Tuesday’s US CPI figures will be the week’s most important numbers. US Dollar opens steady in a tight range
Monday 12 March, 2018
Daily Currency UpdateNorth America moved on to Daylight Saving Time at the weekend but Europe doesn’t do so for a fortnight. This means the time difference between New York and London will be just four hours for the next couple of weeks. The clocks may have changed but the concerns of investors remain frustratingly familiar: the near-term outlook for inflation and interest rates, the impact of tariffs on trade and growth, and the diplomatic tensions between the US and North Korea. The US stock market, as measured by the DJIA is up 400 points since the start of the day on Friday as the combination of a 312,000 increase in non-farm payrolls but a softening in average earnings to 2.6% was deemed to be ‘risk-positive’. This, in turn, weighed down on the US currency and the USD index is down around half a point from last Thursday’s high of 89.90.
Even after Friday’s employment report, Chicago Federal Reserve Bank President Charles Evans said he wanted the US central bank to keep interest-rate increases on hold until after March to allow inflation a chance to rise and even exceed the Fed’s 2-percent target. “My own preference would be to wait a little bit longer,” Evans said in a CNBC interview. “We could go midyear and all of a sudden see, ‘wow, inflation continues to move up towards 2 percent, I’m much more confident’ and we continue an upward gradual adjustment of the funds rate.” Evans told both CNBC and Bloomberg that the February jobs report was good news in that it showed more people entering the labor force, with the participation rate rising to a five-month high of 63 percent. But, with strong hiring and an unemployment rate of 4.1 percent, he had hoped that wage growth would be stronger. He also said he would rather wait at least until inflation data for March had been released before raising rates.
For the week ahead, the main focus on economic data will be Tuesday’s CPI data. The headline inflation rate is expected to tick up to 2.2% y/y from 2.1% although the core rate excluding food & energy costs is expected to remain unchanged at 1.8%. Bear in mind that unlike the RBA, RBNZ or BoE, the Federal Reserve doesn’t have a CPI target. Instead, it looks at the core PCE deflator which is still some way below its preferred 2.0% level. After the inflation numbers, on Wednesday we have retail sales and then towards the end of the week it’s housing and industrial production data. The USD index opens this morning in North America around 89.55.
Key MoversThe Canadian Dollar had quietly been the worst performing major currency of 2018 but it seems the whole world finally noticed the fact early last week and decided to become very bearish. By the end of the week, many of those investors who sold the currency would have been licking their wounds as it rallied sharply on Thursday and Friday after the US specifically excluded Canada and Mexico from the initial impact of tariffs on steel and aluminium and the US employment report weighed on the US Dollar. USD/CAD fell from the mid-1.29’s back on to a 1.28 big figure and the CAD gained more than a cent against both the GBP and AUD with USD/CAD ending at the week’s low around 1.2815.
The Canadian labour market report was released at the same time as its US counterpart and was therefore mostly overlooked. Statistics Canada said the Canadian economy added 15,400 jobs in February after a big loss in January but full-time positions shrank and wage growth decelerated as the unemployment rate dipped to 5.8% from 5.9% in January. Analysts in a Reuters poll had forecast employment would increase by 20,000 after Canada shed 88,000 positions in January, the most in nine years. February’s gains were all in the part-time sector, which added 54,700 positions, while the full-time sector shed 39,300 jobs. Average hourly wages for permanent employees rose by 3.1% y/y, down from the 3.3% y/y increase in January.
For the week ahead, BoC Governor Stephen Poloz is due to make a speech on Tuesday morning which will be closely analysed for further clues on monetary policy. Deputy Governor Tim Lane last week said, “We’ve been balancing the risk of undermining the economic expansion by moving too quickly with the risk of delaying too long and needing to raise rates sharply later to rein in inflation.” The market isn’t fully pricing in the next rate increase - which would be the fourth in the cycle - until July, according to calculations on overnight index swaps. The market expects two to three more hikes during the course of this year. The Canadian Dollar opens in North America at USD/CAD1.2820, AUD/CAD1.0075 and GBP/CAD1.7775.
Having dipped briefly on to a 1.22 ‘big figure’ after the US employment report on Friday, EUR/USD is this morning back on 1.23; albeit unable to sustain an early move which took it almost to 1.2340 and still more than a full cent below the highs seen on Wednesday and Thursday last week, ahead of and during the latest ECB Council Meeting.
This afternoon in Brussels we have a meeting of the Eurogroup. By its own description, the Eurogroup is an informal body in which the ministers from the euro area member states discuss matters relating to their countries' common responsibilities related to the euro. Its main task is to ensure close coordination of economic policies among the euro area member states and promote conditions for stronger economic growth. The Eurogroup's discussions therefore cover specific euro-related matters as well as broader issues that have an impact on the fiscal, monetary and structural policies of the euro area member states. It aims to identify common challenges and find common approaches to them. On the agenda today is the latest Greek bailout proposal and the unlocking of the payment of the fourth tranche of financial assistance.
For the week ahead, a central bank which claims only to be driven by the inflation outlook will be watching carefully the final German CPI numbers on Wednesday and those for the wider Eurozone on Friday. There are plenty of Central Bank speakers, too, with President Draghi, Vice President Constancio and Chief Economist Peter Praet all on Wednesday. Often, the week after an ECB Council meeting is one where monetary officials try to recalibrate any unwelcome market movements or policy expectations but this time around there’s no need at all for that. They’ll all be very happy with currency and interest rate movements since last Thursday’s Press Conference. The EUR opens in North America today at USD1.2315 and EUR/CAD1.5790.
