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There’s never a dull week with President Trump! Global equities tumble on trade war fears, dragging USD lower. GBP and CAD the best performers on the week, AUD and NZD recover after earlier falls.

By Nick Parsons

The US Dollar ended lower after what was yet another week of high political and economic drama. Say what you will about the Trump Presidency, it’s never dull… The US Dollar’s index against a basket of major currencies opened the week around 89.80. If fell half a point on Monday, rallied back to 90.00 for the first time in three weeks on Tuesday then tumbled almost a full point to a low on Thursday morning of 89.05. A near-half point rally was then entirely reversed on Friday and it ended the week at its low of 89.00.

It’s hard to know quite where to begin with the news highlights of the week. On Monday alone, more than $100bn was wiped off the value of US technology shares with Facebook accounting for $35bn of these losses. According to the Financial Times, this was one of the top ten daily losses in value ever suffered by a technology company. The drop in Facebook shares wasn’t just in reaction to allegations about the use of personal data in the US election campaign. It followed reports from the G-20 meeting in Buenos Aries that officials are considering a digital tax’ which would also impact companies such as Google, Amazon and others. The DJIA fell 500 points on Monday. On Wednesday, the FOMC Statement accompanying its 25bp rate hike 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… Market-based measures of inflation compensation have increased in recent months but remain low.”

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 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. On Thursday, 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 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.” The DJIA closed down more than 700 points and after yet another 400 point drop on Friday, the USD index ended the week just a few pips off its low at 89.05.

After its very poor performance year-to-date in 2018, the Canadian Dollar had a very good week; almost managing the rare feat of topping our one-day table for three consecutive days from Tuesday to Thursday. USD/CAD began the week at 13090 ad only very marginally extended gains on Monday to a high of 1.3120 at the start of the European morning. From then on, however, it was downhill all the way to a low on Thursday just under 1.2850. The pair was then back on 1.29 as the US Dollar found some support more generally but closed the week back down around 1.2860 on stronger than expected Canadian inflation data. Having peaked at 1.0235 on March 14th, AUD/CAD moved back down through parity on Wednesday and fell below 0.9920 on Friday to finish at its lowest level in more than three weeks.

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 were 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. Traders rushed to cover short positions in the Canadian Dollar on Wednesday and Thursday and on Friday the currency was given a further lift by stronger than expected inflation figures. Statistics Canada reported that CPI rose 2.2% on a year-over-year basis in February, following a 1.7% increase in January and compared to consensus expectations of a 2.0% annual rate. All eight major components increased year over year in February. The Canadian Dollar ended a good week at USD/CAD1.2835, AUD/CAD0.9925 and GBP/CAD1.8160.

The EUR ended a volatile week higher against the US, Australian and New Zealand Dollars but down against the GBP and CAD. EUR/USD began the week around 1.2280 and rose on Monday as the US stock market tumbled. A much weaker than expected ZEW survey sent the euro tumbling to a low of 1.2240 on Tuesday but as the USD fell immediately after the FOMC announcement on Wednesday, EUR/USD rallied sharply, moving to a high on Thursday morning of 1.2380. By that evening it was back on a 1.22 ‘big figure’ before then rallying on Friday to end the week around 1.2360.

The ZEW research institute said in its monthly survey on Tuesday that economic sentiment among investors dropped to 5.1, its lowest reading in a year and a half, from 17.8 in the previous month. The consensus forecast in a Reuters poll was for 13.0. ZEW President Achim Wambach said “concerns over an U.S.-led global trade conflict have made the experts more cautious in their prognoses…The stronger euro is also hampering the business outlook of German exporters”, adding that the outlook for the economy as a whole remained “largely positive” despite the risks. On Wednesday, the ‘flash estimate’ of 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.

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 euro ended the week at USD1.2360, AUD/EUR0.6255 and NZD/EUR0.5880.

