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US steady ahead of surveys on economic activity. EUR and GBP marginally lower in quiet trade.

By Nick Parsons

The US Dollar ended Wednesday little changed as a generally weaker EUR offset a stronger CAD on the USD index. Having opened around 89.25, it fell to a low of 89.05 before rallying up to a high just above 89.40 then closing around the mid-point of its daily trading range. Overnight in Asia and this morning in Europe, the USD has edged very marginally higher with its index against a basket of major currencies at 89.30.

Keeping up with changes in the Trump Administration is itself a full-time job. Television commentator and former Bear Stearns investment banker Lawrence Kudlow has accepted the role of top economic adviser to US president Donald Trump, the White House confirmed. Mr Kudlow will lead the National Economic Council after Gary Cohn quit last week. As Bloomberg reports the story, “Within minutes of being named as top White House economic adviser on Wednesday, Kudlow was on the airwaves to push a tough stance toward China and promise a new phase of tax cuts - hitting two of Trump’s favorite talking points and making clear why he was chosen for the job. The economist and CNBC contributor also demonstrated a Trump-like willingness to ignore taboos. In a rare departure for someone about to take a senior government job, he questioned Federal Reserve monetary policy and even offered a trading recommendation ‘I would buy King Dollar and I would sell gold.’” It seems we’re now going to have to watch financial TV as well as the POTUS Twitter feed for clues on economic policy.

In economic news, US retail sales fell for a third straight month in February as households cut back on purchases of motor vehicles and other big-ticket items. The Commerce Department said retail sales fell 0.1% last month against consensus expectations of a +0.3% monthly rise. It was the first time since April 2012 that retail sales have declined for three straight months. After the numbers were published, the Atlanta Fed yet again slashed its Q1 GDP forecast; this time from 2.5% to just 1.9%. As recently as end-January, the model was signaling a 5.4% pace of growth in Q1. Later today we’ll have two surveys of business activity: the Philly Fed and Empire Manufacturing reports as well as the NAHB housebuilders index. The USD index opens this morning in North America around 89.30.

As markets continued to digest Tuesday’s speech from Bank of Canada Governor Stephen Poloz, the CAD stabilised yesterday after its initial sharp losses. USD/CAD opened around 1.2955 and traded in a relatively tight 40 pip range throughout the Northern Hemisphere day, finishing towards the lower end of its trading band around the 1.2940 mark. GBP/CAD is still within a few pips of this week’s 20-month high of 1.8125 which was its best level since the day after the UK referendum on Brexit back in March 2016 with USD/CAD steady in Europe this morning in the mid-1.29’s.

Canadian Prime Minister Justin Trudeau said yesterday that he was “very optimistic” of a successful result for his country, the United States and Mexico as they renegotiate the North American Free Trade Agreement. Speaking in a TV interview, he said there was an “eminently achievable win-win-win” result available, and that NAFTA has been good for all three countries. Analysts locally don’t share his optimism and are busy revising down their Canadian Dollar forecasts. TD Securities, for example, write that, “CAD is on the cusp of a renewed down-leg. Though there was no new substantive information in Governor Poloz's speech, the market appears to have finally heeded the message that there is no urgency for the Bank to tighten anytime soon. We continue to view July as the earliest hike… We have recently noted that the market needs to curb its enthusiasm in CAD; economic growth should decelerate while Canada's largest trading partner is leaning towards more protectionist policies. NAFTA negotiations remain unresolved and still far apart on the contentious issues.”

Thursday brings existing home sales data in Canada; these fell 14.5% in January from December to the lowest monthly level in three years as tighter mortgage rules hit demand. New and tougher rules on mortgage lending were imposed at the start of January amid fears of a housing bubble, requiring lenders to “stress test” borrowers to ensure they could withstand higher interest rates. The changes mean fewer buyers qualify for loans. The Canadian Dollar opens in North America at USD/CAD1.2955, AUD/CAD1.0185 and GBP/CAD1.8070.

The EUR came under steady pressure in the Northern Hemisphere on Wednesday, falling to a low in the European afternoon of 1.2350 and taking bottom spot on our one-day currency performance table. It has traded pretty much sideways in a very tight range in Asia and during the European morning, with little enthusiasm from investors to push it one way or another.

France’s central bank has this morning revised up its 2018 growth forecast from 1.7% to 1.9% after data showed the economy grew 2.0% in 2017; its fastest growth in six years. Its updated economic outlook said that confidence indicators have held up better so far this year than it expected, joining the IMF, OECD and European Commission in raising their forecasts since the start of the year. Next year, the central bank sees growth easing to 1.7%, down from 1.8% previously, as exports are expected to offer less of a tailwind next year due to a lagged impact from the euro’s strength. It left its 2020 growth forecast unchanged at 1.6%. The economy is forecast to create 185,000-200,000 net new jobs annually through the end of the decade, cutting the unemployment rate to 7.9 percent by the end of 2020. That would be the lowest jobless rate since the end of 2008 and would also put President Emmanuel Macron within reach of a promise to cut it to 7 percent by the end of his term in 2022.

Of course, what still matters most for ECB monetary policy is the outlook for prices. The Banque de France forecasts that inflation will average 1.6% this year, then ease to 1.4% in 2019 before picking back up to 1.8% in 2020. The EUR opens in North America today at USD1.2365 and EUR/CAD1.6020.

