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Another volatile week for equity markets but the USD finished higher. RBA signals no hurry to raise rates, ECB complains again about US currency talk, GBP lower on Brexit uncertainties.

By Nick Parsons

For the first four days of this week, the US Dollar’s fortunes largely mirrored those of the main US equity indices. At times when stock markets were rallying, the USD had an observable tendency to sell-off, whilst any sign of stress in equities had the opposite effect, leading to something of a safe-haven bid. The 2018 low point for the USD index came on Friday February 16th at 87.95. As the stock market sold-off on Monday, Tuesday and Wednesday last week – culminating in a sharp dive lower after the FOMC Minutes – so the USD index rose to a best level for the week of 89.85; a 10-day high. On Thursday, stocks recovered and the USD fell (no surprise there) but on Friday the inverse relationship seemed to break down. Equity index futures were up almost the whole day but the USD was little moved, ending the week only a down three or four-tenths from Thursday’s best level.

The big event of the week was the Minutes of the January 31st FOMC meeting which finished just two days before the big stock market sell-off. There had been some talk that the Minutes might be used to steer the market towards expecting four rate hikes this year, rather than the median of three which had been signaled in the December ‘dot-points’ and the 2.82 hikes which were reflected in interest rate pricing. This didn’t really happen. For sure, “A majority of participants noted that a stronger outlook for economic growth raised the likelihood that further gradual policy firming would be appropriate" and FOMC voters agreed to add word "further'' in front of gradual increases because of the stronger economic outlook. A number of FOMC participants indicated that they had raised their forecasts for economic growth in the near-term vs their December estimates and the impact of recent tax cuts "might be somewhat larger in the near term than previously thought''. Nevertheless, "Participants generally noted few signs of a broad-based pickup in wage growth in available data" and some participants saw “an appreciable risk that inflation would continue to fall short of the committee's objective'' and judged the FOMC "could afford to be patient".

As for Fed speakers, St. Louis Federal Reserve President James Bullard on Thursday cautioned that investors may be "getting ahead of themselves" in anticipating four rate hikes from the central bank this year. Speaking with CNBC TV, Bullard said he doesn't see the case for a 1.2% increase in the Fed Funds rate this year, adding that "one hundred basis points in 2018 seems a lot to me." He also said there was a "ways to go" with respect to sustainable upward move on inflation and reiterated the view that US GDP will likely grow between 2.4% and 2.5% this year. Fed Governor Randal Quarles, meantime, gave a speech in Tokyo saying, “The U.S. economy appears to be performing very well and, certainly, is in the best shape that it has been in since the crisis and, by many metrics, since well before the crisis… With a strong labor market and likely only temporary softness in inflation, I view it as appropriate that monetary policy should continue to be gradually normalized." Fed Chair Jerome Powell’s first semi-annual monetary policy testimony has been moved forward from next Wednesday to Tuesday morning, Washington time and because February is a short month with a Federal holiday this last week, the payroll numbers won’t be released until March 9th.

The Canadian Dollar didn’t have a great week, though it was rescued to some extent by stronger than expected inflation numbers in the very last trading session of the week on Friday. USD/CAD opened on Monday morning at 1.2560 and after a very brief dip lower in the Asia time zone that day (in line with all the non-USD FX majors) it moved all the way up to a high of 1.2745 in North America on Thursday; a new high for 2018 and the highest level since December 26th last year. On Friday the CAD rallied back onto 1.26 and ended the week around 1.2630, having at one point come within a quarter of a cent of parity against the Aussie Dollar.

In economic news, Statistics Canada reported the value of Canadian wholesale trade dipped 0.5% in December, compared to consensus expectations for a monthly increase of 0.4%. Lower sales were recorded in five of the seven subsectors, representing 65 percent of wholesale trade in December, while volumes declined 0.9%. The personal and household goods subsector dropped 3.3% to its lowest level since April 2017. On Thursday they reported that after three consecutive monthly increases, retail sales decreased 0.8% in December. Sales fell in 6 of 11 subsectors, representing 42% of retail trade. Lower sales at general merchandise; health and personal care; and electronics and appliance stores more than offset gains at motor vehicle and parts dealers and food and beverage stores. Excluding motor vehicle and parts dealers, retail sales fell an even bigger -1.8% m/m.

On Friday, the annual inflation rate was reported at 1.7% in January, down from 1.9% in December but above consensus forecasts for 1.4%. The Bank of Canada’s three measures of core inflation were less muted, with CPI common, which the central bank says is the best gauge of inflation, rising to 1.8%, the highest since April 2012. Transportation costs rose 3.2% from a year ago, moderating from the previous month’s pace as price gains for gasoline and autos decelerated. But food prices were up 2.3%, the largest gain since April 2016, as Canadians paid more for food at restaurants as well as fresh fruits and vegetables. Interest rate markets expect the BoC to make no change at its next policymaking meeting in March but another rate hike is fully priced in by July. The big event for the week ahead in Canada is the Federal Budget on Tuesday. The Canadian Dollar ended the week at USD/CAD1.2630, AUD/CAD0.9905 and GBP/CAD1.7650.

