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Just a few days to month-end, quarter-end Easter. US index lifts with softer than expected Eurozone data and GBP reversal

By Nick Parsons

The US Dollar had a bad start to the week on Monday, falling against every one of the major currencies we follow closely here. Its index against a basket of major currencies tumbled from 89.05 to 88.55; its lowest level since February 16th. The Dollar’s smallest loss (-0.2%) came against the CAD but mostly it was down between seven and nine-tenths of a percent as the stock market rallied sharply and fears of a ‘Black Monday’ for global equities proved both alarmist and misplaced. Indeed, a 670 point rally for the DJIA was its best day since August 2015 whilst for the S&P 500 index, 20 stocks rose for every one which fell. Overnight in Asia, FX markets were very quiet, but during the European morning, a sharp reversal for the GBP and softer than expected Eurozone data have helped lift the US index around three-tenths of a point to 88.90.

Federal Reserve Bank of Cleveland President Loretta Mester yesterday gave a very thorough speech on monetary policy at Princeton University. She began by noting, “This year is shaping up to be another good year for the economy, and the task before monetary policymakers is to calibrate policy to this healthy economy so that the expansion is sustained. Given the economy’s strength, we don’t want to get behind the curve, but we also don’t want to overreact to the positive outlook and potentially curtail the expansion. This takes some careful balancing, and in my view, last week’s decision on rates reflects this type of balanced approach to achieving and maintaining our policy goals”. Formerly thought of as one of the ‘doves’ on monetary policy, Ms Mester has subsequently moved towards a more centrist position.

On the very topical issue of trade policy, Ms Mester said, “for the first time in many years, economic activity around the world is picking up and forecasts for global growth are being revised up. This should have a positive feedback effect on the U.S. economy via exports. However, the tariffs on steel and aluminum imports and the recent announcement of planned tariffs on certain goods imported from China, as well as the ongoing renegotiations of the North American Free Trade Agreement (NAFTA), add uncertainty to the trade picture. This uncertainty may not be resolved quickly. Assessing the impact on the U.S. macroeconomy will ultimately depend on how other countries react, including whether they impose their own tariffs or other trade barriers in response. I am monitoring trade developments, and while I see them as a risk to the forecast, at this point they have not led me to change my outlook for the overall economy.” The USD index opens this morning in North America around 88.90.

The Canadian Dollar was unable yesterday to extend its recent very positive momentum which had twice seen it at the top of our one-day performance table and left it as the best performing currency last week. USD/CAD moved only very slightly lower to 1.2870, having been up and down in a 70 pip range from 1.2845 to 1.2915. After the US dollar, it was the second-weakest currency on the day, with GBP/CAD moving up more than a full cent at one point to 1.8370. Overnight in Asia, the CAD has recovered a large part of yesterday’s losses on the crosses, even though USD/CAD is net little changed around 1.2860.

Speculators have raised bullish bets on the Canadian dollar for the first time in six weeks, according to data from the US Commodity Futures Trading Commission. As of March 20, net long positions had increased to 24,560 contracts from 19,420 a week earlier as incoming news on US tariffs and stronger domestic economic data helped improve sentiment after the CAD’s recent slide. For the rest of this holiday-shortened week we have the monthly GDP data as well as industrial raw materials prices on Thursday.

Stepping back from the minute-by-minute twists and turns of financial markets, Canadian Trade Minister Francois-Philippe Champagne spoke in Singapore at the weekend after several days of meetings to strengthen ties with the Association of Southeast Asian Nations, whose 10 members represent Canada’s sixth-largest trading partner with annual merchandise trade worth about $17 billion. He said plans by President Trump to impose tariffs on a wide array of Chinese imports threatened the stability of the international trading order. “We have all benefited from the world trade order that was put in place after the Second World War, including the US… All of us need to take a step back and take a look at what we’ve achieved over the last few decades.” The Canadian Dollar opens in North America at USD/CAD1.2865, AUD/CAD0.9935 and GBP/CAD1.8175.

