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Currencies quiet ahead of ECB Press Conference. USD is best performer but trading ranges are quite narrow

By Nick Parsons

Since President Trump’s proposed steel tariffs were announced last week, the DJIA is down around 1%, but volatility has increased substantially with several 300 point intra-day swings. The USD index, meantime, peaked last Thursday morning at 90.50 and has subsequently been back down to 89.00 - its lowest level in just over two weeks – before a modest rally yesterday to 89.35. Trading in Asia and Europe this morning has been pretty subdued ahead of today’s ECB Council meeting with the Press Conference scheduled to start at 2.30pm Frankfurt time, 08.30am in New York.

In economic news, the US trade deficit increased to a more than nine-year high in January, with the shortfall with China widening sharply. The Commerce Department said the trade gap jumped 5.0% to $56.6 billion. That was the highest level since October 2008 and exceeded economists’ expectations of an increase to $55.1 billion. The politically sensitive trade deficit with China surged 16.7% to $36.0 billion, the highest since September 2015. The deficit with Canada soared 65% to a three-year high of $3.6 billion. President Trump in late January imposed broad tariffs on imported solar panels and large washing machines, even before last week’s announcement of import tariffs of 25% on steel and 10% on imported aluminum.

After the international trade numbers were released, the Atlanta Fed updated its Q1 GDP forecast. From an annualized pace of 3.5% prior to the data, it now has just 2.8% as the contribution of net exports is even more negative than it had previously assumed. Improving global growth and a weaker dollar have been supporting overseas sales of American-made goods, though not enough to outpace inbound shipments and the Atlanta Fed model currently has trade subtracting -0.59 percentage points from Q1 growth. The USD index opens this morning in North America around 89.40.

The Canadian Dollar on Wednesday was by quite some margin the worst performer of all the major currencies we monitor closely here. USD/CAD reached an 8-month high just below 1.30, whilst GBP/CAD hit 1.80 for the first time in 20 months. For the Antipodeans, AUD/CAD extended its gains to a 9-month high of 1.0135 whilst NZD/CAD at 0.9435 was the highest since early July. Overnight in Asia and in Europe this morning, the CAD has held steady against a somewhat stronger US Dollar which has allowed it to eke out some modest gains from yesterday’s very depressed levels.

As unanimously expected, the Bank of Canada left its target for overnight interest rates unchanged at 1.25%. Its Statement noted that, “Global growth remains solid and broad-based. In the United States, new government spending and previously-announced tax cuts are anticipated to boost growth in 2018 and 2019. However, trade policy developments are an important and growing source of uncertainty for the global and Canadian outlooks… While the economic outlook is expected to warrant higher interest rates over time, some continued monetary policy accommodation will likely be needed to keep the economy operating close to potential and inflation on target. Governing Council will remain cautious in considering future policy adjustments, guided by incoming data in assessing the economy’s sensitivity to interest rates, the evolution of economic capacity, and the dynamics of both wage growth and inflation.”

The Bank of Canada statement didn’t directly mention NAFTA, it is clear that concerns about trade are a growing negative. Looking at interest rate markets, they aren’t fully pricing in the next rate increase - which would be the fourth in the cycle - until July whereas a month ago, overnight index swaps were pricing in at least one increase by May, with a good chance of an April hike. The Canadian Dollar has been the worst performing major currency so far in 2018. The Canadian Dollar opens in North America at USD/CAD1.2930, AUD/CAD1.0085 and GBP/CAD1.7935.

On Tuesday, the Single European Currency put the Italian concerns firmly behind it to reach a best level around USD1.2410; the first time it had been back a 1.24 big figure in two weeks. On Wednesday, the EUR extended its gains to a high just under 1.2440 at lunchtime in Europe before then slipping back to the high 1.23’s in the New York afternoon session. Ahead of today’s ECB Council Meeting, the euro has edged a little lower but there is a good area of technical support around USD1.2350 which ought to limit the downside until traders hear what Mr Draghi has to say about the economy and monetary policy.

Though all the activity data on the Eurozone economy are positive and surveys of business and consumer confidence remain close to multi-year highs, inflation has actually slipped back over the last couple of months. ECB President Draghi will likely use this as a reason not to change the forward guidance around the ending of QE and stick to current language about no increase in interest rates until well past the end of the programme. Indeed, analysts surveyed regularly by Bloomberg forecast that policy makers will pare back their pledge on asset purchases by June, and set an end date for the stimulus program by July. Tweaks to the guidance on interest rates, which currently foresees no change until “well past” the end of bond buying, are not expected until September.

As well as his comments on QE and monetary policy, Mr Draghi is sure to be pressed about the possible impact of US tariffs and possible European retaliatory measures. Of course, these are decided by politicians, not Central Bankers, but the journalists will recall that Mr Draghi used the January Press Conference to complain about US comments on exchange rates and will be looking for more of the same. The EUR opens in North America today at USD1.2375 and EUR/CAD1.6020.

