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US stock markets steady after Monday’s plunge. AUD and NZD rally but GBP and EUR slip after PMI surveys

By Nick Parsons

The last week was a positive one for the US Dollar which just beat its Canadian cousin into top spot overall, rising against all the major currencies we follow here and reaching a near-10 day high on Thursday just above 89.75. Parts of Asia and virtually the whole of Europe is away for the Easter Monday holiday today, though the US stock and bond markets are open and foreign exchange markets have been trading for more than 12 hours. A higher GBP and slightly stronger EUR are weighing on the USD this morning and its index against a basket of currencies is around a quarter of a point down from Friday’s close at 89.45.

Both the Dow Jones Industrial Average and the S&P 500 index ended lower in Q1, with their first quarterly losses since Q3 2015. As we began the second quarter on Easter Monday, both markets broke below their 200-day moving averages which had offered support during the early-February sell-off. The indices were almost 3% lower at one point yesterday but rallied to be around 2% lower at the close. The big level to watch now is 2550 on the S&P 500. This marked the low on Tuesday, February 6th and was broken on an intra-day basis yesterday. As long as this level holds, the ‘dip-buyers’ will take some comfort from the price action, albeit with heightened nervousness. As we go to print, futures markets are signaling a very modest gain of around 5 points for the S&P 500; around 35-40 points above the key technical support level.

Once all last week’s incoming economic numbers were crunched, the Atlanta Fed revised upwards its forecast of Q1 GDP from an annualized pace of 1.8% to 2.4%. Yesterday we had both versions of the March manufacturing surveys (PMI and ISM) as well as the February construction spending numbers and the Atlanta Fed will update its model estimate later this afternoon. We mention this because it has over the last few years been one of the most accurate forecasters of the official GDP number and the model has the advantage of being updated in real-time as new information is received. There are no other economic data scheduled for release today and the USD index opens this morning in North America around 89.55.

The Canadian Dollar had a pretty good week before Easter, only kept off top spot by the strength of the US Dollar. Yesterday, as the USD strengthened during the sharp equity market sell-off, USD/CAD moved back up to 1.2940 but it then fell a quarter of a cent into the New York close and this morning in Europe is down another 40 pips to 1.2870. The Canadian Dollar is steady against the well-bid antipodean currencies and is up against both the EUR and GBP.

A report on the Bloomberg news service this morning claims, “The Trump administration is pushing for a preliminary NAFTA deal to announce at a summit in Peru next week, and will host cabinet ministers in Washington to try to achieve a breakthrough, according to three people familiar with the talks. The White House wants leaders from Canada and Mexico to join in unveiling the broad outlines of an updated pact at the Summit of the Americas that begins April 13, while technical talks to hammer out the finer details and legal text could continue, according to the people. They asked not to be identified because the talks are private.” Mexican Economy Minister Ildefonso Guajardo will travel to Washington for meetings with U.S. Trade Representative Robert Lighthizer on Wednesday while Canadian Foreign Minister Chrystia Freeland will arrive Thursday for her own meetings with Lighthizer, and meetings on Friday may include all three countries, the people said.

Away from NAFTA and back on the economy, the week ahead brings the Canadian employment report on Friday, published at the same time as the US jobs report. The Canadian Dollar opens in North America at USD/CAD1.2870, AUD/CAD0.9895 and GBP/CAD1.8105.

In holiday-thinned conditions on Easter Monday, EUR/USD initially traded sideways before then tumbling to re-test Thursday’s low around 1.2285 as the US stock market fell sharply. Overnight in Asia and this morning in Europe, it recovered most of yesterday’s losses but couldn’t quite regain the high just above 1.2340 and has subsequently slipped back to the mid-point of its range over the past 24 hours.

In economic data, The final Eurozone Manufacturing PMI posted 56.6 in March, unchanged from the earlier flash estimate and down further from December’s series-record high. Markit noted, “The further easing in the headline PMI mainly reflected slower growth of manufacturing production and incoming new business, both of which rose to the lowest extents since November 2016. Growth in new export business (which is not a component of the headline PMI) slipped to a 15-month low.” Rates of expansion eased across all of the nations covered by the latest PMI surveys and across the consumer, intermediate and investment goods industries. The Netherlands, Germany and Austria were the strongest performers overall. All of the other nations covered by the survey also saw solid rates of growth in March. The weakest increases were signaled in France and Ireland.

As for any clues on prices and inflation from today’s PMI report, Recent lengthening in suppliers’ delivery times has been among the greatest in the survey history, leading to widespread reports of raw material shortages and supply delays. This trend was especially noticeable in the Netherlands and Germany, both of which saw record lengthening in vendor lead times. Average selling prices also continued to rise at a solid clip, albeit the slowest in the year so far, as companies passed on the rise in purchasing costs. There were also reports that the ongoing upturn in demand was leading to improved pricing power. The EUR opens in North America today at USD1.2305 and EUR/CAD1.5835.