The EUR had a good day on Monday although – as with the British Pound – a focus just on its exchange rate with the US Dollar gives a misleading appearance of its overall strength. EUR/USD opened in Sydney around 1.2355 and made a series of intra-day highs as it moved to a best level in the New York afternoon around 1.2460; its highest since Friday, February 16th. Its 0.7% daily increase compared to more modest gains of 0.3% against the AUD, 0.65% against the CAD and virtually no change versus the GBP and NZD. Overnight in Asia the EUR/USD pair didn’t move as much as 10 pips either side of 1.2450 but this morning in Europe it has fallen back around half a cent from its earlier high after yet another weaker than expected piece of incoming economic data.

Figures released by the European Commission this morning showed the Economic Sentiment Indicator (ESI) decreased markedly in both the euro area (by 1.6 points to 112.6) and the EU (by 1.9 points to 112.5) This was the third consecutive drop for both measures. The deterioration of euro-area sentiment resulted from drops in industry, services and retail trade. Confidence among consumers remained unchanged, while it increased among construction managers. The ESI weakened in all the five largest euro-area economies; significantly so in Germany (-2.4), Italy (-1.8) and Spain (-1.2) and, less so, in the Netherlands (-0.5) and France (-0.4).

There’s a clear split developing on the ECB. Speaking at the Austrian Central Bank on Monday, Bundesbank President and ECB Council member Jens Weidmann said, “The markets see a first rate hike around the middle of the year 2019, which is probably not entirely unrealistic. However, the end of net purchases is only the beginning of a multi-year process of monetary normalization. That's why it's so important to actually start soon…”. This morning, however, Governing Council member Erkki Liikanen said that exiting from unprecedented stimulus can be more safely done once expectations for inflation exceed policy makers’ goal. “A gradual tightening of monetary policy will rest on a more solid basis when indications of inflation rates to potentially temporarily exceed 2 percent become more prominent in inflation expectations,” the Finnish central bank governor said. The EUR opens in North America today at USD1.2420 and EUR/CAD1.5975.

The British Pound had a decent start to the week, even if its performance against the US Dollar gives a much-exaggerated picture of its overall strength. GBP/USD opened around 1.4135 and, along with most other currencies, rose steadily and without interruption through the day. By lunchtime in New York, the pair had reached a best level around 1.4245; its highest since the day of the US non-farm payroll figures back on February 2nd. After a quiet night in Asia, however, the GBP has slumped this morning, falling by some distance to the bottom of our one-day performance table. Losses average between four and five-tenths of a point, though GBP/USD is down seven-tenths to 1.4130.

Latest figures show that mortgage approvals fell 11% m/m in February to 38,120, well below consensus expectations for around 39k. UK Finance who compile the data said more home-owners were seeking remortgaging deals ahead of expected further interest rate rises by the Bank of England later this year. “We are also seeing a continuing rise in credit card spending, reflecting the growing number of transactions carried out using cards, while other forms of borrowing such as overdrafts continue to fall.” Net credit card lending amounted to 309 million pounds last month, down slightly from a net increase of 325 million pounds in January. As for house prices, Hometrack today reports price growth in London has hit a seven-year low with prices falling in almost half of all London postcodes, while the market in cities further north is “powering ahead”. The average price of a home in London is £487,900. Edinburgh is enjoying the fastest growth at 8 per cent in the year to February to £277,300. This is followed by 7.8 per cent in Liverpool to £115,700 and 7.7 per cent in Birmingham to £155,600.

An interim report commissioned by the British government from the Migration Advisory Council said warned this morning that firms were not prepared for a tightening labour market. The review - commissioned by Home Secretary Amber Rudd - took views from more than 400 businesses, industry bodies, government departments and other organisations. UK employers see EU workers as "more reliable" and eager than their British counterparts and the MAC said businesses are concerned about their ability to recruit workers from the EU after Britain leaves the European Union. “Lower migration would very likely lead to lower growth in total employment, and lower output growth.” The British Pound opens in North America at USD1.4120, GBP/EUR1.1375 and GBP/CAD1.8160 .