The euro had a poor week. It’s 2018 high of USD1.2550 came back on Thursday February 15th and it opened on Monday morning already almost 1 ½ cents down from this level at 1.2410. This proved to be within a quarter of a cent of the week’s high seen in Sydney hours that day and by Thursday morning it had fallen all the way down to 1.2265; the lowest in almost 10-days. In part this was driven by a weaker US stock market which boosted the US Dollar, but this was the first week of the year in which Eurozone economic data were by quite a margin softer than consensus expectations.

On Tuesday the ZEW survey of the current economic situation in the eurozone’s largest economy slipped more than expected thin February to 92.3, although the latest assessment of Germany’s performance is still the second-highest reading on record. On Wednesday, the headline Markit Eurozone PMI fell from 58.8 in January to 57.5 in February, according to the flash estimate, which is based on approximately 85% of usual final replies. Markit noted that, “By country, growth in Germany came in at a three-month low, while in France the composite PMI moderated to the weakest for four months. On Thursday the ifo survey noted, “Germany’s very favourable business climate cooled down considerably this month. The ifo Business Climate Index fell to 115.4 points in February from 117.6 points in January. After the euphoria of recent months, companies’ assessments of the business outlook for the months ahead were also far less optimistic. In manufacturing the index fell considerably from last month’s record high”

The Minutes of the ECB Council Meeting said, “Some members expressed a preference for dropping the easing bias regarding the APP from the Governing Council’s communication as a tangible reflection of reinforced confidence in a sustained adjustment of the path of inflation… However, it was concluded that such an adjustment was premature and not yet justified.” Mr Draghi’s views on FX at the Press Conference were widely shared among Council members. “Concerns were expressed about recent statements in the international arena about exchange rate developments and, more broadly, the overall state of international relations…The importance of adhering to agreed statements on the exchange rate was emphasised.” An unusually extensive discussion of FX said, “It was also pointed out that the bilateral exchange rate of the euro against the US dollar had changed more than the euro's nominal effective exchange rate... However, explaining the US dollar weakness was not straightforward, given the strength of recent data releases and the fiscal and monetary policy outlook in the United States”. The euro ended the week at USD1.2295, AUD/EUR0.6375 and NZD/EUR0.5930.

The GBP ended the week lower against the USD and twice finished at the bottom of our one-day performance tables. It began last Monday around USD1.4080 and this proved to be within just 20 pips of the week’s high reached in Sydney hours that day. The low point came on Thursday morning London time around 1.3875 and though it recovered on Friday, GBP/USD could not get back on to a 1.40 ‘big figure’. As the fortunes of the GBP are just as closely linked to Brexit as to incoming economic data, the intra-day swings in the British Pound are something that businesses and investors are unfortunately going to have to live with for some time to come.

The most important of the monthly round of economic statistics was Wednesday’s labour market report. The unemployment rate ticked up to 4.4% in the three months to December, up from 4.3% (a four-decade low) and the number of people out of work rose by 46,000 to 1.47 million. But, the number of people in work also rose, by 88,000 during the quarter, to 32.147 million. The one-tenth rise in the unemployment rate was the first increase in two years but there was a 109,000 fall in the number of people classed as economically inactive, which helped lift the jobless rate. On Thursday, UK growth in the fourth quarter of last year was revised down to 0.4%, from an initial estimate of 0.5% whilst annual growth for 2017 as a whole was also revised down a little, from 1.8% to 1.7%. Details showed that business investment was flat in Q4 and household spending rose by just 0.3% during the quarter, which means it only grew by 1.8% last year. A tenth or so off the GDP numbers doesn’t sound much but in terms of messaging it is very important. It means the UK is at the bottom of the G7 pack with average growth in 2017 back below Japan and Italy (Canada doesn’t report Q4 figures until March 2nd).

UK Government Ministers headed away on Thursday for a Cabinet ‘offsite’ meeting to discuss Brexit. In what is understood to be the Prime Minister’s preferred model, the UK would be in regulatory alignment with the EU in some areas while finding different ways to achieve the same outcomes in other sectors. In the so-called ‘third basket of sectors’, the UK would in time diverge from the EU and go its own way under the model. Unfortunately, the EU are not prepared to accept this and a European Commission document timed to coincide with the meeting said, “The UK views on regulatory issues in the future relationship including the ‘three basket approach’ are not compatible with the principles in the [European council] guidelines.” Back to the drawing board… The pound ended a choppy week at USD1.3970, GBP/AUD1.7815 and GBP/NZD1.9155.