After its poor week pre-Easter, the pound yesterday recovered all of Friday’s losses on its crosses, and though GBP/USD fell a quarter of a cent from its intra-day high above 1.4070, the GBP still managed – just – to finish at the top of our one-day leaderboard. Earlier this morning, the so-called ‘cable rate’ hit a high just above 1.4080 but couldn’t sustain its early strength and has slipped back around a quarter of a cent. GBP/CAD, meantime, is down almost a full cent from Monday’s best level just under 1.8180.

In economic news, the UK manufacturing sector maintained a steady pace of expansion during March. The IHS Markit/CIPS PMI (to give the index its’ full name) posted 55.1 in March, little-changed from 55.0 in February. The average reading over the opening quarter as a whole (55.1) was the weakest in a year, suggesting that the underlying pace of expansion has been generally slower since the start 2018. IHS Markit, which compiles the report said, “The latest PMI survey provided further evidence that UK manufacturing has entered a softer growth phase so far this year. Although the pace of output expansion ticked higher in March, which is especially encouraging given the heavy snowfall during the month, this was offset by slower increases in new orders and employment. Average rates of increase over the opening quarter as a whole are also down noticeably from the growth spurt seen at the end of 2017. Compared to official data, the performance through quarter one is consistent with only a 0.4-0.5% gain in production volumes, a considerable slide from the fourth quarter’s 1.3% increase.”

On Wednesday we’ll get to see the construction sector PMI survey and on Thursday we have the service sector report. The British Pound opens in North America this morning at USD1.4055, GBP/EUR1.1425 and GBP/CAD1.8090.

The Australian Dollar had a pretty quiet start to a holiday-thinned week but a brutal day for US equity markets - with the DJIA and S&P 500 indices both down 2¾ percent and a 2-point jump in the VIX index - saw AUD/USD down around a quarter of a cent to USD0.7655. Overnight in Asia and this morning in Europe, the Aussie has recovered quite smartly and at one point briefly regained a US 77 cents ‘big figure’ before then slipping around a quarter of a cent from its high to 0.7685.

This being the first Tuesday of the month, the Reserve Bank of Australia this morning held a Board meeting to discuss monetary policy. To no-one’s surprise whatsoever, it left official rates unchanged at 1.5%. It was the 18th consecutive board meeting where the RBA has kept rates on hold and equals the previous longest stint without rates changing since the RBA became independent from Federal Treasury, set between January 1995 and July 1996. Indeed, the Cash Rate has been steady for the entirety of governor Philip Lowe’s term in office, having been cut from 1.75 to 1.5 percent in September 2016 at the final meeting chaired by his predecessor, Glenn Stevens. The key passage for markets in the RBA Statement was, “Notwithstanding the improving labor market, wages growth remains low. This is likely to continue for a while yet, although the stronger economy should see some lift in wages growth over time. Consistent with this, the rate of wages growth appears to have troughed and there are reports that some employers are finding it more difficult to hire workers with the necessary skills.”

Just as last month we saw some analysts clutching at straws in the RBA Statement, so too this throwaway anecdotal line about hiring difficulties might offer some encouragement to those still looking for a rate hike this year. The rest of the Statement, however, did little to encourage such hopes and it finished by noting that, “Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual.” The February retail sales data released tomorrow will now be watched closely to see whether the continued rise in employment has led to any increase in consumer spending. The Australian Dollar opens in North America this morning at USD0.7685, with AUD/NZD at 1.0600 and AUD/CAD0.9895.

On Easter Monday, the Kiwi Dollar was unusually steady in the European session but then fell a quarter of a cent to close at 0.7210 amidst the sharp drop in US equity markets. Overnight in Asia, NZD/USD briefly dipped below 72 cents before snapping back sharply to a best level of 0.7260; its highest since last Wednesday. This has pushed the NZD up against all the major currencies we follow closely here and at the start of trading in North America, it is top of our one day chart.

There are no official economic statistics today, but New Zealand’s Fonterra Co-operative Group said this morning their milk production in its home market fell 2% in February due to “difficult weather conditions.” February’s production figures could impact New Zealand’s fortnightly milk auction, due on April 4th. In the last auction on March 21st, prices dropped for the third consecutive time, as production continued its slow pick up from weaker levels earlier in the season. Last month, the firm reported a 5% fall in January’s milk production on account of dry weather. Indeed, the weather in New Zealand at the moment seems as volatile as the currency itself!

There are no official economic numbers scheduled for release in New Zealand this week, though on Wednesday we have the ANZ consumer confidence index and on Thursday it’s the QV house price data and ANZ job advertisements. The New Zealand opens in North America today at USD0.7245 and NZD/CAD0.9335.