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It’s Good Friday, the last day of the week and first quarter. Happy Easter everyone.

By Nick Parsons

Parts of Asia and virtually the whole of Europe is away for the Good Friday holiday today, and though the US stock and bond markets are closed, foreign exchange markets are still open albeit with much-reduced liquidity and wider bid-offer spreads. Thursday was a day of consolidation for the US dollar, whose index against a basket of major currencies held in a relatively tight range from 89.50 to 89.80 and closed pretty much around the midpoint. It hasn’t moved much at all in Asia overnight, though with EUR/USD around a quarter-cent up from last night the index is down very slightly at 89.60.

Incoming economic data on personal income and expenditure were pretty close to consensus expectations; up 0.4% and 0.2% respectively whilst the core PCE deflator – the Fed’s preferred measure of inflation – was up 0.2% to take the annual rate up to 1.6%. This measure has been rising gradually over the past few months but is set to accelerate quite sharply from here as some very weak numbers in Q2 last year begin to drop out of the y/y calculation. Indeed, if we assume a run of 0.2% m/m increases, then the annual rate could hit 2.2% by June; above the Fed’s 2.0% target.

As well as the spending and inflation data, weekly jobless claims came in much lower than expected at just 215k; the lowest since 1973 and consistent with monthly payroll growth around 200k. Once all the numbers were crunched, the Atlanta Fed revised upwards its forecast of Q1 GDP from an annualized pace of 1.8% to 2.4%. It will offer another update on Monday after the ISM manufacturing survey is released. The USD index opens this morning in North America around 89.65.

The Canadian Dollar has been quite volatile all week, albeit within a fairly narrow one-cent range from USD/CAD1.2820 to 1.2930. It has had many intra-day swings and reversals without really gaining traction in either direction, though this has allowed the CAD to strengthen on many of its major crosses. On Thursday, USD/CAD moved down from a high just under 1.2930 to close around 1.2890 and it opens in North America this morning at 1.2875. GBP/CAD is now down below 1.81 and is more than 2 ½ cents down from Wednesday’s high.

Statistics Canada reported yesterday that real gross domestic product edged down 0.1% in January, offsetting part of the 0.2% growth in December. The decline was mainly the result of lower output of non-conventional oil extraction and decreased activity in real estate. The 20 industrial sectors were evenly split between increases and decreases. The output of goods-producing industries fell 0.4% in January, mainly on lower non-conventional oil extraction. There were increases in the manufacturing and construction sectors. The output of services-producing industries was essentially unchanged in January, as a decline in real estate and rental and leasing was offset by increases in the wholesale, retail, and finance and insurance sectors. This was the weakest monthly growth for services-producing industries in more than a year.

Despite the somewhat softer than expected January outturn, analysts appear in no rush yet to downgrade their GDP estimates. National Bank of Canada, for example, said, “we still expect GDP growth to come out around potential in Q1 (1.5%)… Does it mean that our scenario of 2.5% annual growth in 2018 is at risk? In light of this week’s release of both Ontario and Quebec budgets, we are sticking with our scenario of a subsequent acceleration of growth as pre-electoral gifts will provide a lot of support to the Canadian economy. This assumes, of course, a favorable outcome of NAFTA negotiations in the coming weeks. It would be disappointing to curb a manufacturing sector that is showing a good momentum after years of stagnation." The Canadian Dollar opens in North America at USD/CAD1.2875, AUD/CAD0.9905 and GBP/CAD1.8090.

The euro edged lower again on Thursday, moving down from USD1.2330 at the start of the European session to a low late in the afternoon around 1.2285; more than 2 ½ cents below its intra-day peak of 1.2475 on Tuesday morning. Against the Canadian Dollar, EUR/CAD is down around 2 cents from its best level of the week at 1.5870.

Early on Thursday morning, several of the German States reported CPI somewhat below consensus expectations and the pan-German number of 0.4% m/m fell one-tenth short of estimates. The annual rate of inflation rose from 1.4% to 1.6% but this is due more to base effects from last year than any pick-up in the current rate of growth of prices. The measure of inflation known as HICP which is a harmonized calculation across all EU Member States was 1.5% y/y. In France this morning, figures released by INSEE showed their measure of HICP jumped from 1.3% to 1.7%; well above most estimates of a 1.5% annual increase.

