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Fed Chair Powell’s speech to set tone for markets on Tuesday. For now, it’s stocks up, USD down once more.

By Nick Parsons

For most of last 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 back 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 somewhat. 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. On this first day of the week in Asia and Europe, the old pattern has reasserted itself; a triple-digit gain for the DJIA has pushed the USD index down almost half a point to 89.10.

The last FOMC meeting was back on January 31st and at that point in time, stock markets hadn’t yet started the dramatic decline which began after the labour market and average earnings numbers on Friday February 2nd. In that sense, last week’s Minutes were out of date even before they were published. Since then, we now have a new Fed Chairman and this week will be his first semi-annual monetary policy testimony to Congress. Most of the published calendars for this week will show this being on Wednesday but it has in fact been moved forwards 24 hours to 10am Tuesday, apparently because the casket of preacher Billy Graham will be lying in state in the Capitol Rotunda for two days from February 28th; only the fourth ever private citizen to do so.

As well as Jerome Powell’s testimony, there is a raft of US economic data scheduled for release this week, although the first Friday of the month of March won’t bring the payroll numbers due to the Presidents Day holiday late in the already-short month of February. Tuesday brings wholesale inventories, the advanced goods trade balance, durable goods, and consumer confidence; the first three of which will all feed directly into the Atlanta Fed’s GDPNow model. Wednesday is the Chicago NAPM and existing home sales, whilst Thursday brings the personal income, expenditure and deflators as well as the ISM manufacturing survey. There’s scope for plenty of volatility around each of the data prints, though the tone and content of Mr Powell’s remarks will be key ahead of the March 22nd FOMC meeting. The USD index opens this morning in North America around 89.10; down almost three quarter of a point from Thursday’s high but still more than a full point up on the February 15th low.

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 last Monday morning in the mid-1.25’s and 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 but ended the week with a net loss around one cent and has held in a tight range in the low 1.26’s throughout the Asian and European time zones this morning.

On Friday afternoon, 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 seventh round of talks on NAFTA renegotiation begins in Mexico City. According to Reuters, talks are running behind schedule although some officials believe the longer they last, the less likely it is that Trump will dump NAFTA, which he has threatened to do if the overhaul of the accord does not benefit the United States. Negotiators had wanted to wrap up talks by March to avoid them being politicized by Mexico’s July presidential election. But officials have already raised the possibility that they will run past Mexico’s vote, and some say they could continue at a technical level for several months if necessary. A US official noted, “there has never been a hard deadline”, and among Mexicans following the process, belief is growing that lobbying efforts by US business leaders and politicians to preserve NAFTA has been gaining traction. Back home in Canada on Tuesday afternoon, Finance Minister Bill Morneau will table his government’s third federal budget in the House of Commons. The Canadian Dollar opens in North America at USD/CAD1.2630, AUD/CAD0.9945 and GBP/CAD1.7765.

The euro had a poor week but has fought back well this morning, helped by a weaker US Dollar on the back of higher US equity markets. On Thursday of last week, it was down almost 3 cents from its 2018 high of 1.2550 but it has regained a 1.23 handle and seems to have some positive momentum at the start of a busy week of economic data.

It’s only a few days since we had the final Eurozone CPI numbers for January and in this shortest month of the year it’s already time for the ‘flash estimate’ for February which will be published on Wednesday. The final PMI numbers are out on Thursday when we’ll also see all the Eurozone countries which are not covered in the mid-month flash. Before then, Bundesbank President Jens Wiedmann will be presenting the institution’s annual report. A fascinating account of a wide-ranging lunch with Mr Weidmann and the FT’s Frankfurt bureau chief was published in this weekend’s Financial Times. Its author reported, “Weidmann contents himself with offering lukewarm praise for Draghi, while echoing a view I have heard on countless occasions in Germany that the ECB has done too much to bail out weaker members of the eurozone. “The ECB [is] certainly an institution that functions well,” he says. “But this cannot be an argument for us to take over the role . . . of governments.”

On the subject of governments, Italy votes at the weekend to try to elect a new one of its own. The latest polls point to a hung parliament, where no one party or coalition has a majority to form a government. Should that happen, Italian President Sergio Mattarella, will call on parties to form a broader coalition of pre-election adversaries. This could include the ruling centre-left Democratic Party and Silvio Berlusconi’s Forza Italia. Whilst most political pundits see a hung parliament, leading to a broad coalition that includes mainstream parties, as the most positive market outcome because it could result in political stability and policy continuity on Europe, any uncertainty over the government’s make-up could still lead to some short-term volatility in foreign exchange and bond markets. The EUR opens in North America this morning at USD1.2345 and EUR/CAD1.5595.

The GBP ended last week lower against the USD and twice finished at the bottom of our one-day performance tables. The low point came on Thursday morning London time around 1.3875 before a recovery on Friday in to the high 1.39’s. Overnight in Asia and in Europe this morning, as stocks have rallied further, the USD has fallen against all the major currencies and the GBP is back at 1.40 for the first time since Wednesday last week. Half way through this first day of the new week, the GBP is the best performer of all the major currencies we follow closely here.