Equity markets globally finished the week with small net losses, though at one point on Wednesday there was a very sharp reversal lower for the Dow Jones Industrial Average before it recovered all its losses over the net 36 hours. This was the 7th occasion year that the DJIA has moved in a 450 point high-low range; a far cry from last year when it didn’t happen on a single trading day. The higher volatility and generally lower trend for stock markets gradually eroded support for the Aussie Dollar. It began the week at USD0.7910 and moved lower almost without interruption to 0.7790 on Thursday morning in Sydney. A subsequent rally as stock markets jumped took the pair up to 0.7855 but it then slipped steadily through the Northern Hemisphere on Friday to end the week around 0.7840.

The two highlights of the week locally were the RBA Minutes on Tuesday and the wage price index on Wednesday. After leaving interest rates unchanged for 16 consecutive months, the Minutes of the February RBA Board signaled more of the same ahead. Business conditions remained at a relatively high level and prospects for non-mining investment “were more positive than they had been for some time” but strong retail competition has exerted downward pressure on consumer goods and food for some time and was expected to persist “in the next few years”. Indeed, “members noted that food prices, excluding fruit and vegetables, had been little changed for nearly a decade”. After all the warnings from the Governor and Deputy Governor in recent speeches, the Minutes reiterated that, “There was still a risk that growth in consumption might turn out to be weaker than forecast if household income growth were to increase by less than expected. In an environment of high household indebtedness, consumption might be particularly sensitive to adverse developments in household income or wealth”

The Australian Bureau of Statistics reported that its wage price index grew by 0.55% over the December quarter in seasonally adjusted terms, leaving the change on a year earlier at 2.08%. Markets had been expecting a quarterly gain of 0.5%, seeing the year-on-year rate hold steady at 2.0%, so the data was marginally better than consensus. Most of the increase was due to increases in pay for government employees - mainly in the health industry and education - while private sector pay, which accounts for the majority of workers, remained weak at just over 1.9%. Rises through the year in the Public sector ranged from 1.9% for Professional, scientific and technical services to 2.9% for Health care and social assistance and public sector pay has now outpaced that in the private sector for the past four years. In terms of what it means for interest rates, CBA and Westpac now see the RBA on hold in 2018 with Westpac now seeing unchanged rates until the end of 2019. NAB still has two hikes in H2 this year; quite a marked split amongst the big banks locally. The AUD ended the week at USD0.7840, with AUD/NZD at 1.0740 and GBP/AUD1.7820.

The New Zealand Dollar began the week around USD0.7390 and apart from a couple hours on Monday in the low 74’s, stayed on a US 73 cents handle right until Friday morning when it broke down into the high 72’s. Though a graph of NZD/USD traces out a steady decline (other than the Wednesday night spike higher which all the other FX majors enjoyed against the USD) the big story was on the AUD/NZD cross which fell on Thursday to a fresh 6-month low of 1.0655; the lowest since August 4th last year. By Friday, however, a sharp reversal higher took the pair back to 1.0740 to leave it within a few pips of its starting point on Monday morning.

In economic news, it was mostly a week of second-tier data. Monday’s performance of services index showed growth in New Zealand’s services sector eased in January to 55.8 and new orders fell to their lowest in 10 months. On Tuesday, Statistics NZ reported that producer output prices rose 1.0% q/q in the fourth quarter of 2017, in line with expectations and unchanged from the previous three months. Higher output prices were mainly due to dairy product manufacturing and higher oil prices. Data from the Reserve Bank of New Zealand showed total credit card spending in New Zealand decreased for the first time in five months in January. Credit card spending dropped 0.6% month-over-month in January, fully reversing a 0.6% rise in December. The good news is that credit card users are making much more of an effort to pay balances more promptly. As at December 2017, 60.4% of all balances incurred interest. That is the lowest level ever recorded since this data started in July 2000. Just one year ago it was 62.2%, and five years ago it was 64.8%. It peaked at 76.1% in January 2001.

Labour productivity rose 0.9 percent in the year ended March 2017. Setting aside for a moment the irony of publishing productivity figures 10 months after the quarter-end, the statisticians’ Press release was punchily titled, “More New Zealanders working, and working smarter” and the details showed that New Zealand workers could produce 133 units of goods or services each hour in 2017, compared with 100 an hour 20 years ago. Separately, the New Zealand Government today published a mammoth report on the economic impact of the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP). The 243-page National Interest Analysis (NIA) estimates the economy would grow between 0.3% and 1% more than if TPP had not existed, with exporters enjoying better access to new markets such as Japan, Canada and Mexico. By Friday’s New York close, the NZD ended the week at USD0.7290 and AUD/NZD1.0740.