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After a week of political drama in the United States, the USD index finished net unchanged. CAD was the worst performer after BoC Poloz speech whilst AUD/USD and NZD/USD both ended lower.

By Nick Parsons

The US Dollar fell for 2 ½ days, rallied for 2 ½ days and ended a week of high political drama with its index against a basket of major currencies almost exactly unchanged. It opened on Monday at 89.75 but as stock index futures gave back a large part of the previous Friday’s gains ahead of US CPI figures on Tuesday, the USD index fell around a quarter of a point. The inflation numbers were then completely overshadowed by the firing of US Secretary of State Rex Tillerson which added to a sense of chaos in the Trump Administration and the USD fell to a low around 89.15. As the revolving door into government turned once more, former Bears Stearns economist and TV pundit Larry Kudlow was announced as the Presidents Chief Economic Advisor. As he hit the financial TV studios talking up the USD, so it rallied to a best level of 89.95 before ending the week unchanged at 89.95.

It wasn’t just the fact of Mr Tillerson’s departure, but the way it had been announced with the Secretary of State learning of his fate from the POTUS Twitter feed. President Trump subsequently told reporters that he and Tillerson disagreed on Iran, that he made the North Korea decision himself and thinks Tillerson will be "much happier now." Trump said "I wish Rex Tillerson well… I very much appreciate his commitment and his service and I wish him well. He’s a good man… We got along actually quite well but we disagreed on things.” The Trump White House has seen 24 departures in its first 417 days - a rate of around one senior position every 17 days (and more first-year departures than any other president in at least 40 years). A chief of staff, press secretary, three communications directors, a chief strategist, a health secretary, and now a Secretary of State and Personal Assistant are among those who have left the Trump administration.

Within minutes of being named as top White House economic adviser, Kudlow was on TV saying “I would buy King Dollar and I would sell gold.” He then He told CNBC that, “I must say as somebody who doesn’t like tariffs, I think China has earned a tough response not only from the United States... A thought that I have is the United States could lead a coalition of large trading partners and allies against China, or to let China know that they’re breaking the rules left and right. That’s the way I’d like to see. You call it a sort of a trade coalition of the willing.” It may not be a hard and fast rule, but it’s a long-held tradition that only the Fed speaks about interest rates and only the US Treasury makes official comments on the Dollar. Asked about interest rates, however, Kudlow said, “the profit picture is good. It’s looking real good, and growth is not inflationary just let it rip for heaven's sakes. The market is going to take care of itself. The story takes care of itself let it rip. The Fed will do what it has to do, but I hope they don’t overdo it.” With a President on Twitter and his Chief Economic Advisor on financial TV, it’s going to be very hard to keep up with all the breaking news and fresh volatility which markets now face. Ahead of a week which has an FOMC meeting, the USD index stands at 8975. USD index back down to almost exactly where it had begun the week at 89.65.

The Canadian Dollar had a very poor week, the worst performer amongst the six major currencies we follow closely here. USD/CAD opened on Monday morning around 1.2820 and the pair fluctuating in a range 20 pips either side of this level for the next 36 hours as traders awaited a speech on Tuesday from Bank of Canada Governor Stephen Poloz. As the headlines hit the newswires (see below) USD/CAD jumped more than a full cent to 1.2970 and after a very soft set of housing numbers on Thursday and more talk of US tariffs, it broke 1.30 for the first time since June last year. GBP/CAD hit 1.82; its best level since the EU referendum 20 months ago whilst AUD/CAD and NZD/CAD registered 9-month highs.

In a speech which focused on labour market slack, the Governor said Canada is at the “sweet spot” of the business cycle where growing demand is actually generating new capacity as companies invest to meet sales, a process he said the Bank of Canada has an “obligation” to nurture. The increased investment, meanwhile, will help bring more people into the work force - such as women, youth and the long-term unemployed. “Put it all together, and it is not much of a stretch to imagine that Canada’s labour force could expand by another half a million workers. To put this thought experiment into perspective, this could increase Canada’s potential output by as much as 1.5 per cent, or about $30 billion per year. That’s equal to a permanent increase in output of almost $1,000 per Canadian every year, even before you factor in the possible investment and productivity gains that would come with such an increase in labour supply. Clearly, that is a prize worth pursuing.” On monetary policy, Poloz said, “It should be clear that there are likely to be significant economic benefits associated with allowing the economy to find its way to a higher, more productive economic equilibrium, if this can happen within our inflation-targeting regime… “We cannot know in advance how far the capacity-building process can go, but we have an obligation to allow it to occur.”