Despite the softness of incoming economic activity data, policymakers are still talking up the prospect of further rate hikes. An interview with the Sunday Times revealed that the newest MPC member, Dave Ramsden, who was one of the two doves to vote against a rate hike in November, has now changed his mind. “There does seem to me more impetus on wages. We all will keep a close eye on what happens through the early part of this year to see if that forecast [in a Bank survey] of wage growth picking up to 3% is realised. But certainly relative to where I was, I see the case for rates rising somewhat sooner rather than somewhat later… “The economy has a lower speed limit than it did. We already had a productivity growth puzzle, but Brexit has reinforced things.”

No discussion of the GBP, it seems, can ever be complete without a Brexit update. European Council President Donald Tusk spoke about this in talks with media on Saturday. He warned the British government that Brussels would not accept what he views as cherry picking. "If the media reports are correct, I am afraid the UK position today is based on pure illusion." So, whilst Opposition Leader Jeremy Corbyn this morning in Coventry set out a new policy towards membership of a customs union, in which “we would also seek to negotiate protections, clarifications or exemptions where necessary in relation to privatisation and public service competition directives, state aid and procurement rules and the posted workers directive,” this seems to be the very kind of cherry-picking which the EU has warned against. The British Pound opens in North America at USD1.4055, GBP/EUR1.1390 and GBP/CAD1.7755.

The Australian Dollar moved lower last week, in part due to early weakness in global stock markets, in part due to higher volatility across asset classes and in part also to incoming news on the RBA and wage costs. The AUD began the week at USD0.7910 and moved lower almost without interruption to 0.7790 on Thursday morning before a late rally on Friday saw it end the week around 0.7840. After the first trading session of the week in Asia and this morning in Europe, a triple-digit gain for stocks has helped lift the Aussie Dollar another quarter of a cent to the high 78’s.

The wide split of views on the Australian Dollar is well-illustrated by a Google search. The top four articles on the news function are headed ‘Australian Dollar is a sell but a risky one’, ‘Australian Dollar is on the ropes but can still triumph in 2018’, ‘Buying Australian Dollars an attractive way to bet against US Dollar’ and ‘Australian Dollar likely to be pulled one way by China, another by US’. That selection of headlines pretty much covers all bases; the AUD is either going up, or down, or both at the same time! We are likely to see this wide spread of views continue until there is a more general consensus on interest rates from the ‘Big Four’ banks locally. Westpac see no change in RBA rates until at least the end of 2019, CBA look for unchanged rates until the end of this year, whilst NAB are still calling for two hikes in H2 2018.

For the week ahead, and away from the obvious influence of ever-volatile stock markets, the two main drivers for the AUD are likely to be domestic economic news flow and China’s PMI figures. There have been some signs of hardening in China’s attitude to credit creation and its currency has been allowed to appreciate against the US Dollar. On Wednesday and Thursday, we get the official and private sector PMI survey numbers which will be watched closely for any signs of slowdown; albeit against a backdrop of continued global strength. At home, Thursday brings the two Australian manufacturing PMI surveys and the Q4 Private Capital Expenditure numbers which will feed directly into the following week’s GDP estimate. The Australian Dollar opens in North America this morning at USD0.7865, with AUD/NZD at 1.0725 and AUD/CAD0.9935.

The New Zealand Dollar spent much of last week on a US 73 cents ‘big figure’; until Friday morning when it broke down into the high-72’s. Though the story of NZD/USD was a steady decline (other than the Wednesday night spike higher which all the other FX majors enjoyed against the USD) the main action 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 the mid-1.07’s to leave the NZD as the worst performer on the day even as the locals had gone home and were already starting the weekend. This morning it has reversed most of Friday’s losses and though it hasn’t quite kept pace with the GBP, so far the Kiwi Dollar is in second place on our one-day FX leader board.

In terms of economic data this week, monthly trade figures are released on Tuesday and on Wednesday it’s the always-fascinating international travel and migration statistics. Also on Wednesday, the ANZ business survey will show if business confidence has picked up from the year-end slump which took the headline number down to -37.8 in December. They are not a market mover, but your author always enjoys the colour and detail provided by the international visitor arrivals figures which are out on Friday; so important for all those whose livelihoods depend on tourism and discretionary spending from overseas.

Speaking of overseas visitors, it has been announced that former US president Barack Obama is to visit New Zealand for the first time next month. Obama will speak to about 1000 invited guests at an event run by the NZ-US Council in Auckland on March 22, spending about three days in the country, before going on to Sydney. Prime Minister Jacinda Ardern welcomed confirmation of the trip. "I look forward to welcoming Mr Obama to our country and anticipate meeting him once his full programme is finalised," she said in a statement. The Kiwi Dollar opens this morning in North America at USD0.7330 and NZD/CAD0.9265.