UK-EU Brexit agreement positive for GBP, though watch for any political backlash. GBP/AUD and GBP/CAD at post-referendum highs. UK CPI today might dampen May rate hike calls.
Tuesday 20 March, 2018
Daily Currency UpdateAfter finishing in top spot last week, the British Pound continued where it left off, rising on Monday against every major currency we closely follow here. GBP/USD was back on a 1.40 handle for the first time since February 26th whilst GBP/NZD reached a 3-month high of 1.95 and GBP/AUD hit 1.82 for the first time since the EU referendum back in June 2016. Overnight in Asia, the GBP has consolidated its gains, holding steady against the USD and EUR and a quarter of a cent higher against both the AUD and NZD.
The main reason for the continued strength in sterling was confirmation that the UK and EU have reached agreement on the terms of a Brexit ‘transition’ period extending beyond March 29th 2019 until December 31st 2020. Britain has won concessions from the EU to allow it to negotiate and sign trade deals during the period without seeking authorisation, but it will elsewhere have to follow EU rules, with strict sanctions if the government fails to do so. At a joint press conference, Brexit Secretary David Davis and EU negotiator Michel Barnier said they had resolved all the major sticking points to allow the deal to be signed by European leaders this week. The Brexit secretary said that the agreement represented a “significant step” while the EU’s chief negotiator described it as “decisive”. The director-general of the Confederation of British Industry, said: “Agreeing transition is a critical milestone that will provide many hundreds of businesses with the confidence to put their contingency planning on hold and keep investing in the UK.” Whether or not the early optimism is well-founded remains to be seen: The reaction of right-wing Conservative MP’s, those in fishing communities and in Northern Ireland may now be crucial in determining whether the GBP can hold on to its gains of the past week.
The UK-EU agreement is especially important in the context of this week’s Bank of England MPC meeting. BoE Governor Mark Carney has previously said that an assumption of smooth progress on Brexit negotiations was the Bank’s central working assumption. With this now apparently achieved, one of the remaining obstacles to another interest rate hike has arguably been removed. Whether or not it will actually be required might become a little clearer after today’s CPI figures are published. Consensus looks for the annual rate of inflation to slip back from 3.0% to 2.8% in February.
Key MoversThe US Dollar Index rose modestly through Monday’s Asian session to reach a best level just below 89.95 before then turning sharply lower as the GBP jumped above 1.40 and the EUR found solid buying interest after its early dip to a low of USD1.2260. By mid-afternoon in New York, the US Dollar had tumbled to 89.35, unable to benefit from a sharp decline in the stock market. More than $100bn was wiped off the value of US technology shares with Facebook alone accounting for $35bn of these losses. According to the Financial Times, this was one of the top ten daily losses in value ever suffered by a technology company.
The drop in Facebook shares wasn’t just in reaction to allegations about the use of personal data in the US election campaign. It followed reports from the G-20 meeting in Buenos Aries that officials are considering a digital tax’ which would also impact companies such as Google, Amazon and others. A US Treasury Official said the US strongly opposes such measures on the digital sector but the so-called “FANG” group of stocks was sold heavily on Monday, dragging the US down in its wake. If only the US Administration had a market friendly face always available to pop up on 24-hours financial TV to reassure the markets…
The FOMC begins its two-day monetary policy meeting today; one of four such occasions each year at which it will release new staff economic projections and so-called ‘dot points’ which show members’ estimates of where official interest rates will be over the next 2-3 years. There will also be a Press Conference where the Chairman of the Board of Governors, Jerome Powell, will be questioned on the economic outlook and the prospects for future monetary policy. Remember that with the US having already changed on to daylight savings time, the announcements will come at 6pm UK time rather than the usual 7pm headlines. The US Dollar index opens in Europe this morning around 89.50.
After a generally underwhelming performance last week, the euro kicked off Monday by re-testing Friday’s lows in the USD1.2260 area. Throughout the Northern Hemisphere day, however, the Single European Currency was progressively well-bid and by the middle of the New York afternoon had gained almost a full cent to a shade under 1.2360. By the end of the day, it shared second-spot on our one-day performance table with the NZD; beaten only by the surging British Pound. The Asian session overnight has been much calmer, with less than 20 pips separating the high and low in EUR/USD and just a 10 pip range for GBP/EUR.
