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FOMC Member’s Speeches at the Forefront Today

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 having reached a low of 89.00, it ended only a few pips above this level. In the first trading session of the week in Asia, the USD has slipped against the EUR but is holding strong against the Yen and its index is around 10 pips lower at 88.95; its lowest level since February 20th.

Last week was the worst weekly performance by the US stock market since January 2016 with the Dow Jones Industrial Average finishing at a four-month low. As the Facebook story broke last Monday, the DJIA was down 500 points intra-day and more than $100bn was wiped off the value of technology shares. It ended the day down 330 at 24,610. Tuesday brought a 100-point gain and Wednesday a 100-point loss. On Thursday President Trump announced the US Trade Representative’s “Section 301” investigation into alleged misappropriation of US intellectual property by China and the DJIA fell 325 points, followed by a further 420 points loss on Friday. The picture is just as bad for the S&P 500 Index which fell six per cent on the week. Indeed, the S&P 500 has closed lower than the midpoint of its daily range for 10 straight days, the longest stretch since at least 1982. The index closed on Friday at 2,588.26, hovering just above its 200-day moving average and its decline since March 9th was its third dip of at least 5 percent in the past two months.

Economic data in the US is quite to start the week but will ramp up as we go. Today’s event risks come from FOMC members speeches from Dudley, Mester and Quarles keynote addresses are at 12:30 pm, 4:30 pm, and 7:10 pm respectively. Top-tier economic data begins tomorrow with Conference Board Consumer Confidence figures expectations are for 126.6 while previous was at 130.9. Wednesday we have the most important figure of the week released at 8:30 am, 4th quarter GDP and annualized, expansion is for 2.1% and 3.3% respectively. Thursday has weekly continued and initial jobless claims reported along with personal income and spending numbers, PCE core price index month over month and year over year are released, this will be topped off at 10 am with the Michigan Consumer Sentiment forecast reported which is expected to be in line with the previous of 102.

The Canadian dollar is testing a fourteen day high against the greenback to start the last week of the month, it is also a short week with markets closed in North America for Good Friday. The Loonie’s strength comes from Friday’s inflation figures expanding more than analysts had predicted. Consumer Price accelerated on an annualized basis to 2.2 percent from 1.7 a month earlier its fastest pace in three years. The main contributors to the annualized inflation figures were higher prices in vehicles, gasoline, and mortgage interest costs. Ontario’s minimum wage hike in January is also a factor the restaurant prices up 6.6 percent in Ontario and 4 percent Nationally over the year.

Economic data for Canada is very light this week with no fundamentals released until Thursdays month over month GDP figures expectations are in line with previous at 0.1 percent. Risks for the Loonie remain high with President Trump is putting pressure on the NAFTA talks saying he will impose steel and aluminum tariffs on Canada and Mexico by the end of next month if he is not satisfied with the negotiations.

USD/CAD has just broken through 1.29 and opens this morning in North America at 1.2915.

A quiet week ahead in the EU zone as we near the Easter weekend and a shortened work week. The EUR/USD is trading at close to a 3 week high and is flirting with the critical 1.2410 region, where it found resistance a few times a couple of weeks ago. Near-term upside risks strengthen above 1.2445/50. Support is 1.2360.

The currency pair has been seesawing over the past week with threats of the Trump Administration’s aluminum and steel tariffs, which it avoided. France and the Netherlands confirmed decent growth momentum in the final Q4 GDP data today. ECB/Buba’s Weirdmann urged “rule-based, multilateral trade” and said that a rate hike expectations centering on mid-2019 were not “unrealistic”.

As mentioned the week will be light on data from the EU, with some interesting data being released on Thursday, when Germany will release its’ March preliminary CPI numbers. USD/EUR is currently trading at 1.2405 and at 1.6003 vs the CAD.

The British Pound starts this Monday morning after a good week, finishing higher but off its best levels against nearly all the major currencies. It began last week around USD1.3940 and by Thursday morning touched a high just under 1.4175 before closing on Friday in New York around 1.4130. Overnight in Asia, GBP/USD has been back testing the highs against a somewhat weaker US Dollar, though early strength in stock index futures has helped underpin the traditionally risk-sensitive AUD and NZD.

