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It is the last trading day of the month and the quarter in many financial centers. It could be a volatile time in FX markets

By Nick Parsons

The US Dollar had a very good day on Wednesday, rising against all of the currencies we follow here. Its index against a basket of major currencies opened in Asia around 88.90 and having been little changed for the first 8 hours of the trading day, the USD began to climb in early European time and went on to reach a high of 89.75; its best level since Wednesday of last week. This morning in Europe, it has eased back a little but is still trading just below 89.70; more than a full point up from Tuesday’s low.

Incoming economic data were a mix of second-tier numbers: the second revision to Q4 GDP, pending home sales and wholesale inventories. Gross domestic product expanded at a 2.9% annual rate in the final three months of 2017, up from the previously reported 2.5% and only a slight moderation from the third quarter's 3.2% pace. This meant that overall in 2017, the US economy grew 2.3% after the 1.5% seen in 2016. Growth in consumer spending, which accounts for more than two-thirds of US economic activity, was revised up to 4.0% in the fourth quarter from the 3.8% reported last month. That was the quickest pace since the fourth quarter of 2014 and followed a 2.2% rate of growth in the July-September period. Looking forward into the first quarter of 2018, the Commerce Department reported that retail and wholesale inventories were up 0.4% and 1.1% respectively in February. While rising inventories can always be interpreted in two ways (is it due to confidence in the future or a lack of current demand?) they do count as a positive in the calculation of GDP.

Today brings the personal income and expenditure numbers as well as the Fed’s preferred measure of inflation: the PCE deflator. Once all these data are released, the Atlanta Fed will also update its GDPNow forecast of GDP for Q1. This currently stands at an annualized pace of 1.8%; well down from the 5%+ readings it was indicating back in early February. The USD index opens this morning in North America around 89.70.

We mentioned here yesterday that, “traders in the Canadian Dollar market are struggling to get traction in either direction.” Over the past 12 hours, the USD/CAD pair has consolidated on a 1.29 ‘big figure’ and the overall range has narrowed substantially after Thursday’s frequent swings and reversals. Barely 20 pips separate the high and low, but this has allowed to CAD to improve on most of its major crosses with GBP/CAD, for example, almost 1 ½ cents down from Wednesday’s high just below 1.83.

According to a Reuters report yesterday, U.S. Trade Representative Robert Lighthizer expressed optimism that talks to modify NAFTA could be wrapped up quickly but a top Canadian official was more downbeat, saying much work remained. Lighthizer told CNBC television, “I’d say I’m hopeful — I think we are making progress. I think that all three parties want to move forward, we have a short window, because of elections and things beyond our control… But if there’s a real effort made to try to close out and to compromise and do some of the things we all know we should do ... I’m optimistic that we can get something done in principle in the next little bit.” Chief Canadian negotiator Steve Verheul, asked by reporters whether a deal was close, replied: “No, we’ve got quite a bit of work do yet”. Asked whether a deal could be done in April, he replied: “That would be a bit of a challenge.”

The main economic data to be published this week come today with the monthly GDP data as well as industrial raw materials prices. For the January GDP numbers (Canada is to be congratulated for being the only country in G7 to produce official monthly GDP statistics), the consensus is a rise of just 0.1% m/m. The Canadian Dollar opens in North America at USD/CAD1.2910, AUD/CAD0.9895 and GBP/CAD1.8150.

The euro was only kept off bottom place in our table on Wednesday by the New Zealand Dollar. It fell against every other major currency we follow closely here. From a best level of USD1.2420, the EUR was sold heavily in the European afternoon and by the end of the day in New York had tumbled to 1.2300. Overnight in Asia, it recovered to USD1.2330 and EUR/CAD1.5925 but has subsequently slipped back around a quarter of a cent against both the US and Canadian Dollars.

The European Commission yesterday announced proposals to make cross-border payments in euro cheaper across the entire EU. Under current rules, there is no difference for euro area residents or businesses if they carry out euro transactions in their own country or with another euro area Member State. The new proposal aims to extend this benefit to people and businesses in non-euro countries. This will allow all consumers and businesses to fully reap the benefits of the Single Market when they send money, withdraw cash or pay abroad. All intra-EU cross-border payments in euro outside the euro area will now be priced the same – with small or zero fees - as domestic payments in the local official currency. The proposal will, therefore, require that consumers are fully informed of the cost of a currency conversion before they make such payment (e.g. with their card abroad, be it a cash withdrawal at an ATM or a card payment at a point of sale, or online).

The quarter ends today in the Eurozone with the first estimate of German CPI for March. Due to favourable base effects from a year ago, it looks as though the annual rate of inflation might jump from 1.2% to 1.6%; certainly a step in the right direction in terms of progress towards the ECB’s target for Inflation across the Eurozone as a whole but not really marking a real acceleration in recent months. The numbers are released at 2pm Frankfurt time but some individual states already reported during the course of the morning which weighed on investor sentiment. The EUR opens in North America today at USD1.2310 and EUR/CAD1.5890.

