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Trump’s steel tariffs weigh on stocks. Italy elections depress EUR but good PMI data help lifts GBP

By Nick Parsons

The US Dollar had a week of two unequal halves: up for the first three and a half days and down for the remainder. Its index against a basket of major currencies opened last Monday morning at 89.50 and as stock markets fell and volatility rose, so the USD index hit a near 6-week high on Thursday of 90.50. That afternoon, President Trump announced tariffs of 25% on imported steel and 10% on aluminium products. This surprise move sent stocks plunging once more, with the DJIA down more than 500 points and the VIX index above 20. This time, however, the USD did not respond positively. Amidst fears of retaliatory action from other countries, the index gave back around half a point to 90.00 and then fell on Friday to 89.60. Overnight in Asia and in London this morning, the USD has eased back further to a low of 89.50, taking it back to where it was on Tuesday last week.

President Trump tweeted on Friday that, “When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win. Example, when we are down $100 billion with a certain country and they get cute, don’t trade anymore-we win big. It’s easy!” In response, most countries - including Canada, China and much of Europe - have issued statements condemning Trump's decision and threatened retaliatory action. The European Union vowed to “react firmly” with World Trade Organization-compliant countermeasures in the next few days. An EU Commission spokesman said that the EU already has counter-measures ready against US tariffs and stands ready to respond, whilst Canada, which is the biggest foreign supplier of steel to the US was furious: Ottawa said the US measures were “unacceptable.”

Over the weekend, President Trump doubled down on his threats. After hearing that the EU was considering specifically target measures on Harley Davidson motorbikes and Levi Strauss jeans, he tweeted that, “If the E.U. wants to further increase their already massive tariffs and barriers on U.S. companies doing business there, we will simply apply a Tax on their Cars which freely pour into the U.S. They make it impossible for our cars (and more) to sell there. Big trade imbalance!” He went to say, “The United States has an $800 Billion Dollar Yearly Trade Deficit because of our “very stupid” trade deals and policies. Our jobs and wealth are being given to other countries that have taken advantage of us for years. They laugh at what fools our leaders have been. No more!” We’d note that the last time the US started a trade war over steel in 2002, the S+P 500 fell almost 30% and the USD fell 20% over the next 18 months until the WTO ruled the tariffs were illegal… The USD index opens this morning in North America around 89.65.

The Canadian Dollar had another poor week. USD/CAD opened last Monday morning in the mid-1.26’s and moved relentlessly higher to a best level on Friday around 1.2910; its first time on a 1.29 ‘big figure’ since November 30th and the highest level since mid-July. AUD/CAD, meantime, on Friday hit parity for the first time since August 18th and is up 3½ cents since its early-December low, whilst GBP/CAD at 1.78 is the highest since late-June.

The announcement of US tariffs hits the Canadian Dollar in two ways. First, and directly, Canada is the world’s number one exporter of steel to the United States, followed by Brazil, South Korea, Mexico and Russia. Canada’s Foreign Minister Chrystia Freeland said it’s “entirely inappropriate” for the US to consider the country a threat to national security. “We will always stand up for Canadian workers and Canadian businesses... Should restrictions be imposed on Canadian steel and aluminum products, Canada will take responsive measures to defend its trade interests and workers.” Second, as a seventh round of NAFTA talks is underway in Mexico City, an escalation of a trade and tariffs war makes for a very difficult backdrop, throwing doubt on the whole process.

The week ahead could be quite busy for the Canadian Dollar, not just in terms of economic data and trade news, but also on Wednesday the Bank of Canada policy meeting. The BoC is unanimously expected to leave official rates unchanged at 1.25% after the 25bp hike in January and the accompanying statement will be closely read for what the Central Bank has to say about trade and the economy. Ahead of that on Tuesday is the PMI survey and on Wednesday morning the housing starts and labour productivity data. On Friday, the Canadian labour market report will be released at the same time as the US employment numbers. The Canadian Dollar opens in North America at USD/CAD1.2890, AUD/CAD0.9995 and GBP/CAD1.7820.

By last Thursday morning, EUR/USD had fallen to 1.2160; its lowest since mid-January. It began to rally as soon as President Trump announced his trade tariffs and having gained a full cent by the close of business in New York, it extended gains on Friday to a high of 1.2330. Overnight in Asia, the EUR initially rallied on news that Angela Merkel can form a coalition government but has subsequently given back almost half a cent to around 1.2305 as investors attempt to digest the results of the Italian general election.

With votes counted from more than 75 percent of polling stations in Italy, it seems that none of the three main factions will be able to govern alone. A majority of Italian voters have supported Eurosceptic candidates in the national election and projections suggest the two parties with the most gains, the eurosceptic Five Star Movement and the anti-migrant League, could reach a majority in at least one of the houses of parliament should they join forces. Observers say such a coalition would likely challenge EU budget restrictions and be little interested in further European integration. According to Reuters, “The full result is not due until later on Monday and, with the centre-right coalition on course for 37 percent of the vote and 5-Star for 31 percent, swift new elections to try to break the deadlock are another plausible scenario.”

In economic news today, the final Eurozone PMI Composite Output Index posted 57.1 in February, down from January’s near 12-year high of 58.8. The headline index has signaled expansion in each of the past 56 months, although the latest reading was slightly below the flash estimate of 57.5. The manufacturing sector again registered stronger output growth than services. Both sectors also continued to enjoy the best periods of expansion for seven years, despite seeing rates of increase in output and new orders easing across the board in February. By country, Markit reported that rates of output growth were solid despite mostly slowing since January. Germany (three-month low) topped the rankings, followed by France (five-month low) and then Spain (eight month high). Rates of expansion in Ireland and Italy slipped to four- and three-month lows respectively. The EUR opens in North America today at USD1.2310 and EUR/CAD1.5875.