With trade figures very much in the spotlight recently, Eurostat yesterday announced that in January 2018 compared with December 2017, exports decreased by 0.7%, while imports increased by 1.1%. The seasonally adjusted balance was +€19.9bn, a fall compared with December (+€23.2bn) and lower than most observers had been expecting. The EU’s trade surplus with the United States, however, widened to €10.3bn from €9.7bn in the same month a year ago. President Trump has long been critical of this surplus and it will be interesting to see if his new economic team specifically call this out. As for monetary policy, yesterday saw anonymous “ECB sources” quoted on the Reuters newswires saying that policymakers are shifting their debate to how steeply interest rates should rise and how to phase out a bond buying program after purchasing 2.5 trillion euros in over three years. Quite why they chose to float the story at this time is something of a mystery after their recent successful communication of the ECB meeting but it does show the need to remain ever-vigilant when tracking global currency market: there’s always something moving foreign exchange rates.
Toady we have Germany’s ZEW survey of investor expectations, and on Thursday it’s the ifo Survey which has recently been incredibly upbeat in its numbers and commentary. Sandwiched between these are the so-called ‘flash PMI’s’ for manufacturing and service sector activity in France, Germany and the Eurozone. The ECB will publish its monthly Economic Bulletin on Thursday; something to which markets never used to pay attention but will which now be analysed very closely, especially in the light of the anonymous “sources” story noted above. The EUR opens in London this morning at USD1.2335 with GBP/EUR in the high-1.13’s.
The Australian Dollar continued its recent decline on Monday, reaching a low around USD0.7690 before then stabilizing in the European morning and actually clawing its way back on to a US 77 cents handle during the North American afternoon. Its modest rally came despite a sharp sell-off in stock markets on both sides of the Atlantic which saw the DJIA at one point more than 400 points lower and the VIX index rise almost 3 points to 19.1. Overnight in Asia, it has managed to hold 77 cents but still feels vulnerable to any further deterioration in global risk appetite.
Because Australia has a different mix to its economy than many other countries – a much greater proportion of resource and mining output – GDP is arguably less of a guide to the correct stance of monetary policy than household consumption. GDP may rise substantially without necessarily directly impacting jobs and wages across the whole economy. For this reason, household consumption may be the more appropriate gauge for an inflation-targeting Central Bank such as the RBA. The Minutes of the latest Board meeting out this morning note “Wages growth had remained low. The wage price index had increased by 0.6 per cent in the December quarter and growth over the year had increased slightly to 2.1 per cent. Across the states, wages growth had risen to almost 2½ per cent in Victoria, and in Queensland and Western Australia had increased from the lows recorded during 2016/17. In contrast, wages growth in New South Wales had been steady at around 2 per cent for a couple of years, despite the strong labour market conditions in that state. By sector, wages growth had been rising in an increasing number of industries over the prior year. In particular, some (but not all) of the industries with a relatively high share of employees on individual agreements had seen wages growth pick up.”
The reference to a pick-up in individual agreements (rather than those which are firm-wide or union-driven) was a straw for some analysts to clutch at but overall there is no sense of anything other than a very slow pick-up in pay and activity. As the RBA puts it, “Employment had grown strongly and the unemployment rate had fallen over the preceding year. However, the improvement in overall conditions had not yet translated into a definitive pick-up in wages growth, which remained low. Forward-looking indicators suggested that spare capacity in the labour market would continue to decline gradually over 2018 and, as a consequence, wages growth was expected to rise gradually.” If there is one word which thus far defines Phil Lowe’s time as Governor, it is “gradual”. The Australian Dollar opens this morning little changed from last night’s close at USD0.77 with GBP/AUD at 1.81.
As the negative sentiment surrounding the Canadian Dollar continued over the weekend, USD/CAD yesterday morning hit a high of 1.3125; its highest level since late June. GBP/CAD hit 1.83; its best level since the EU referendum 20 months ago although both AUD/CAD and NZD/CAD slipped a little from their recent 9-month highs. By the middle of the New York afternoon, however, USD/CAD had fallen around three quarters of a cent, though this was more a reflection of a poor session for the US Dollar than any new-found enthusiasm for its northern neighbour. The pair still shows no sign yet of returning below the psychological 1.30 barrier.