Friday brought existing home sales data in Canada. These had fallen 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 meant fewer buyers qualify for loans. Far from rebounding in February, home sales fell another 6.5% during the month and were down 16.9% in year-on-year terms. Sales were down from the previous month in almost three-quarters of all local housing markets, with large monthly declines in and around Greater Vancouver and Greater Toronto. Despite an 8.1% monthly increase in February, new listings nationally were still lower than monthly levels recorded in every month last year except January, and came in 6.4% below the 10-year monthly average and 14.6% below the peak reached in December 2017. The Canadian Dollar ended a very poor week at USD/CAD1.3095, AUD/CAD1.00100 and GBP/CAD1.8265.

The British Pound had a good week, finishing up against a generally well-bid US Dollar and gaining against every one of the major currencies we follow here. GBP/USD opened the week around 1.3855 and after junior Brexit minister Robin Walker said at a conference on Brexit, “We recognise how important it is to secure the deal on the implementation period as soon as possible. I want to stress that we are very close to a deal at this time” it finished on Monday at 1.3905 and at the top of our one-day performance table. Tuesday was the Chancellor’s well-received Spring Statement and by Wednesday in Asia, GBP/USD hit a best level of 1.3995. Trading was quite volatile on Thursday and Friday but the GBP finished only half a cent down from the week’s high and almost a cent up from Monday’s opening level.

We wrote on Monday about the Spring Statement that, “There is the chance of a rare upgrade to UK economic forecasts after the incoming data over the past few months have shown the Office for Budget Responsibility was too pessimistic in its assumptions on UK productivity.” That is exactly what happened, albeit the upward revisions were only very small and from an exceptionally weak starting point. What really grabbed the attention was how upbeat the Chancellor was; as if he had been practicing really hard for quite some time. Often accused of being an Eeyore (the pessimistic, gloomy, depressed, old grey donkey who is the friend of Winnie-the-Pooh in the childrens’ books by A.A. Milne), Mr. Hammond began by insisting, “I am at my positively Tigger-like best” (As this character says, bouncing is what Tigger does best). He proceeding to read a dismal series of five-year economic growth forecasts in a very positive voice: 1.5%, 1.3%, 1.3%, 1.4% and 1.5%. This will be the first time in 70 years of five consecutive years of growth below 2%, but the Chancellor made it sound like the winning lottery numbers; hailing a 0.1% upward revision to the 2018 number.

There is now less than a week until the EU Summit at which decisions will be taken on the next steps in the Brexit negotiations. With politicians focused almost exclusively on a huge diplomatic row with Russia over the past few days, this Summit has rather dropped off the radar screens in the UK. As the date approaches, though, do be prepared for comments from either side which have the potential to move the pound suddenly and without any warning. The pound ended last week at USD1.3945, GBP/AUD1.8075 and GBP/NZD1.9325.

The Australian Dollar rose for three days of last week then fell for the final two with a net loss from the previous Friday’s close around 1 ¼ cents. For the early part of the week, continuing the price action seen since the US non-farm payrolls report was published, the AUD tracked risk sentiment very closely. The opening of the cash equity market in the United States on Tuesday (just before its 250-point drop) marked the peak in the AUD/USD exchange rate at just under 0.7895 whilst on Wednesday, the high of the US equity market coincided almost exactly (in fact within 10 minutes) of the high of the AUD/USD exchange rate. AUD/USD opened on Monday morning at 0.7855, hit a best level on Wednesday of 0.7905 but then fell quite sharply on Thursday and Friday, losing almost a full cent on both days.

The economic highlight in Australia last week was the well-respected NAB monthly business survey. The business conditions index moved 3 points higher to +21. This is a record high since the monthly survey commenced in March 1997, although the same measure in NAB’s quarterly survey reached this level in 1994. In contrast, the business confidence index declined by 2 points to +9. According to NAB, “The fall in confidence may reflect the turbulence seen in international financial markets in early February, but confidence remains above average suggesting that the impact was relatively limited”. The strength in business conditions was broad-based with all major industry groups reporting above-average conditions. NAB noted, “The gap between the best and the softest performing industries is at a relatively low level with even the underperforming retail sector recording its highest reading in eight months. That said, the trend down in personal & recreational services over the past four months needs to be watched closely as it could indicate that softness in consumer spending is broadening beyond retail.”