We wondered yesterday morning whether the British Pound could hold onto the gains made on the back of the Chancellor’s Spring Statement. As we noted here, “Rarely has such poor news been so well received; both by backbench MP’s and a usually more skeptical foreign exchange market”. On Wednesday it seems the market had second thoughts and it was only the weakness of the EUR which prevented the GBP from taking bottom spot on our one-day performance table. Overnight in Asia and in Europe this morning, the GBP has edged around a quarter of a cent lower to USD1.3940 in what has been an unusually quiet session.

With no fresh economic news and the UK media totally focused on a diplomatic row between the UK and Russia, we can turn instead to a study by the Economist Intelligence Unit and reported in The Guardian which found that British cities have dropped to their cheapest levels internationally since at least the 1990s. It said the sharp fall in the pound after the EU referendum – still more than 6% lower than it was on the eve of the vote – had sent London and Manchester sharply down the rankings. Analysing a basket of more than 150 goods in 133 cities around the world, the report found London was now almost a third cheaper than Paris to visit, and almost a 10th cheaper than Dublin. The UK capital fell six places to 30th in the rankings for the most expensive city in Europe, while Manchester dropped five places to 56. Singapore retained the title as the world’s most expensive city for a fifth year running, while Paris and Zurich topped the list in Europe.

How the diplomatic crisis between the UK and Russia plays out is impossible to predict, but it serves to show how even in an age of careful news-management, unforeseen events can introduce a huge degree of political and economic uncertainty into financial markets. The British Pound opens in North America at USD1.3930, GBP/EUR1.1275 and GBP/CAD1.8060.

Once more, the high of the US equity market on Wednesday coincided almost exactly (in fact within 10 minutes) of the high of the AUD/USD exchange rate. The Aussie Dollar rose steadily through the European morning to reach a best level of 0.7910; the first time it had been back on a 79 cents ‘big figure’ since February 20th. From its level at that moment of 25,110, the Dow Jones Industrial Average then fell almost 430 points over the next 4 hours, dragging AUD/USD down to a low of 0.7870. Overall, however, the Aussie has been pretty resilient. The US stock market is this morning almost exactly where it was immediately prior to Friday’s US labour market numbers (DJIA at 24,800) but AUD/USD is still more than half a cent higher.

We mentioned last week that NAB scrapped one of the two RBA rate hikes in its forecast profile for 2018. Macquarie Bank is the latest local name to push back its forecast for the RBA’s first rate increase since late 2010, now seeing this in early 2019 rather than its previous forecast for August of this year. “The primary reason for pushing back our RBA call is that the Bank can err on the side of growing the economy faster for longer to erode spare capacity and have confidence that inflation is firmly moving back into the 2-3% target… After two years of below-target inflation, and at least another one to come, there seems little danger of generating a meaningful pick-up in inflation expectations from keeping interest rates low for longer.” Looking at short-term market interest rates, the implied probability that the RBA will deliver a 25 basis point rate increase by the end of this year is roughly 45%, a view that Macquarie describes as “about right.”

In the only incoming economic data today, expected inflation rate as represented by the Melbourne Institute Survey of Consumer Inflationary Expectations, increased by 0.1 percentage points in March to 3.7% from 3.6% in February. Total pay growth over the 12 months to March 2018 increased to 2.0% from the December quarter reading of 1.5% although respondents appear cautious about future wage growth; expectations for pay growth in the next 12 months fell to 1.8% from 2.4% in the previous quarter. The Australian Dollar opens in North America this morning at USD0.7855, with AUD/NZD at 1.0745 and AUD/CAD1.0180.

The New Zealand Dollar underperformed its Aussie cousin on Wednesday. The peak of NZD/USD actually came during the Asian session around 0.7350 and at the time of the peak in AUD/USD, it had fallen short of this level by around 10 pips. Its subsequent decline extended only another 20 pips, however and the Kiwi has now remained on a 73 cents ‘big figure’ ever since late Tuesday morning; a notable period of calm for this recently very volatile currency.

The long-awaited Q4 GDP figures released earlier this morning fell short of consensus expectations. Most of the banks locally had penciled-in growth of 0.7% but the New Zealand economy actually grew 0.6% in the final three months of 2017, the same pace as the previous quarter. Although the year-on-year rate accelerated to 2.9%, it was also below the 3.1% expansion expected by economists. For the full year 2017, the economy grew by 2.9%, down from 4% in 2016. According to the officials at StatsNZ, “Hot, dry weather appeared to have a negative impact this quarter on agriculture production, which fell 2.7%. Falling milk production was reflected in lower dairy manufacturing and dairy exports.” The statisticians said that household expenditure - the largest part of the New Zealand economy at around 60% - grew by 1.2% over the quarter. “Households ate out more and spent more on groceries and alcohol. This fueled increased retail trade activity, with food and beverage services and supermarkets experiencing growth.”

Today’s numbers effectively draw the line under 2017 and it’s only a couple of weeks until the end of the first quarter of 2018. Tomorrow we’ll get the performance of manufacturing numbers for February and next week there’s an RBNZ meeting. For now, the Kiwi Dollar opens in North America at USD0.7310 and NZD/CAD0.9475.