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Stock markets still nervous after a 3% drop Thursday. USD steady awaiting President Trump’s next move

By Nick Parsons

The couple of days since the FOMC meeting on Wednesday evening have certainly been quite lively. The initial reaction to the rate hike, Statement and Press Conference was to buy stocks and sell the Dollar. The USD index against a basket of major currencies fell from 89.80 to 89.20 and extended its losses to a low on Thursday morning of 89.00. Yesterday was a very bad day for the stock market, especially in the last couple of hours of trade, but as the DJIA was down 700 points by the close, the USD recovered to 89.50. Overnight in Asia and this morning in Europe, both stocks and the dollar are under pressure once more, albeit the USD index at 89.25 is still for the moment holding above its previous low.

The US stock market took fright at the prospect of higher tariffs on Chinese exports which were announced at 1.30pm local time in Washington. In a Memorandum the President has directed his Administration “to take a range of actions responding to China’s acts, policies, and practices involving the unfair and harmful acquisition of U.S. technology.” According to a Reuters report, “Trump will target the Chinese imports only after a consultation period, a measure that will give industry lobbyists and legislators a chance to water down a proposed target list which runs to 1,300 products. China will also have space to respond to Trump’s actions, reducing the risk of immediate dramatic retaliation from Beijing, and Trump struck an emollient tone as he started speaking, saying “I view them as a friend.” The United States runs a $375 billion goods trade deficit with China.

As for next steps, the U.S. Trade Representative’s office will present a list of products that could be targeted, primarily from the high-tech sector. There will then be a 60-day consultation period before definitive action will be put into force. The tariffs and investment restrictions will be imposed under the U.S. Trade Representative’s “Section 301” investigation into alleged misappropriation of U.S. intellectual property by China. The Chinese Trade Ministry responded overnight with a statement saying, the higher US tariffs “seriously undermine” the global trading system. “China doesn’t hope to be in a trade war, but is not afraid of engaging in one… China hopes the United States will pull back from the brink, make prudent decisions, and avoid dragging bilateral trade relations to a dangerous place.” Against this very difficult economic and diplomatic background, the USD index opens this morning in North America around 89.25.

The Canadian Dollar yesterday came very close to achieving three consecutive days at the top of our one-day performance table but a late sell-off on Thursday afternoon prevented it from doing so. During the European morning, USD/CAD dropped to a low around 1.2835 – its lowest level in more than a week – before clawing its way back on to 1.29 late in the New York afternoon. GBP/CAD fell two-tenths whilst AUD/CAD fell six-tenths of a point to 0.9955; its lowest level in almost three weeks. Overnight in Asia, USD/CAD has traded in a fairly tight range though we’d note that GBP/CAD is now down almost 2 cents from Wednesday’s 1.8360 high.

During testimony to the Senate Finance Committee, US Trade Representative Robert Lighthizer confirmed a list of countries which will be exempt from tariffs on steel and aluminium: Canada, Mexico, EU, Brazil, Australia, Argentina and South Korea. Lighthizer told senators that Trump agreed, “based on a certain set of criteria, there are some countries with whom we're negotiating and the question becomes the obvious one that you think, as a matter of business, how does this work? So what he has decided to do is to pause the imposition of the tariffs with respect to those countries." The global impact of the steel and aluminium tariffs is now only 30% of the original announcement. The exemptions for Canada were already known so the direct impact was minimal but, to the extent that it might indicate a willingness on the part of President Trump to continue to negotiate and do deals, there was a mild sense of relief for the Canadian Dollar.

In her speech at the University of Toronto’s Rotman School of Management, Bank of Canada Senior Deputy Governor Carolyn Wilkins said that while much has been accomplished to make the financial system more resilient, the job is not done. “We have accomplished much over the past decade, and we are now reaping the benefits… They might not be durable, though, unless we focus on some unfinished business: refining our understanding of the role of monetary policy in supporting financial stability, keeping regulatory and supervisory policies current as risks evolve, and planning for recovery and resolution when things go wrong.” As for the immediate pressures on monetary policy, we may get more of a clue this morning when CPI inflation data for February is published. Consensus expectations are for annual CPI to rise from 1.7% to 2.0%. The Canadian Dollar opens in North America at USD/CAD 1.2935, AUD/CAD 0.9975 and GBP/CAD 1.8220.

The euro had another generally disappointing day on Thursday. Having gained more than a full cent after the Fed Statement and Press Conference to reach a best level around USD1.2385 early yesterday morning in Europe, it subsequently lost more than three-quarters of a cent on softer than expected economic data. After a brief dip on to a 1.22 ‘big figure’ late in the afternoon, it has nudged gradually higher in Asia and this morning in Europe. It will be interesting to see if it now catches any ‘safe-haven’ bid as the war of words between the US and China escalates.

The ECB’s Economic Bulletin published on Thursday confirmed the analysis from the latest Council Meeting. “The euro area economic expansion continues to be strong and broad-based across countries and sectors. Private consumption is supported by rising employment, which is also benefiting from past labour market reforms, and by growing household wealth. Business investment has continued to strengthen on the back of very favourable financing conditions, rising corporate profitability and solid demand, while housing investment has improved further over recent quarters. In addition, the broad-based global expansion is providing impetus to euro area exports.”

The EU Summit in Brussels today was supposed to be about Brexit but all the significant announcements came earlier in the week. The official text this morning merely states, “EU leaders adopted the guidelines on how the EU will approach the negotiations on the post-Brexit trading relationship”. The Summit, instead, is now mainly focused on the two issues of Russia and the EU’s response to US tariffs. Next week sees a bit of a lull in the Eurozone data calendar with surveys of business and economic confidence on Tuesday and the flash estimate of German CPI on Thursday, but otherwise it’s pretty quiet on the data front. The EUR opens in North America today at USD 1.2330 and EUR/CAD 1.5945.