The British Pound was lower for much of the day on Wednesday but a late afternoon rally left it little changed against the US Dollar and the EUR. It would be a mistake to read too much into the price action, however. For ten hours from 7am to 5pm London time, GBP/USD was stuck in just a 40 pip range from 1.3855 to 1.3895 as investors tired of over-interpreting the latest Brexit shadow-boxing. Overnight in Asia, the GBP crept on to a USD 1.39 ‘big figure’ but couldn’t sustain the move in the European morning today and has slipped back in to the 1.38’s.

The EU’s draft guidelines on the UK’s exit from the EU were presented by European Council President Donald Tusk. He struck a conciliatory tone saying, "The UK will be our closest neighbour and we want to remain friends and partners after Brexit - partners that are as close as possible, just like we have said from the very first day after the referendum." While the guidelines make clear that the EU wants "as close as possible a partnership" after Brexit, however, it is expected that there will be negative economic consequences. "Being outside the customs union and the single market will inevitably lead to frictions… Divergence in external tariffs and internal rules as well as absence of common institutions and a shared legal system, necessitates checks and controls to uphold the integrity of the EU single market as well as of the UK market… This unfortunately will have negative economic consequences."

Responding to the publication of the guidelines, a Downing Street spokesman stressed they were a draft version which had not been formally published. "We look forward to seeing the final guidelines when published and hope they will provide the flexibility to allow the EU to think creatively and imaginatively about our future economic partnership," they said. The British Pound opens in North America at USD1.3865, GBP/EUR1.1200 and GBP/CAD1.7930.

The Australian Dollar has slipped gradually lower from Tuesday’s high of USD0.7835. The fall hasn’t been dramatic by any means but three times it has slipped back on to a US 77 cents ‘big figure’ and the price action suggests the downside may be the more vulnerable. Against the Canadian Dollar, meantime, the Aussie is around 40 pips down from Wednesday’s 1.0135 high, having broken above parity on Monday for the first time in more than 6 months.

Australia’s latest monthly trade figures were released overnight. The headlines were much better than expectations, with a $1.05 billion surplus, a more than $2 billion turnaround on the $1.1 billion deficit the month before. Details showed a 4.3% m/m jump in exports whilst imports fell -2.4%. Digging a little deeper in to the numbers, around three-quarters of the surplus was made up by a $770 million contribution by gold, with exports jumping 54 per cent over the month. A $208 million jump in the export of transport equipment also improved the monthly picture. Elsewhere, iron ore (+0.6% m/m) and coal (0.0% m/m) added little to exports growth, although last month’s figures were revised up slightly. According to CBA, generally stronger commodity prices so far this year point to another solid result next month and an improvement in the terms of trade — the ratio of the prices received for exports to prices paid for imports. "This will provide a short-term boost to nominal GDP and therefore national income."

The latest foreign exchange survey from Reuters showed the median forecast of 41 analysts is for the AUD/USD exchange rate at 78 cents in one, three and six months’ time. This would be an unusually flat profile for the typically volatile currency pair. Over 2017, for example, the Aussie went from as low as 0.7165 to as high as 0.8125 before ending the year just above $0.7800 where it currently sits. The median forecasts, however, disguise a wide range of views about the AUD. Looking at the one-year time horizon, the range of expectations is between 70 and 86 US cents. The Australian Dollar opens in North America this morning at USD0.7795, with AUD/NZD at 1.0740 and AUD/CAD1.0095.

Having found the air on a US 73 cents handle a bit thin, the New Zealand Dollar has spent the last 36 hours catching its breath in the mid to high-72’s. Generally, its movements matched those of its Aussie cousin and the key AUD/NZD cross has remained steady throughout around 1.0735.

After two of the ‘partial data’ which feed in to the calculation of the GDP numbers were released Wednesday (construction work and wholesale trade), today we’ve seen manufacturing output. The total volume of manufacturing sales rose 1.0% in the December 2017 quarter compared with the previous quarter. This follows a 0.4% rise in Q3. Seven of the 13 manufacturing industries saw sales rise in the December 2017 quarter. The largest movements were petroleum and coal product manufacturing, up 17% and meat and dairy product manufacturing, down 2.8%. The petroleum and coal manufacturing series is not seasonally adjusted, as it does not have a stable seasonal pattern. It is not unusual for this industry to show large movements from quarter to quarter.

Analysts are now firming up their forecasts for the Q4 GDP estimate due on March 15th. ANZ and Westpac both pick +0.7% q/q and 3.1% y/y whist ASB Bank go for +0.8% and 3.2%. The Kiwi Dollar opens this morning in North America at USD0.7260 and NZD/CAD0.9395.