The British Pound had a pretty eventful week, finishing higher but off its best levels against nearly all the major currencies. It began on Monday morning in Asia around USD1.3940 and by Thursday morning touched a high just under 1.4175 before closing on Friday in New York around 1.4150. It was a similar pattern against the Antipodean currencies. GBP/AUD started on Monday at 1.8075 but by Friday morning in Asia touched 1.8340; its highest level since the EU referendum back in June 2016. GBP/NZD, meantime, rose from 1.9310 at the start of the week to a high on Wednesday of 1.9630 before giving back around 1 ¼ cents of its gains into the New York close on Friday.

The early strength in sterling came on confirmation that the UK and EU had reached agreement on the terms of a Brexit ‘transition’ period extending beyond March 29th 2019 until December 31st 2020. Britain has won concessions from the EU to allow it to negotiate and sign trade deals during the period without seeking authorisation, but it will elsewhere have to follow EU rules, with strict sanctions if the government fails to do so. At a joint press conference on Monday, Brexit Secretary David Davis and EU negotiator Michel Barnier said they had resolved all the major sticking points to allow the deal to be signed by European leaders this week. The Brexit secretary said that the agreement represented a “significant step” while the EU’s chief negotiator described it as “decisive”. The Director-General of the Confederation of British Industry, said: “Agreeing transition is a critical milestone that will provide many hundreds of businesses with the confidence to put their contingency planning on hold and keep investing in the UK.”

Figures from the Office for National Statistics on Thursday 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”. Also on Thursday was the Bank of England MPC meeting; 7-2 split with two members voting for an immediate rate hike. This is 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 Governor’s House of Commons testimony and it very briefly did so again on Thursday. It’s fair to say that a rate hike is now already fully discounted, as indeed is a Brexit transition agreement. The pound ended last week at USD1.4150, GBP/AUD1.8300 and GBP/NZD1.9460.

The Australian Dollar began last week around USD.0.7715 and though for most of the time the currency seemed to be under pressure, its entire trading range was only just over 100 pips from 0.7677 to 0.7781 and it actually closed the week very modestly higher. Its’ low point came on Wednesday morning in Europe and its high was seen on Thursday morning in Asia. Of course, AUD/USD may be telling us more about the US than the Aussie Dollar. Looking on its crosses, the AUD lost ground against the GBP, NZD and CAD and was little changed against the EUR.

The two highlights of last week were the RBA Minutes on Tuesday and the jobs report on Thursday. The RBA noted, “Wages growth had remained low. The wage price index had increased by 0.6 per cent in the December quarter and growth over the year had increased slightly to 2.1 per cent. By sector, wages growth had been rising in an increasing number of industries over the prior year. In particular, some (but not all) of the industries with a relatively high share of employees on individual agreements had seen wages growth pick up.” The reference to a pick-up in individual agreements (rather than those which are firm-wide or union-driven) was a straw for some analysts to clutch at but overall there is no sense of anything other than a very slow pick-up in pay and activity. Back to the RBA: “Forward-looking indicators suggested that spare capacity in the labour market would continue to decline gradually over 2018 and, as a consequence, wages growth was expected to rise gradually.” If there’s one word which so far defines Phil Lowe’s term as Governor, it surely has to be “gradual”.

As for the jobs report, 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 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%. The AUD ended last week at USD0.7735, with AUD/NZD at 1.0635 and GBP/AUD1.8300.

The New Zealand Dollar opened last Monday around USD0.7220. It fell to a low just under 0.7160 at lunchtime in Europe on Wednesday but recovered all its losses - and more – to a high of 0.7270 in New York on Friday. The main feature of the week, however, was the Kiwi’s performance against the Australian Dollar. The AUD/NZD cross fell to a near 8-month low around 1.0635 on Monday and after rallying a full cent on Wednesday, returned to test this level once more on Friday. Elsewhere on its crosses, GBP/NZD rose from 1.9300 on Monday to 1.9630 on Wednesday before then falling over a cent into the end of the week. Volatility in the NZD seems a permanent fixture of the FX landscape.

The main highlight of the week was the RBNZ meeting on Thursday at which it 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 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 new RBNZ Governor Adrian Orr will reveal the new Policy Targets Agreement (PTA) they have signed, along with the outcomes of phase-1 of the RBNZ Act review. The Kiwi Dollar ended the week in New York at USD0.7270 and AUD/NZD1.0635.