As of Friday morning in London, GBP/USD was exactly unchanged on the week around 1.38 though by the end of the day it had rallied almost three quarters of a cent to USD1.3875 as the US Dollar slipped back against all the major currencies. Whilst the GBP finished the week higher against the USD, it was down against the Australian and Kiwi Dollars at 1.7650 and 1.9015 respectively, whilst GBP/CAD fell more than 2½ cents from Wednesday’s high around 1.8040.
In UK economic news this Monday morning, credit card company Visa says spending on cards fell again in February, dropping 1.1%, and that the first quarter of 2018 was on track to be the “worst on record”. It said spending by consumers had fallen in nine out the past 10 months. The detailed Visa figures show the amount spent on the physical high street fell 2.6% while households also cut back spending on recreation and culture by 6.1%. The firm noted, “Britons have been in belt-tightening mode since last summer. February’s cold snap certainly didn’t alleviate this situation, particularly when we shine a spotlight on high street spending, and recreation and culture in particular, which saw its biggest decline since April 2010. As we look ahead into March, consumer spending is at risk of posting one of the worst Q1 results on record.”
Investors’ thoughts now turn to Tuesday’s Spring Statement from the Chancellor of the Exchequer (the traditional Budget has now been moved to Autumn). There is the chance of a rare upgrade to UK economic forecasts after the incoming data over the past few months have shown the Office for Budget Responsibility was too pessimistic in its assumptions on UK productivity. Speaking on TV on Sunday, the Chancellor said Britain's debt mountain was still too high and had to be brought down. "There is light at the end of the tunnel because what we are about to see is debt starting to fall after it has been growing for 17 continuous years. That is a very important moment for us but we are still in the tunnel at the moment… We have a debt of £1.8 trillion - 86.5% of our GDP. All the international organisations recognise that is higher than the safe level." The British Pound opens in North America at USD1.3860, GBP/EUR1.1255 and GBP/CAD1.7775.
The Australian Dollar finished on Friday on a high note against a USD whose trade weighted index was little changed over the course of the week. On Thursday it had made a marginal fresh high for the week around 0.7835 but then joined in the ‘risk-on’ party after Friday’s US employment report to end the week at a 10-day high around 0.7850. A very quiet overnight session in Asia and this morning in Europe has seen the AUD trade a little higher to USD0.7875 as equities globally extend Friday’s gains.
The only real positives for the AUD at present are a continued recovery in global asset prices and a reduction in asset market volatility, most generally measured by the VIX index. Absent either of these two, the case for long or overweight positions in the AUD looks pretty thin. In their latest update, the analysts at Westpac are particularly negative on the Australian housing market. They note, “Dwelling investment contracted in 2017 by 5.8%. Based on the downturn in the trend in high rise approvals and a flat outlook for detached housing, we expect this downturn has further to run with the contraction accelerating into 2019. Oversupply and a marked slowdown in sales to foreigners are weighing on the outlook for residential building. House price inflation is disappearing. On a six month annualised basis, prices are now falling in Sydney and Perth and slowing in Melbourne and Brisbane… We expect a long, extended period of flat house prices on a national basis with weakness particularly centred on the Sydney and Melbourne markets. This will represent a considerable change in the “atmospherics” around housing wealth and may weigh further on prospects for consumer spending.”
For the week ahead, NAB’s monthly business survey is out on Tuesday and on Wednesday we have the consumer confidence numbers. Three RBA speeches are also scheduled. The first is from Michele Bullock, Assistant Governor (Financial System), at the Seamless Australia Payments Conference in Sydney on Tuesday, followed by Christopher Kent, Assistant Governor (Financial Markets) speaking at the KangaNews DCM Summit on Wednesday. Deputy Governor Guy Debelle ends the week with a speech on “Risk and return in a low rate environment.” The Australian Dollar opens in North America this morning at USD0.7865, with AUD/NZD at 1.0760 and AUD/CAD1.0085.
The New Zealand Dollar had by its recent standards a pretty quiet week, with NZD/USD spending all but a few minutes on the same ‘big figure’ of 72 US cents. A ‘risk-friendly’ US labour market report on Friday helped lift the NZD back up to a close around 0.7285 and overnight in Asia, the Kiwi has climbed back on to 73 cents. With the AUD/NZD cross around 15 pips lower at 1.0760, this leaves the NZD at the top of the charts as we approach the mid-point of the trading day.
A spokesman for Trade and Export Growth Minister David Parker said today that New Zealand has formally sought an exemption from the tariffs announced by President Trump, and while the details are still to be clarified, New Zealand may fall within the flexibility offered to close security partners. In an emailed statement to the Press, he said, "I am also concerned about the secondary impacts of these tariffs in terms of the knock-on effects on prices of steel and aluminium products around the world, including in New Zealand… A tit-for-tat escalation benefits no-one and hurts everyone." Prime Minister Jacinda Ardern also said ministers were working to get an exemption for New Zealand.
In economic data, three of the ‘partial data’ which feed in to the calculation of the GDP numbers which are out this coming week have already been released. The total sales value for wholesale trade rose 3.0% in the December 2017 quarter. Building Work Put in Place, total building activity volume was up 1.4% in the quarter whist the total volume of manufacturing sales rose 1.0% in Q4. Analysts have now firmed up their forecasts for the Q4 GDP estimate due on Thursday. ANZ, BNZ and Westpac all pick +0.7% q/q and 3.1% y/y whilst ASB Bank go for +0.8% and 3.2%. The Kiwi Dollar opens in North America at USD0.7310 and NZD/CAD0.9375.
- USD/CAD: 1.2775 - 1.2875 ▼
- EUR/USD: 1.2250 - 1.2380 ▼
- GBP/USD: 1.3720 - 1.3915 ▼
- AUD/USD: 0.7780 - 0.7930 ▼
- NZD/USD: 0.7250 - 0.7350 ▼