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Fed Chair Powell monetary policy testimony due at 10am. Equity and currency markets steady with USD holding recent gains

By Nick Parsons

Just when the inverse relationship between stock markets and the US Dollar seemed to be re-established during the Asian and European time zones on Monday, so it fell apart again during North American hours as the EUR, EUR and CAD all came under separate local pressures. Thus, the USD index against a basket of major currencies fell from 89.60 to a low of 89.15 as stock index futures rallied almost 200 points but then regained all its losses as the stock marked added a further 100 points. Overnight in Asia and this morning in Europe, futures have been largely flat whilst the USD index is pretty much around the mid-point of yesterday’s trading range at 89.45.

A very busy week for US economic data got off to a mixed start. After a 9.3% plunge in December, it had been expected that new home sales would rebound around 3.5% in January. Instead, they tumbled a further 7.8% m/m for the biggest two-month drop since August 2013 whilst the median price dropped from $336,700 to $323,000 - the lowest since October last year. Elsewhere, however, the Dallas Fed business survey surged to 37.2; its highest level since 2005, probably on the back of higher oil prices which are so important for the regional economy in Texas. The indees of future general business activity and future company outlook slipped to 40.6 and 34.5, respectively, but both stayed well above their average readings. Most other indexes for future manufacturing activity also fell but remained highly positive.

As well as Jerome Powell’s semi-annual monetary policy testimony which begins around 10am Washington time, 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. 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 89.45; still more than a full point up on the February 15th low.

Ahead of today’s Federal Budget, the Canadian Dollar had an poor day on Monday, the worst performer of all the major currencies we follow closely here and has now weakened in six of the past seven trading days. USD/CAD had fallen to a low around 1.2620 during the Asian session but then turned higher and rose almost a full cent to a day’s high of 1.2705 before settling in the high 1.26’s.

As Bloomberg points out, since defeating former Prime Minister Stephen Harper in 2015, Prime Minister Justin Trudeau has taken what was a structural balance under the Conservatives to a small structural deficit. A federal budget operating surplus of about 1 percent of GDP has been brought to a level just above zero. Which means revenues right now just about match expenses, and Canada’s deficit essentially represents borrowing to pay interest on its debt. There’s not much wrong with these metrics but it is not exactly the foundation of something ambitious. In fact, if all goes as planned, Canada’s fiscal picture in about five years’ time will be pretty much the same as Harper’s last Conservative budget; a situation Bloomberg say “could be a problem if Trudeau has any intentions of seeking re-election on an ambitious second-term agenda”. In its October update, the government estimated the deficit at C$19.9 billion for the fiscal 2017-18 year ending March 31, down from the C$28.5 billion anticipated in last year’s budget. For the upcoming 2018-19 fiscal year, the deficit is seen at C$18.6 billion

With the seventh round of talks on NAFTA renegotiation underway in Mexico City, optimists note that an eighth round is already planned in Washington next month. But, with a general election in Mexico on July 1st and the US midterm elections in November, there is a growing sense of urgency for Canada to achieve some progress now. The Canadian Dollar opens in North America at USD/CAD1.2690, AUD/CAD0.9950 and GBP/CAD1.7710.

The euro traced out a similar pattern of trading to the GBP on Monday, climbing almost three-quarters of a cent up to 1.2350 by late morning in Europe as US equity index futures registered strong early gains. Most of the gains were reversed in the afternoon session, however, as ECB President Draghi was viewed as being on the dovish side of expectations. Overnight in Asia and this morning in Europe, however, the EUR has fared somewhat better; back on a US 1.23 ‘big figure’ but unable thus far to crack technical resistance around 1.2350.

ECB President Draghi’s testimony to the Committee on Economic and Monetary Affairs of the European Parliament said, “Looking ahead, we anticipate that headline inflation will resume its gradual upward adjustment, supported by our monetary policy measures. At the same time, uncertainties continue to prevail. In particular, the recent volatility in financial markets, notably also in the exchange rate, deserves close monitoring with regard to its possible implications for the medium-term outlook for price stability… Therefore, while the strong momentum of the euro area economy has clearly strengthened our confidence in the inflation outlook, patience and persistence with regard to monetary policy is still needed for inflation to sustainably return to levels of below, but close to, 2%. In fact, the evolution of inflation remains crucially conditional on an ample degree of monetary stimulus provided by the full set of our monetary policy measures: our net asset purchases, the sizeable stock of acquired assets and the forthcoming reinvestments, and our forward guidance on policy interest rates.”

The main contender for Mr Draghi’s job once his term of office ends is Bundesbank President Jens Weidmann. Speaking in Frankfurt this morning, he said that, “I believe it is important to gradually and dependably reduce the degree of monetary policy accommodation when the outlook for price developments in the euro area permits us to do so. If the upswing continues and prices rise accordingly, in my view, there is no reason why the Governing Council should not end the net purchases of securities this year… One thing seems clear to me: monetary normalization in the euro area will take a long time. Monetary policy will remain very expansive even after the end of net bond purchases.” The EUR opens in North America this morning at USD1.2325 and EUR/CAD1.5635.

The GBP had a classic day of two halves on Monday: the strongest of all the majors in the local morning and almost the weakest of all in the afternoon (apart from the CAD) which left the pound in second from bottom place on our one-day performance table. The focus in the early part of the day had been on talk of BoE rate hikes, whilst Brexit-related concerns then returned to undermine the currency after a speech from Opposition Labour Party leader Jeremy Corbyn. Having gained almost a full cent from USD1.3970 to 1.4060, the GBP gave up all its gains and more in the space of just a few hours and overnight in Asia has been stuck in the mid-1.39’s.