In its latest report on Canada, credit ratings agency Moody’s warns that while the end of NAFTA would be worse for Canada than for the US, the impact on Canada's overall economy would be "marginal" - although there would be winners and losers in terms of different industries and regions of each country. It identified New Brunswick and Ontario as having the highest exposure in terms of trade with NAFTA partners based on their output and export mix and said that of all the provinces, New Brunswick's exports to the US account for the largest share of its gross domestic product — nearly 30 per cent overall — with "significant exposure to higher-risk" food, agricultural commodities and forestry sectors. Meantime, Ontario exports more to the U.S. than any other province, largely because of its significant exposure to the manufacturing industry, including the auto sector. Despite these concerns, Prime Minister Justin Trudeau sounded quite upbeat on Monday: “We’re renegotiating NAFTA, we’ve seen from the President he’s enthusiastic about getting to a deal,” he said during a panel discussion, adding that Canada was continuing to work on resolving the trade talks.
It is reported by Bloomberg that, “the Trump administration is pressing countries to ally with the U.S. in pushing back against Chinese trade policies in exchange for relief from American tariffs on steel and aluminum which take effect this Friday. US Trade Representative Robert Lighthizer has laid out five conditions that countries must address before being excluded. They are: Limiting steel and aluminum exports to the U.S. to 2017 levels; actively addressing China’s various trade-distorting policies; being more assertive and cooperative with the U.S. at the G-20 Global Steel Forum; cooperating with the U.S. in launching cases against Chinese practices at the WTO; and enhancing security cooperation with the U.S” Although Canada has already been granted exemption from the steel tariffs, there are fears that this exemption could be revoked unless it takes the US side in disputes with third countries. The Canadian Dollar opens in Europe this morning with USD/CAD in the high-1.30’s and GBP/CAD in the mid-1.83’s.
The New Zealand Dollar had a decent start to the week on Monday, especially given the souring of risk appetite globally. AUD/NZD fell almost 40 pips to a 7-month low of 1.0650 whilst NZD/USD – which earlier in the Asian session has fallen below 72 cents – was back up around 0.7245. The Kiwi Dollar shared second place with the EUR on our one-day performance table, beaten only by the British Pound which rose to an intra-day high of GBP/NZD1.95 before settling back to the 1.9380 area. Overnight in Asia the GBP/NZD cross is back at 1.94.
In economic data released this morning, consumer confidence has picked up where it left off, before last year's general election, according to the latest Westpac McDermott Miller survey for March. The index rose 3.8 points to 111.2; reversing almost all its drop over the past few months. The analysts at Westpac said, “"The past few months have also seen mortgage rates pushing down and a related second wind in the housing market. We've also continued to see positive conditions in some key sectors of the economy, like the hospitality sector." Westpac said households are feeling more optimistic about the outlook for their own financial situation over the coming year. "They have also become more upbeat about the economy's longer-term trajectory more generally… The lift in confidence was widespread across geographic regions and household groups.”
Acting RBNZ Governor Graeme Wheeler holds his last Board meeting this Thursday before Adrian Orr takes the reins next week. Not a single analyst expects any change in official interest rates, with most attention focused instead on the likely new Policy Targets Agreement between the Government and the Central Bank. Even this is more likely a shift of nuance, rather than substance and it would be a big surprise if there were a material shift towards explicitly targeting unemployment rather than inflation. Before the RBNZ meeting, Wednesday brings the net migration numbers. The Kiwi Dollar opens in London this morning at USD 72 cents with GBP/NZD in the mid-1.94’s.
- GBP/USD: 1.3990 - 1.4130 ▼
- GBP/EUR: 1.1365 - 1.1490 ▼
- GBP/AUD: 1.8095 - 1.8370 ▲
- GBP/CAD: 1.8120 - 1.8405 ▼
- GBP/NZD: 1.9350 - 1.9600 ▲