In other economic data, Westpac’s Index of Consumer Sentiment rose 0.2% to 103.0 in March from 102.7 in February. Their analysts noted, “Sentiment continues to hold in slightly optimistic territory with March marking the fourth consecutive monthly reading above the 100 level. That followed a year in which pessimism dominated. However, the Index is still well below levels typically associated with a robust consumer.” For the week ahead, the main events for currency markets locally will be the Minutes of the latest RBA Board meeting released on Tuesday and the labour market report on Thursday. The AUD ended last week at USD0.7715, with AUD/NZD at 1.0690 and GBP/AUD1.8075.

The New Zealand Dollar had very similar price action to its Aussie cousin last week, though its peak on Wednesday came somewhat earlier during the day and the sell-off against the US Dollar on Friday was less marked; allowing the AUD/NZD cross to trade down on to a 1.06 ‘big’ figure by the New York close. NZD/USD opened on Monday morning around 0.7290 and it went on to a best level in Asia on Wednesday around 0.7350; its highest in almost 3 weeks. From then it was downhill all the way against a generally firmer US Dollar and the pair hit a low on Friday afternoon of 0.7210 before closing around 0.7220.

The long-awaited Q4 GDP figures released on Thursday 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.”

Although there is an RBNZ meeting next Wednesday, there are no expectations at all for any change in official interest rates of 1.75%. The accompanying Statement is also not expected to show any significant changes to the outlook given that the Q4 GDP number was pretty close to the RBNZ’s own expectation. The Kiwi Dollar ended the week in New York at USD0.7220 and AUD/NZD1.0690.

The EUR ended the week marginally lower against the USD, having followed the pattern of all the major currencies by rallying for the first half but then falling persistently through Thursday and Friday. EUR/USD opened on Monday morning at 1.2310 and added exactly once cent to a best level in Asia on Wednesday of 1.2410. As ECB officials took the opportunity talk the currency lower, EUR/USD fell almost three-quarters of a cent on Thursday and on Friday afternoon hit an 8-day low of 1.2260 before then rallying around 30 pips into the New York close.

Speaking to the annual “ECB Watchers” conference in Frankfurt, its President Mario Draghi said the European Central Bank will avoid surprising investors with sudden changes to its stimulus plans, stressing that inflation is still too low and US trade policies and a stronger euro are concerns. “Adjustments to our policy will remain predictable, and they will proceed at a measured pace… We still need to see further evidence that inflation dynamics are moving in the right direction. So monetary policy will remain patient, persistent and prudent.” Speaking about US trade tariffs, he said that while the initial impact is likely to be small, “there are potential second-round effects that could have much more serious consequences. These include the risk of retaliation across other goods and an escalation of trade tensions, and the potential for negative confidence effects which would weigh on business investment in particular.” In a separate interview in Dublin, Governing Council member Philip Lane who heads Ireland’s Central Bank said the European Central Bank must keep its guard up against the risk of a sudden appreciation in the euro. “There’s no concern about the current level. But if it moves a lot within a short time interval then you have to think about the implications.” Repeating this message, Mr Draghi said that “any further sharp repricing” must be watched carefully.

Figures released on Friday showed the final Eurozone annual inflation rate was 1.1% in February 2018, down from 1.3% in January. This was one-tenth below the provisional estimate. The core rate excluding food and energy prices was unchanged at 1.0%, in line with the consensus and first estimate. Looking at the whole of the European Union rather than just those countries which use the euro currency, annual inflation was 1.3% in February 2018, down from 1.6% in January. The lowest annual rates were registered in Cyprus (-0.4%), Greece (0.4%), Denmark and Italy (both 0.5%). The highest annual rates were recorded in Romania (3.8%), Estonia and Lithuania (both 3.2%). Compared with January, annual inflation fell in eighteen Member States, remained stable in two and rose in seven. The euro ended the week at USD1.2290, AUD/EUR0.6275 and NZD/EUR0.5875.