The Brexit policy speech from Labour leader Corbyn - supporting UK membership of a Customs Union with the EU and claiming to offer a new way forward in the Brexit negotiations - didn’t quite work out that way. His speech said, “Labour would negotiate a new and strong relationship with the single market that includes full tariff-free access and a floor under existing rights, standards and protections… In our transport networks, our energy markets and our digital infrastructure, too often Britain lags behind. So 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.”

It is hard to see how this speech was anything other than the cherry-picking approach which European Council President Donald Tusk has already warned would be “totally unacceptable”. Thus, we have a situation whereby the Opposition leader is outlining a policy which many people might prefer (thus raising the prospect of a Labour Government) but which would not be compatible with existing EU rules. In other words, it could end up for the GBP being the worst of all worlds – continued confusion around Brexit but more talk of a general election which could well result in defeat for the incumbent Conservatives and their coalition partners the DUP. We’ll now have to wait and see what, if any, is the response from the EU side. The British Pound opens in North America at USD1.3965, GBP/EUR1.1330 and GBP/CAD1.7725.

Given the volatility elsewhere in the FX majors on Monday – most notably the GBP and EUR – the Australian Dollar had a relatively quiet day. From an opening level in Sydney around USD0.7840, the AUD moved up to a best level of 0.7885; its highest since last Tuesday. It then spent the rest of the day giving back these gains, even as equity markets stayed well-bid and the VIX index eased back around half a point to a 3-week low of just 16.2. Overnight in Asia it has remained on a US 78 cents ‘big figure’ where it has been ever since last Thursday morning.

There’s a hard-hitting report from Credit Suisse overnight which is getting some coverage in the Australian Press. The bank says, “The RBA has become renowned over the years for delivering hawkish and arguably credible narratives, supported by consistent upward inflection points in its growth and inflation forecasts, virtually dismissing near-term undershoots, resulting in consistent over-prediction of real GDP growth and core CPI inflation.” They go on to argue that, “If sluggish wage inflation is a problem for highly leveraged consumers, and RBA forecasting errors are contributing to low wage inflation by allowing growth and inflation expectations to become unhinged, then it stands to reason that officials bear some responsibility for anaemic consumption growth.” The report concludes that, “If the RBA continues on its merry way, lost credibility may become a more significant factor weighing on inflation expectations and bond yields, notwithstanding how global factors evolve… This means that either the Bank materially revises down its forecasts — and adjusts rates accordingly — to win more credibility, or fiscal policy makers need to take on more responsibility to help keep inflation within the target band.”

There is still no general consensus on Australian 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. The GDP figures for Q4 are released next week and the task for analysts until then is to keep one eye on incoming information which shows the progress of the economy in Q1, and the other on the so-called ‘partial data’ for the end of last year which feed directly into the GDP number. Thus, 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 whilst Thursday brings the two Australian manufacturing PMI surveys and the Q4 Private Capital Expenditure numbers. The Australian Dollar opens in North America this morning at USD0.7845, with AUD/NZD at 1.0770 and AUD/CAD0.9955.

Having been the worst performing currency on Friday, the New Zealand Dollar was back at the top of the pile on Monday, even as there was no fresh incoming news or economic data. Instead, it continued to be driven by flows in the AUD/NZD cross rate which then fed through across the majors in what can sometimes be a relatively illiquid currency. Today, after a worse than expected set of merchandise trade figures, NZD/USD is back on a US 72 cents ‘big figure’ and testing technical support in the 0.7275-80 area which could then open up a bigger downside move.

Just as New Zealand’s dollar is volatile, so too are some of its economic statistics. In January 2018, New Zealand recorded its largest deficit for a January month since 2007. This deficit contrasts with last month’s surplus, which was the largest ever for a December month. The January 2018 trade balance was a deficit of $566 million. This was larger than January 2017 deficit as imports rose more than exports. Stats NZ noted that, “Both imports and exports reached new highs for January months. Import growth remains strong while export growth didn’t carry on at the same rate as the record-setting December 2017 month.” The official statisticians always provide plenty of fascinating detail and this months report was no exception. They report the $373 million (9.5%) rise in exports was led by milk powder, butter, and cheese – up $101 million. The countries with the largest rises in exports in the milk powder, butter, and cheese group were Algeria (milk powder), Peru (milk powder), and Iran (butter). Values were down $21 million to China, due to lower exports of milk powder. This fall is the first for the milk powder, butter, and cheese group to China since November 2016.

As local news media are consumed both with a controversial Australian TV interview with Prime Minister Jacinda Ardern and suggestions for what former US President Barack Obama should do on his forthcoming trip to New Zealand, the week’s economic calendar barely registers any interest at all. On Wednesday we have the ANZ Business survey and on Friday the international travel and migration figures. These will be a stark reminder of the importance of tourism to the NZ economy, which is now New Zealand's largest export earner, overtaking dairy in 2015/16. International tourism expenditure reached $14.5 billion in the year-ended March 2017 and it is estimated that international visitors are delivering $40 million in foreign exchange to the New Zealand economy each day of the year – one in five export dollars. The Kiwi Dollar opens this morning in North America at USD0.72800 and NZD/CAD0.9240.