&A, Science Museum, Southbank Centre, Somerset House, Tower of London and Royal Museums Greenwich complete the top 10. Only the V&A saw a significant increase in numbers: up a quarter, in part due to the success of the exhibition Pink Floyd: Their Mortal Remains. Edinburgh’s top two attractions, the National Museum of Scotland and Edinburgh Castle, each rose four places and took 11th and 12th spots respectively.

There is now less than a week until the EU Summit at which decisions will be taken on the next steps in the Brexit negotiations. With politicians focused almost exclusively on Russia over the past few days, this Summit has rather dropped off the radar screens in the UK. As the date approaches, though, do be prepared for comments from either side which have the potential to move the pound suddenly and without any warning. Having orders already in place is one of the best ways to profit from or to mitigate risk as volatility picks up. The British Pound opens in North America at USD1.3960, GBP/EUR1.1325 and GBP/CAD1.8250.

In his first TV appearance since being appointed chief economic adviser to US President Donald Trump, Larry Kudlow said, “I would buy King Dollar and I would sell gold.” Someone certainly listened to that advice as less than 24 hours later, the USD was up a quarter of a point and gold was down $6; neither of which helped the Australian Dollar on Thursday. By close of business, AUD/USD had fallen to a low of just 0.7795; just a few pips above where it stood just before last Friday’s US labour market report. The pair has struggled to hold on to a 78 cents handle in the European morning and now stands around 0.7775.

Deputy Governor of the Reserve Bank of Australia, Guy Debelle, said in a speech in Sydney this morning that investors are underpricing the risk of higher interest rates globally and need to seek adequate compensation for that risk. “Equity prices embody a view of the future that robust growth can continue without generating a material increase in inflation… there is little priced in for the risk that this may not turn out to be true.” Debelle said that spike in volatility in February was only “a small example of what could happen following a larger and more sustained shift upwards in the rate structure.”

As the weekend is already underway for our Australian colleagues, thoughts turn to next week’s economic calendar. The highlights will be the Minutes of the latest RBA Board meeting released on Tuesday and the labour market report on Thursday. The Australian Dollar opens in North America this morning at USD0.7780, with AUD/NZD at 1.0735 and AUD/CAD1.0170.

The New Zealand Dollar outperformed its Aussie counterpart on Thursday with AUD/NZD falling from around 1.0775 to a low around 1.0720 late in the European afternoon. NZD/USD couldn’t hold on to a U73 cents ‘big figure’ and fell to 0.7275 which – like the AUD – takes it back to where it was just before last Friday’s US labour market report. On the last European morning of the week, the NZD has given back all the gains it made yesterday with NZD/USD now at its lowest in 10 days.

In economic data released this morning, New Zealand's level of manufacturing expansion decreased slightly in February. The PMI for February was 53.4; one point lower than January, and the second lowest expansion value in the last 13 months. The February result was also exactly on par with the overall average PMI value since the survey began. BNZ who co-produced the PMI report said, “But the 53.0 average over the past three months is a clear slowing from the 57.6 average of the three months before that… New orders, while still positive, have cooled, raising questions about the sustainability of demand strength seen last year. Meanwhile, production expansion has slowed. The generally slower PMI suggests we shouldn’t expect Q1 manufacturing GDP to be much different from the flat result recorded in yesterday’s official figures for Q4.”

Although there is an RBNZ meeting next Wednesday, there are no expectations at all for any change in official interest rates of 1.75%. The accompanying Statement is also not expected to show any significant changes to the outlook given that the Q4 GDP number was pretty close to the RBNZ’s own expectation. The Kiwi Dollar opens in North America at USD0.7240 and NZD/CAD0.9475.