The Aussie Dollar spent almost all of Monday tracking the US stock market. As stocks opened higher and built steadily on their gains throughout the Asian and European time zones, so the AUD rallied; moving from an opening level of USD0.7700 to a best level of 0.7745. This morning in Asia, AUD/USD extended its gains to a high of 0.7755 but has subsequently given back around a quarter of a cent despite a further 100 point gain for DJIA futures.

There’s so much going on simultaneously that it is very difficult from one minute to the next to determine what is the key driver of the AUD. There’s a menu of influences which includes China trade, US tariffs, precious and industrial metals’ prices, the level of global asset markets, the volatility of stock markets and, of course, interest rate differentials and incoming local economic data. At any given moment there are three or four different menu items which can be ticked off, and different weights then ascribed to each of these. Sometimes, it’s hard even to explain a movement which has just happened, let alone to be brave enough to have a firm view on what the next move might be.

The analysts over at Bank of America Merrill Lynch have ticked three of the boxes above. “The deceleration in iron ore shipment growth warrants caution against buying AUD until the data distortions dissipate. Moreover, a stronger USD, firmly neutral RBA and rising trade tensions at a global level are unlikely to present a constructive backdrop for the currency.” They say, “It is clear the downtrend in iron ore shipments began well before the Lunar New Year distortions, coinciding with the broader slowdown in fixed-asset investment. The smoothed growth rate (3m% y/y) of iron ore shipments in value terms is now at its weakest since February 2016, falling 23.7% y/y. This is partly related to high inventory at Chinese ports, but at least partly symptomatic of a weaker demand trend [which] bodes poorly for Australia's exports to China. The Australian Dollar opens in North America this morning at USD0.7720, with AUD/NZD at 1.0610 and AUD/CAD0.9935.

The New Zealand Dollar was one of three currencies which pretty much tied for top spot on our one-day performance table on Monday; the other two being the GBP and EUR. NZD/USD opened the week around 0.7240 and it was onwards and upwards throughout the Asian and European sessions, with a high just under 0.7300 late in the North American afternoon. The Kiwi’s most notable performance came on the AUD/NZD cross which moved on to a 1.05 ‘big figure’ for the first time since mid-July last year but as NZD/USD tried and failed to break on to 73 cents this morning, so it has slipped back a little on all its crosses except the GBP.

Back in early December, the NZD got a lift when it was announced that Adrian Orr would become the next Governor of the RBNZ effective March 27th. The flightless bird got a further lift when the date finally arrived and the new Policy Targets Agreement was unveiled yesterday. There wasn’t a great deal of surprise in the announcements, but the tone appeared to be one of mutual understanding and agreement between the Bank and Treasury which certainly helped create a favourable first impression. Along with a goal of maintaining price stability, the RBNZ will have a goal of "supporting maximum sustainable employment within the economy." The PTA also shifts responsibility for interest rates away from the Governor himself to a newly-formed Monetary Policy Committee. The MPC will have seven members: four internal at the bank and three external, along with a non-voting observer from the Treasury. On the inclusion of external, expert, members on the Monetary Policy Committee, Mr. Robertson said this would help ensure a "diversity of perspectives is harnessed in the decision making" whilst the presence of the Treasury official "was the subject of significant discussion during the first phase of the review."

Amidst all the understandable focus on the changes at the RBNZ, we still have the regular incoming economic data. Statistics New Zealand reported that the monthly trade balance in February 2018 was a surplus of $217 million but had a fascinating explanation for the lowest monthly value of imported cars since March 2013. “The delay in final unloading of four vehicle carriers at New Zealand ports had an impact on the total value of vehicle imports in February. The discovery of stink bugs on these vessels meant that around 8,000 cars could not enter New Zealand as scheduled. The goods on these vehicle carriers would normally have been included in February’s import statistics, but will now be included in the statistics of the month when the respective shipments are unloaded.” The Kiwi Dollar opens in North America at USD0.7275 and NZD/CAD0.9360.