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US trade figures will come under intense scrutiny today. USD opens towards top of recent range, GBP and EUR down slightly

By Nick Parsons

The US stock market is making Bitcoin look stable by comparison! After a 600-point plunge on Monday, the Dow Jones Industrial Average rose 400 points on Tuesday. Yesterday morning, it fell 600 points once again but then rallied almost 800 points off its earlier lows to end the day up more than 200 points. Throughout this period of extreme volatility, the US Dollar index against a basket of major currencies has remained remarkably steady; moving only within a half-point range from 89.40 to 89.90 and last night closed almost exactly at the mid-point of this band.

As the US stock market dived yesterday – dragging all global equity indices lower in its wake – the President’s new economic advisor, Larry Kudlow, duly popped up on 24-hour financial TV. Speaking on CNBC he said, "Don't overreact, we'll see how this works out... At the end of this whole process, the end of the rainbow, there's a pot of gold." Asked on Fox News if there is a trade war, he replied, “Absolutely not. Absolutely not. And let me just say right at the top, number one, blame China, not President Trump.” Continuing the media blitz, US Trade Secretary Wilbur Ross then told CNBC that threats from the United States to impose tariffs on goods worth $50 billion could pave the way for talks between Washington and Beijing, but it was unclear whether discussions could take place before the proposed extra duties were introduced. “President Trump is a “lifelong dealmaker… the dispute with China is not the first controversy he’s gone into. It wouldn’t be surprising at all if the net outcome of all this is some sort of a negotiation… It’s very difficult to put a specific time denomination on negotiations that are as complex as these.”

Away from trade, there was plenty of incoming US economic data too. The ADP Survey of private sector payrolls showed an increase of 241k on the month whilst factory orders rose 1.2%. The ISM non-manufacturing index printed at 58.8, which was 0.7 percentage point lower than the February reading of 59.5. Today’s February trade balance numbers will be more important than ever given the new focus on tariffs. The consensus expectation is for a deficit of -$55.7bn after -$56.6bn in January. The USD index opens this morning in North America around 89.70.

The Canadian Dollar had a very choppy but ultimately pretty good day on Wednesday. During the Asian session, USD/CAD moved down to 1.2775; its lowest level since February 28th, whilst GBP/CAD was below 1.80 for the first time in three weeks. As the China news on tariffs was announced, USD/CAD rallied more than half a cent to a high just above 1.2840 but then retraced all of these gains and more to finish around 1.2770. Overnight, USD/CAD reached a low just above 1.2750 but might now need some more positive news on NAFTA or the Canadian economy if it is to extend this move.

Speaking to reporters outside the White House, Larry Kudlow suggested Trump’s proposed steel and aluminum tariffs could be little more than a move to get China to the negotiating table over its trade practices. And he hinted a U.S.-Canada-Mexico trade deal could be near. “Everybody wants to solve this the best way they can… We don’t want to hurt businesses. We don’t want to hurt districts. We don’t want to hurt congressmen. And I think, at the end … of my mythical rainbow, they’re all going to come out ahead.” Calling Trump a “free-trader,” Kudlow said the President “wants to solve this with the least amount of pain… Here’s a key point: Both sides benefit by positive solutions that lower barriers and open markets. This is a growth action. … Sometimes the path to this kind of growth is a little rocky. That’s the way the world works.” On ongoing talks to negotiate the North American Free Trade Agreement, Kudlow said the three countries are “moving in the direction of a NAFTA deal… I think we’re going to see some very positive news on NAFTA, and maintaining NAFTA, and reforming NAFTA. And, heck, the stock market is going to love that.”

The next focus on data will be the Canadian employment report on Friday morning, published at the same time as the US jobs report. The Canadian Dollar opens in North America at USD/CAD1.2775, AUD/CAD0.9815 and GBP/CAD1.7955.

The Single European Currency had a mixed day on Wednesday, up against the USD, CAD and GBP, little changed against the AUD but down against the NZD. In early European trade as stock markets tanked, EUR/USD fell to test Tuesday’s low just below 1.2260 but then rallied as stocks recovered, even though it was ultimately unable to hold on to a 1.23 ‘big figure’. Overnight in Asia and this morning in Europe, the pair marginally broke below Tuesday’s low before rebounding a quarter of a cent to 1.2280.

