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USD steady after post-FOMC drop. Soft economic data weighs on EUR and AUD.

By Nick Parsons

Late on Tuesday evening, the USD index against a basket of major currencies was back at 90 for the first time in almost three weeks. Wednesday saw the USD slip around a quarter of a point to 89.75 before the Fed announcement and then extend its losses by a further half-point late in to the New York afternoon despite a somewhat higher forecast profile for official interest rates in 2019. By the close of business, the USD was at the bottom of our one-day performance table. This morning in Europe, the Dollar traded down to a low of 89.05 before rally to where it closed in New York last night at 89.25.

A very uncontroversial FOMC Statement noted, “the labor market has continued to strengthen and economic activity has been rising at a moderate rate. Job gains have been strong in recent months, and the unemployment rate has stayed low. Recent data suggest that growth rates of household spending and business fixed investment have moderated from their strong fourth-quarter readings. On a 12-month basis, both overall inflation and inflation for items other than food and energy have continued to run below 2 percent. Market-based measures of inflation compensation have increased in recent months but remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.”

There had been some speculation ahead of the FOMC meeting that the Fed would signal a total of four rate hikes in 2018 rather than the three which had previously been forecast. It didn’t do that (which may explain some of the subsequent USD weakness) but it did raise its median estimate for 2019 by 25 basis points. Looked at another way, it was previously penciling-in seven more rate hikes until the end of 2020 but has now added an extra one, with two more to come in 2018, three more in 2018 and another two in 2020. Quite why this should have been taken as a trigger to aggressively sell the USD is something of a mystery but we’d always caution against reading too much into immediate post-FOMC moves which are often prone to re-appraisal and reversal. The USD index opens this morning in North America around 89.25.

The Canadian Dollar topped our one-day performance table for a second consecutive day on Wednesday. Prior to the FOMC Statement, USD/CAD was already back below 1.30 for the first time since last Thursday with a one percent daily drop whilst EUR/CAD and NZD/CAD were both down six-tenths and AUD/CAD was three-tenths lower at 1.0020. Post-Fed, USD/CAD extended its losses and was down almost 1 ¼ percent on the day, moving back on to a 1.28 ‘big figure’ for the first time in over a week. This morning in Europe, USD/CAD has fallen even further, hitting a low around 1.2850 and though there are another 8-9 hours before close of business, it is on track for a third day at the top of the table.

Prime Minister Justin Trudeau reiterated his belief there will be agreement on a renewed North American free trade deal between Canada, Mexico and the United States. Trudeau didn't offer any timeline when questioned about the negotiations on Wednesday, only saying he believed a deal is eminently possible. “We are there working very, very hard and moving forward on trying to get a good deal. We know that there is a good deal eminently possible for Canada, for the U.S. and for Mexican citizen and workers.” According to Bloomberg, there are indications the U.S. is willing to budge on one of its core demands as President Donald Trump pushes to get a deal ahead of looming Mexican elections. One person familiar with the talks, speaking on condition of anonymity, said the Americans are showing flexibility on a demand for a 50 percent, U.S.-specific content requirement, but it hasn’t been formally withdrawn.

Canada’s ambassador to Washington, David MacNaughton, told reporters the U.S. has made suggestions on auto rules that “were actually quite creative” and, if taken “to their logical conclusion,” would eliminate the need for the 50 percent requirement. The Globe and Mail newspaper, citing unidentified sources, reported the U.S. had altogether dropped its demand for 50 percent U.S. content in vehicles. Away from the twists and turns of NAFTA, Bank of Canada Senior Deputy Governor Carolyn Wilkins will deliver a speech today, while domestic inflation data for February is due on Friday. The Canadian Dollar opens in North America at USD/CAD1.2875, AUD/CAD0.9950 and GBP/CAD1.8210.

The euro continues its rather lacklustre performance and on Wednesday it couldn’t get back on to a USD1.23 ‘big figure’ before the Fed announcement. It fell against the CAD, AUD and GBP, was unchanged against the NZD and rose against the USD. After the Fed Statement and Press Conference, the EUR rallied in line with all the other non-USD currencies, reaching almost 1.2350 by the New York close. After a jump to 1.2385 early in the European morning today, however, it has subsequently lost around half a cent on disappointing economic data.

According to the ‘flash estimate’ which is derived from around 85% of survey respondents, the Eurozone composite PMI fell to 55.3 in March, down from 57.1 in February. This was the lowest since January of last year and signaled a second successive monthly easing in the rate of expansion. Output growth moderated in both manufacturing and services, the latter seeing business activity grow at the slowest rate for five months while factory output increased at the weakest pace since January 2017. Both sectors also saw new order inflows wane, with goods export orders showing the smallest rise since November 2016. Measured overall, inflows of new orders showed the smallest monthly increase seen over the past 14 months.

Commenting on the data, Markit said, “While the first quarter average PMI reading remains relatively robust, indicative of GDP rising by 0.7-0.8%, the loss of momentum since the buoyant start to the year has been quite dramatic… The fact that export order book growth has more than halved since the end of last year suggests the stronger euro is taking an increasing toll on export performance. Survey responses also highlighted how political uncertainty also appears to have intensified, dampening demand. The data therefore suggest that eurozone growth peaked around the turn of the year and the region is settling into a slower, but still robust pace of expansion. Price pressures have meanwhile also eased slightly, in part linked to cheaper imports arising from the euro’s recent strength, but remain elevated.” The EUR opens in North America today at USD1.2320 and EUR/CAD1.5860.