The GBP has had a pretty volatile couple of days. Yesterday morning in Europe, the pound traded up to a near 3-week high of 1.4175 immediately before the retail sales data were published and then reached an intra-day high just under 1.42 as the results of the Bank of England MPC meeting were announced. Anyone unlucky enough to have bought GBP/USD on this spike upwards lost more than a cent in just a few hours and by the end of the day in London, GBP/USD stood at 1.4110. Overnight in Asia and this morning in London, the GBP has slipped against all the major currencies we follow closely here.

The Bank of England MPC meeting revealed a 7-2 split with two members voting for an immediate rate hike. This is exactly the same tactic employed in September last year to prepare the market for a rate hike in December. We are, however, probably reaching the limits of how many times the GBP can react to the same signal. It did so at the Press Conference for the February Quarterly Inflation Report. It did so again at the Governors House of Commons testimony and it very briefly did so again yesterday. It’s fair to say that a rate hike is now already fully discounted, as indeed is a Brexit transition agreement. The risks, if anything, are perhaps now skewed to the downside: what if CPI falls further or GDP disappoints, or a political rebellion gathers momentum?

The week ahead is unusually quiet for UK economic data, and even without the Good Friday holiday, the PMI data at the beginning of each month wouldn’t be released until the following week. The first quarter of the year was marked by two extreme bouts of cold and snow which twice brought much of the country to a literal standstill. The Bank of England has revised down its forecast for quarter-on-quarter GDP growth in Q1 to 0.3%, from 0.4% and said that it would be "difficult to quantify" the damage that the bad weather would do to Q1 GDP. Retailers will be hoping for a significant pick-up in both temperature and activity over the Easter weekend. The British Pound opens in North America at USD 1.4105, GBP/EUR 1.1440 and GBP/CAD 1.8225 .

The Aussie Dollar had a poor day on Thursday. AUD/USD fell almost a full cent before lunchtime in New York and the AUD dropped against every one of the major currencies we follow closely here. AUD/EUR was down around five-tenths of a percent whilst AUD/CAD, AUD/USD and AUD/NZD were all almost seven-tenths lower. Overnight in Asia and this morning in Europe, the Australian Dollar has stabilized somewhat as gold has jumped almost one per cent to $1342, with AUD/USD clawing its way back to a 77 cents ‘big figure’.

A fascinating article on Bloomberg notes that, “Australia finds itself between a rock and a hard place… As a close ally of the U.S. and the most China-dependent economy in the developed world, the $1.3 trillion economy has a lot to lose as the world’s two biggest trading nations lock horns.” It points out that China buys 35 percent of Australian exports, equivalent to about 8 percent of gross domestic product, and dominates iron ore shipments and education. Already, in response to the Turnbull government’s announcement of measures to try to thwart Chinese political influence, Beijing is reportedly seeking to discourage students from studying Down Under by warning about safety risks. Education is a significant export, and it’s not much of a stretch to imagine China could undertake far more disruptive measures in the event Australia sided with the U.S. in a trade war. Education exports to China were worth A$9 billion in the year through June 2017, up 260 percent in a decade. As for tourism, almost 1.4 million Chinese visited Australia in 2017 and pumped a record A$10.4 billion into the economy, up 14 percent from 2016.

As analysts dig deeper into the details of Thursday’s labor market report, they are also finding more reasons to be cautious about the near-term outlook. Commonwealth Bank note a rise in underemployment and labor force under-utilization in February cast doubt as to whether wage pressures will build sufficiently to help boost inflation and economic growth. “The employment report showed there was still plenty of labor market slack left in the economy… Australia’s underemployment rate edged up 0.1 percentage points to 8.4% in February. This will limit a significant pick up in wages growth and limit upward revisions to Australian interest rate expectations.” The Australian Dollar opens in North America this morning at USD 0.7720, with AUD/NZD at 1.0660 and AUD/CAD 0.9975.

For a currency which has recently been very volatile, the most surprising feature of the New Zealand Dollar over the past few days has been how little it has actually moved. Having risen to almost 0.7240 after the FOMC announcement, NZD/USD went on to a best level in Europe yesterday morning just under 0.7260. This was as good as it got but even as we saw a more broad-based dollar rally during the Northern Hemisphere day, NZD/USD still managed to hold on to a 72 cents ‘big figure’ with the key AUD/NZD cross falling around 70 pips.

The weekend has already started in New Zealand and although a new policy targets agreement (PTA) between the Government and Central Bank was said to be imminent, this will now come next week when the new RBNZ Governor Adrian Orr takes up his position. The central bank is presently mandated to keep inflation within a 1 percent to 3 percent target range, with a focus on the midpoint. The new government has said it wants the central bank to target maximizing employment along with price stability. It is also pushing for other changes, including shifting to a committee structure as opposed to a sole-decision maker, and a wider review of the Reserve Bank Act is currently underway. A press conference has been scheduled for 9am Monday morning where Finance Minister Grant Robertson and Mr. Orr, will reveal the new Policy Targets Agreement (PTA) they have signed, along with the outcomes of phase-1 of the RBNZ Act review.

A change of Central Bank Governor is always a chance to focus on style as well as substance. Analysts will be watching to see what changes the new man introduces to communication, both in formal Press Conferences around RBNZ policy meetings and also in speeches up and down the country. As a former Deputy Governor of the Reserve Bank where he headed up the economics division, he’ll certainly already know his way around the building. The Kiwi Dollar opens in North America at USD 0.7245 and NZD/CAD 0.9355.