The British Pound had a decent recovery early on Wednesday morning and at 7am London time, it was up against every one of the major currencies we follow closely here. GBP/USD extended Tuesday’s rally from a low of 1.4080 to hit 1.4200 but this was then as good as it got. Given a nudge lower by some poor economic data, the so-called ‘cable’ rate fell a full cent, dragging the pound down against everything except the NZD and EUR. This morning in London, GBP/USD has been down to almost 1.4040 before finding some support at this lower level.

The UK housing market continues to soften - mainly in London and surrounding areas - and mortgage lender Nationwide said this morning that annual house price growth cooled to a seven-month low of just 2.1% in March; well below consensus estimates of a 2.6% gain. Meantime, the Band of England said the number of mortgages approved for house purchase fell to 63,910 in February from 67,110 in January, well below economists’ forecasts of a smaller drop to 66,000. Figures earlier this week from industry group UK Finance showed the number of mortgages approved by British banks during February fell by 11 percent compared with the same month last year after rising for the first time in four months in January.

The weather forecast for the holiday weekend in the UK is unlikely to give any lift to business or consumer confidence. With temperatures well below the seasonal average, any Easter Egg hunts will be especially cold and wet. Good Friday, in particular, looks especially grim. The Bank of England has already lowered its forecast for Q1 GDP as a result of the two bouts of extreme weather in February and March and it seems that Q2 will get off to a very soft start also. The British Pound opens in North America at USD1.4060, GBP/EUR1.1425 and GBP/CAD1.8150.

The Aussie Dollar had a more mixed performance on Thursday – rising against the NZD, EUR and GBP but down against the Canadian and US Dollars. AUD/USD reached a high just above 0.7700 early in the day couldn’t sustain its hold on a 77 cents ‘big figure’ for more than an hour and finished at the low of the day around 0.7760. Overnight in Asia, AUD/USD printed a fresh low for 2018 of 0.7643 before rallying more than a quarter of a cent while AUD/CAD is back on a 98 cents ‘big figure’.

In economic data overnight, job vacancies in Australia climbed to a record high of 220,900 in the three months to February, up from 211,700 in the previous quarter and up 19.3 percent year-on-year. This was the seventh straight quarter of solid gains. Vacancies in the private sector rose 4.2 percent to 201,500, again the highest on record. That was up 20.7 percent on the previous year. Separate figures from the RBA showed private sector credit rose a seasonally adjusted 0.4 percent m/m in February, faster than the 0.2 percent rise in January. Consensus expectations had been for a 0.3 percent rise for the month. On an annual basis, credit advanced 4.9 percent in February.

The next RBA Board Meeting is on the very first working day of Q2; Tuesday April 3rd. The main point of interest will be how many times the accompanying Statement uses the words ‘slow’ and ‘gradual’ to describe the pick-up in economic activity, consumer spending, wages and inflation. The February retail sales data will also be watched closely on Wednesday to see whether the continued rise in employment (notwithstanding a rise in the jobless rate) has led consumers to open their wallets. The Australian Dollar opens in North America this morning at USD0.7665, with AUD/NZD at 1.0655 and AUD/CAD0.9895.

We warn continually here that volatility is a near-permanent feature of the Kiwi Dollar and on Wednesday it was back at the bottom of our one-day performance table having topped the chart earlier in the week. NZD/USD hit a low in North America just under 0.7210 and overnight in Asia it has fallen on to a 71 cents ‘big figure’ for the first time in more than a week and is once again lower against all the major currencies. NZD/CAD at 0.9290 is the lowest since March 1st.

Earlier this morning saw the monthly business confidence numbers published by ANZ Bank. Confidence had been picking up after the sharp post-Election drop but the analysts report this month that, “Headline business confidence is treading water. A net 20% of businesses are pessimistic about the year ahead, down 1%pt versus February. A marked divergence was evident across sectors: retail and agriculture sank significantly, manufacturing and services floated higher, and construction was little changed. In level terms, services are most optimistic and agriculture the least. Activity indicators increased pretty much across the board but remain below the levels of six months ago. A net 12% of firms are expecting to lift investment, up 5 points. Employment intentions lifted from +5% to +10%, making a comeback whilst profit expectations increased from -1% to +6%, back in the black.”

As well as official economic statistics, never underestimate anecdotal evidence and what you see with your own eyes. Consultants and quantity surveyors Rider Levell Bucknall today supplied their half-yearly update for the number of construction cranes in operation. Nationally, there are 125 tower cranes in operation at the end of March 2018, up only marginally from the 123 at the end of September 2017, but down from the 132 counted at March 2017. The Auckland crane tally rose by +10 to 83 with installations in the period of 33 replacing 23 that were removed. Most cranes are in large residential projects with 48 of the 83 units installed on these. But that is two less than six months ago whilst Christchurch and Wellington lost 4 cranes each in the period. The Kiwi Dollar opens in North America at USD0.7195 and NZD/CAD0.9290.