The British Pound yesterday traded as high as 1.4075 ahead of the FOMC and was up against four of the five other currencies we track closely here. The exception was the Canadian Dollar, with GBP/CAD down more than half a cent to 1.8245. Once the Fed Statement was released and the USD sold off despite a somewhat higher forecast profile for official interest rates in 2019, GBP/USD extended its gains to 1.4150. This morning in Europe, the pound traded up to a near 3-week high of 1.4175 before easing back after UK retail sales data were published.

Figures from the Office for National Statistics showed retail sales increased by 0.8% in February when compared with the previous month, with increases seen across all main sectors except non-food stores. February’s rise follows two monthly declines in December and January, resulting in an overall decrease of 0.4% in the past three months. The Press Release accompanying the data was pretty downbeat with the statisticians noting, “the underlying three-month picture is one of falling sales, mainly due to strong declines across all main sectors in December… Store prices continue to rise across all store types, but at a lower rate than the previous month due to a slowdown in price growth, though clothing and household goods stores continued to see stronger price rises.”

Looking forward, we should point out that the official numbers covered the 4-week period up to February 24th; before the very bad weather which paralysed much of the UK the following week. This means the March data will likely show a big drop in retail sales and the three months Jan-March which comprise Q1 might see total sales fall by around half a percentage point. With some of the pound’s recent strength built on the strong belief that the Bank of England will be raising interest rates at its May MPC meeting, we wonder if the pace of gains might at the very least begin to slow? The British Pound opens in North America at USD1.4150, GBP/EUR1.1490 and GBP/CAD1.8200.

With the US Dollar generally on the defensive after the Fed Statement yesterday afternoon, AUD/USD rebounded to 0.7775. A positive reaction in the stock market and a rising gold price helped lift the AUD on most of its major crosses, with AUD/NZD, for example, extending gains to 1.0740. Overnight in Asia and this morning in Europe, a slightly softer than expected labour market report has seen the Aussie slip back almost half a cent from Wednesday’s best levels. The AUD/CAD cross is now firmly below parity having been as high as 1.0230 just a week ago.

Employment in Australia rose 17,500 in February, slightly below consensus expectations for a 20,000 increase but still the 17th consecutive monthly gain. Full-time jobs rose 64.9k whilst part-time fell -47.4k but this split merely reverses the equally volatile movements seen in January and isn’t really telling us much about underlying conditions. The Australian working-age population has grown around around 27k per month over the past year and a greater percentage of them are available for work. The so-called ‘participation rate’ has risen from around 64.5% to 65.7% over the past 12 months. Putting these two factors together, employment needs to grow almost 30k a month to keep the unemployment rate steady. It clearly didn’t do this in February so the jobless rate rose to 5.555% which was rounded up to show a one-tenth increase to 5.6%.

RBA Governor Phil Lowe continues to stress that progress towards what he sees as full-employment rate of 5% jobless will be “slow and gradual”. In February, it actually went very slightly into reverse. Unlike the UK or US, the official statisticians in Australia don’t produce wage numbers in the employment report so we don’t know what’s happening to earnings and whether employers are having to pay up to attract or retain staff as more people find jobs. With the unemployment rate ticking very slightly higher, though, there is certainly no rush to be raising rates. As CBA puts it, “Under-employment and under-utilization rates continue to trend lower but still indicate that spare capacity is available in the job market. We expect that the next move in rates will be up, but we can’t see a change happening until late 2018 at the earliest.” The Australian Dollar opens in North America this morning at USD0.7730, with AUD/NZD at 1.0675 and AUD/CAD0.9945.

After slumping to the bottom of our one-day performance table on Tuesday, falling against all the major currencies we follow closely here, the New Zealand Dollar didn’t do a whole lot better on Wednesday. Ahead of the FOMC announcement it was down against the GBP, CAD and AUD, and little changed against both the USD and EUR. As the USD then softened against all the majors, so the Kiwi Dollar managed to regain 72 US cents and went on to a best level late in the New York afternoon around 0.7240. It has traded pretty much sideways around that rate through the European morning today.

As expected, the RBNZ today left the Official Cash Rate (OCR) unchanged at 1.75 percent. Its Statement noted, “The outlook for global growth continues to gradually improve. While global inflation remains subdued, there are some signs of emerging pressures. Commodity prices have continued to increase and agricultural prices are picking up. Equity markets have been strong, although volatility has increased. Monetary policy remains easy in the advanced economies but is gradually becoming less stimulatory. GDP was weaker than expected in the fourth quarter, mainly due to weather effects on agricultural production. Growth is expected to strengthen, supported by accommodative monetary policy, a high terms of trade, government spending and population growth. Labour market conditions are projected to tighten further… CPI inflation is expected to weaken further in the near term due to softness in food and energy prices and adjustments to government charges. Tradables inflation is projected to remain subdued through the forecast period. Non-tradables inflation is moderate but is expected to increase in line with a rise in capacity pressure. Over the medium term, CPI inflation is forecast to trend upwards towards the midpoint of the target range. Longer-term inflation expectations are well anchored at 2 percent.”

The RBNZ Statement concluded with the line that, “Monetary policy will remain accommodative for a considerable period. Numerous uncertainties remain and policy may need to adjust accordingly” and it was interesting that it made no reference at all to the exchange rate for the first time since 2012. The analysts at Westpac commented, “The RBNZ still expects that the economy will accelerate this year, eventually pulling inflation slowly up towards two percent. We doubt very much that the economy will accelerate as the RBNZ expects, but our expectation of exchange rate depreciation leaves us with an inflation outlook that is similar to the RBNZ’s. The main point is that both we and the RBNZ are much more dovish than financial market pricing, and comfortably so.” The Kiwi Dollar opens in North America at USD0.7245 and NZD/CAD0.9315.