The next ECB meeting doesn’t come until the end of April though the head of the Dutch Central Bank, Klaas Knot, said in an interview on Thursday that the Bank was at risk of normalizing policy too slowly. Considered a hawk on the ECB’s Governing Council, Knot said in an interview with Reuters that he was comfortable with market expectations for an end to bond buys in the fourth quarter and a first interest rate hike since mid-2011 in the second quarter of next year. Considered a hawk on the ECB’s Governing Council, Knot said in an interview with Reuters that he was comfortable with market expectations for an end to bond buys in the fourth quarter and a first interest rate hike since mid-2011 in the second quarter of next year. The EUR opens in North America today at USD1.2325 and EUR/CAD1.5875.

The British Pound had another poor day on Thursday, with the GBP/USD exchange rate falling from an opening level around 1.4080 to a low in the North American afternoon of just 1.4015; its lowest level in more than a week. The GBP was the worst-performer of all the currencies we follow closely here and though it has recovered around a quarter of a cent overnight against both the US and Canadian Dollars, it is on track to be the worst performer of the week.

The second revision to the UK’s Q4 GDP numbers didn’t contain any surprises, with quarterly growth unchanged at +0.4% and the annual rate at just 1.4% after 1.8% in Q3. Even with the significant depreciation of the GBP after the EU referendum back in June 2016, net trade was still estimated to have subtracted around 0.4% from GBP; a worse performance than after all other big depreciations of sterling in the post-war period. Elsewhere in the details of the report, household spending was estimated to have increased by 0.3%, while business investment increased by 0.3%, rather than held steady as previously thought.

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, wet and miserable. 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 USD1.4050, GBP/EUR1.1395 and GBP/CAD1.8100.

The Aussie Dollar had a rare good day on Thursday. Having printed a fresh low for 2018 of 0.7643, it then rallied throughout the Northern Hemisphere day and closed in North America around 0.7680. This morning in Asia, the pair briefly clawed its way back on to a US 77 cents ‘big figure’ but it couldn’t sustain this level for more than an hour and has subsequently slipped back in to the high-76’s. Against the Canadian Dollar, the Aussie is back on a 99 cents handle having at one point overnight traded as high as 0.9920.

In an interview with Bloomberg, Australia needs to be more relaxed about Chinese cash despite the political tensions that come with it, said the head of the Foreign Investment Review Board, David Irvine. Chinese investors growing presence simply reflects China’s burgeoning power, and Australia needs such capital for its economic development, he said. “Having a largest economic partner who is not a traditional ally, that’s I think one of the big challenges of Australian foreign policy… It’s a fact of life. We will adapt to it. It’s somewhat understandable, but I think it’s a mistake to look at foreign investment in Australia only through the prism of Chinese investment and of developments in Australia-China relations… The facts are that Australia has always welcomed and indeed encouraged foreign investment into our country. We’re a capital-importing country.”

Back to markets, and 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 USD0.7695, with AUD/NZD at 1.0630 and AUD/CAD0.9915.

The New Zealand Dollar topped our one-day performance chart on Thursday for the second time this week, having on Wednesday been in bottom place. The volatility which has been a feature of the flightless bird ever since Christmas shows no sign of easing. From a low point yesterday morning around 0.7190 (which was the lowest in more than a week), NZD/USD recovered to 0.7235 and today in Asia extended these gains to just under 0.7250. Against the Canadian Dollar, NZD/CAD is up around half a cent from Thursday’s low to a best level in Europe this morning around 0.9330.

In their latest economic review, the analysts at ANZ Bank say that NZ economy is likely to grow broadly around trend for the next couple of years, with the unemployment rate set to remain low. “It is hardly a negative story. We see wage growth gradually lifting off lows, corresponding with a modest broadening in domestic inflation pressures in time. That lift should eventually see the RBNZ join other central banks in removing monetary policy stimulus. However, we feel strongly that it will be late to that party, with the first hike not until the second half of 2019… While funding market pressures both here and abroad are creating some angst, we don’t believe local pressures will escalate. We see scope for local short-end rates to fall modestly in the near term, but NZ-US 10-year spreads to push more clearly negative. We expect downward pressure on the NZD over the course of 2018, especially against G4 currencies. NZD/AUD has threatened to break higher, but we see it remaining range-bound.”

There are no top-tier economic numbers scheduled for release in New Zealand next week, but as we’ve often noted here, the Kiwi Dollar is quite volatile enough even without the distractions of incoming data! It opens in North America today at USD0.7235 and NZD/CAD0.9325.