After last week’s positive news from the UK and EU on a Brexit transitional agreement running until December 31st 2020, there’s still a lot of detail to be agreed, most notably on the very tricky issue of the land border between Ireland (which is in the EU) and Northern Ireland which will not be. Talks will begin in Brussels today which are aimed at reaching a deal on what will happen here. The Brexit Secretary David Davis has said the UK will agree to a 'backstop' text for the Irish border, but not the one proposed by the EU. In February, it was proposed Northern Ireland stay in the customs union or single market if there was no other way to maintain a soft border but Mr Davis said on TV on Sunday that it was "overwhelmingly likely" that the border issue would be solved in the context of a trade and customs agreement. He said trusted trader schemes and technological options would be able to maintain an invisible border. "There are ways of dealing with this. You can't just say 'we haven't done it anywhere else' - we haven't attempted to do it anywhere else."

By Friday of this week, there will be less than one year to Brexit on March 29th 2019 but it will still be the dominant theme for UK politics, economics and financial markets. The Bank of England has done its best to maintain a sense of normality; assuming a smooth transition and preparing the ground for the second interest rate rise of the current cycle. Indeed, the 7-2 split at last week’s MPC meeting with two members voting for an immediate rate hike was the exact same tactic employed in September last year to prepare the market for a rate hike in December. 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. GBP/USD is continuing its strength in North America this morning and cracking through 1.42.

The Aussie didn’t just end lower against the USD last week. It was the worst performer of all the major currencies we follow closely here after a dive in the last hour of trading in New York. AUD/USD began the week around USD.0.7715, hit a low around lunchtime on Wednesday in Europe of 0.7677 but then rallied sharply immediately after the FOMC announcement as the USD was sold heavily. From a high of 0.7780 on Thursday morning, however, a near-1,000 point drop in the DJIA over the next two days saw the Aussie fall almost a cent to end the week around 0.7705. After the first trading session of this new week, a rally in stock-index futures and continued support for the gold price have helped lift the AUD a little and it has clawed its way back on to a US 77 cents ‘big figure’.

There has been plenty of news out of Australia over the past 24 hours, even if none of it has been directly related to the currency. The first Formula 1 Grand Prix of the new season in Melbourne, the first ever non-stop Qantas flight between Australia and the UK and the scandal around the Australian cricket team are much more interesting than whether the AUD goes up or down a cent; especially in a week when there’s little or no fresh incoming economic data. The weekly consumer confidence numbers are due on Tuesday, whilst private sector credit and job vacancies are released on Thursday ahead of Easter four day weekend.

The one word which has come to define RBA Governor Phil Lowe’s view on the Australian economy is ‘gradual’. If we had to choose two words, they’d be ‘slow and gradual’; a phrase which runs through his speeches and the RBA’s commentaries on the economy. Assistant Governor Christopher Kent, the RBA’s Head of Economics, is due to make a speech on Tuesday and it would be a great surprise if there was much change in this description of the economic or monetary policy outlooks. The currency, instead, will more likely be driven by global risk appetite, volatility in asset markets and the extent to which safe-havens such as gold can find any support. The Australian Dollar opens this morning in North America in the low-USD 77’s with AUD/CAD at 0.9960 after having given up parity mid-last week.

The new mandate has been signed off by the government and incoming central bank chief Adrian Orr where a new Policy Targets Agreement will have to consider a “maximum sustainable” level of employment when setting interest rates. Beyond full employment, the RBNZ target is to keep inflation within the 1-3% range and at 2% over the medium term. The RBNZ does not expect to increase interest rates until 2019 whereas the FOMC is looking at 2 more hikes this year. This could put some downside pressure on the NZD/USD long term.

NZD gained more than 0.5% to over a week high and tested the 0.7285-0.7290 on the back of positive trade balance coming in to show a surplus due to lower imports. Monthly trade balance was a surplus of 217M (4.9% of exports)

NZD/USD opens in the North American session trading at 0.7278 and 0.9395 against the CAD