Brexit remains the key driver of the GBP which ebbs and flows according to whether any final deal is seen to be good for the UK trade (soft Brexit) or something which leaves the country more isolated from the continent of Europe but free to strike global trade deals (hard Brexit). Sentiment can shift strongly from day-to-day and even intra-day and last week was a very good example of how sensitive the pound can be. GBP/USD fell over three cents to a low point on Thursday of 1.3720; the lowest since January 12th. The pair rallied on Friday as the USD came under pressure and the GBP has extended its gains in Europe this morning to a best level around 1.3830.

The Prime Minister’s major Brexit speech on Friday was high on aspiration but still low on detail, even if it did acknowledge for the first time that totally frictionless trade with the EU will be a future impossibility. The good news in terms of domestic politics is that both wings of the Conservative Party have subsequently welcomed Theresa May’s new approach. The threat of losing a vote of confidence in the House of Commons appears much less likely than it did just a few days ago. However, what we haven’t yet seen is any reaction from Brussels which on Friday was busy crafting a response to President Trump’s trade tariffs. The GBP will now be driven by the extent to which the EU will seek to harden its own negotiating position ahead of the EU Summit in just over two weeks’ time.

This morning’s UK economic data were generally better than expected. The service sector PMI registered 54.5 in February, up from 53.0 in January, to signal the strongest rate of output growth for four months. Higher levels of business activity were attributed to the resilient economic backdrop and an associated upturn in new work. Markit noted that, “UK service providers experienced a modest rebound in business activity growth during February, supported by the fastest rise in new work since May 2017. The latest survey also pointed to stronger job creation across the service economy, with payroll numbers rising to the greatest extent for five months as firms sought to boost operating capacity in response to improved order books.” The British Pound opens in North America at USD1.3820, GBP/EUR1.1230 and GBP/CAD1.7830.

The Aussie Dollar still feels largely friendless, even though equity markets have stabilized after last week’s sharp losses. Last Thursday, AUD/USD tumbled to a low of 0.7715; a fresh low for 2018 and the weakest since December 27th. It hasn’t subsequently been able to rally back above 0.7780 and though it is up against the Canadian Dollar, it is second-weakest so far on our one-day performance table.

It’s been quite a volatile series recently, but building approvals jumped 17.1% m/m in January, returning to growth following a revised 20.6% fall in December, according to the Australian Bureau of Statistics. That was above the 5% growth forecast in a Reuters poll of economists. Approvals for apartments, classed as private sector dwellings excluding houses, jumped 42.2% in January while approvals for private sector houses fell 1.1%. Meantime, CBA published their service sector PMI survey which rose to 54.2 in February from 53.8 in January, indicating a solid and accelerated rate of output growth. CBI noted that, “New order growth accelerated to a seven-month high, with the favourable demand environment encouraging firms to pass on higher cost burdens to their clients through greater output prices. Meanwhile, the rate of job creation remained weak relative to the series trend amid reports of increased labour costs.”

The next two main events for the Aussie Dollar are tomorrow’s RBA Board meeting and then Wednesday’s Q4 GDP report. It would be one of the biggest surprises ever if the RBA changed interest rates and there’s no great need for any change of signaling from the Central Bank on future policy intentions. Not all the ‘partial data’ are yet in for GDP but early estimates indicate a number around 0.6-0.7% q/q for an annual rate of growth around 2.6-2.7%. The Australian Dollar opens in North America this morning at USD0.7750, with AUD/NZD at 1.0715 and AUD/CAD0.9995.

The New Zealand Dollar continues to defy analysis or even explanation. On Friday ten days ago, it was bottom of our one-day performance table without any incoming news. Last week, it was top on Monday; again with no fresh incoming data or news catalyst. Both Tuesday and Wednesday it was bottom of the pile and on Thursday it was back in top spot. Friday was notable only for the fact that it didn’t finish either top or bottom! These seemingly random swings are frustrating for everyone but show the importance of placing orders in advance to benefit or protect from volatility in offshore centres. So far this Monday, NZD/USD is holding on to a 72 cents handle whilst the AUD/NZD cross rate is in the lower half of last week’s range at 1.0715.

In the first economic data of a fairly busy week, the ANZ Commodity Price Index rose 2.8% m/m in February, kicking on from the 0.7% gain in January. The lift was fairly broad-based, although the dairy group provided the major thrust, with a 6% gain and beef prices rose 3.9% m/m. ANZ’s analysts noted that, “New Zealand’s merchandise terms of trade hit a new all-time high in Q4. It represents a key purchasing power benefit for the economy. We are assuming that it stabilises around this level over the next couple of years. And while today’s figures only represent half of the equation, the lifts seen over 2018 to date do suggest there is a possibility of some further near-term upside.”

The GDP numbers are not out until March 15th but this week there are three of the ‘partial data’ which feed in to the calculation. On Wednesday it is Building Work Put in Place and Wholesale Trade whilst Thursday is the quarterly Survey of Manufacturing. For the moment, early estimates of the GDP number are for growth around 0.4-0.6% in the December quarter. The Kiwi Dollar opens this morning in North America at USD0.7230 and NZD/CAD0.9330.