In this morning’s economic data, March saw eurozone economic activity expand at the weakest pace since the start of 2017, as rates of increase moderated in both the manufacturing and service sectors. The final Markit PMI Composite Index posted 55.2 in March, down from 57.1 in February and below the earlier flash estimate of 55.3. The headline index has nonetheless signaled expansion in each of the past 57 months. Manufacturing production rose to the lowest extent since November 2016, whereas service sector business activity increased at the weakest pace since August last year. Markit noted that “National PMI data indicated that the upturn remained broad-based in nature, with output expanding in all of the countries covered. However, signs of a growth slowdown were also widespread, with the ‘big-four’ nations and Ireland all seeing moderations during the latest survey month. March saw the level of incoming new business rise at the weakest pace for 14 months, with slower increases signaled in Germany, France, Italy and Ireland. The pace of expansion held steady in Spain. Growth in new orders remained sufficient to test capacity, however, as indicated by a further solid increase in backlogs of work.”

As for signs of progress towards the ECB’s inflation target, the survey noted, “Price pressures moderated in March, with rates of increase in output charges and input costs both slowing. That said, almost all of the nations reported higher input and output prices during the month, the sole exception being a slight decrease in output charges at Italian service providers… Output charge inflation eased to a three-month low, while costs increased at the slowest pace since last September.” The EUR opens in North America today at USD1.2280 and EUR/CAD1.5685.

The British Pound had a very mixed and choppy day on Wednesday, finishing in the middle of the FX pack. GBP/USD reached a high just under 1.41 in Asia but then a combination of yet more poor UK economic data and a plunging US stock market sent the pair down to 1.4020 before a 60-pip rally as equity markets recovered all – and more - of their earlier losses. The GBP finished the day net higher against the USD and CAD, little changed against the EUR and AUD but more than a cent lower against a buoyant NZD. Overnight in Asia, GBP/USD initially tested Wednesday’s high but has subsequently slipped back to 1.4070.

The IHS Markit/CIPS UK Services PMI dropped from 54.5 in February to 51.7 in March, to signal the weakest service sector performance since July 2016. Survey respondents noted that snow disruption and unusually bad weather conditions in March had been a key factor holding back business activity growth but there were also reports that heightened economic uncertainty continued to act as a brake on growth during the latest survey period. Markit said that “Mirroring the trend for business activity, latest data revealed a slower upturn in new work received by service sector companies. The latest rise in new business volumes was the weakest seen for 20 months. In addition to bad weather, survey respondents often cited subdued consumer demand, while there were also some reports that Brexit-related uncertainty had led to delayed decision-making and risk aversion among clients.”

Commenting on what today’s survey might mean for the Bank of England, CIPS said, “A strong rebound is nevertheless likely to be needed to ensure the majority of policymakers feel the economy is ready for another hike in interest rates. Encouragingly, in January 2010 and December 2010, the PMI fell sharply due to heavy snow but in both cases, the decline was more than reversed in the following month. Some caution is warranted this year, however, as a drop in business expectations about the year ahead during March suggests the underlying trend remains one of weaker economic growth compared to that seen late last year.” The British Pound opens in North America this morning at USD1.4065, GBP/EUR1.1450 and GBP/CAD1.7970.

Wednesday saw very different price action across the three major time ones for the Australian Dollar. In the Asia session, AUD/USD was supported by some slightly better than expected economic numbers, rising from 0.7680 all the way up to 0.7715. As stock markets plunged in the European morning, AUD/USD lost almost exactly half a cent to 0.7665 before the stunning rally in equities lifted AUD/USD back up to close at its highs around 0.7715. Overnight, the Aussie extended gains to a one-week high of 0.7725 before then losing almost half a cent to the high-0.76’s.

Economic data released earlier this morning showed Australia recorded another large trade surplus in February, continuing the solid run of results seen since late 2016. According to the Australian Bureau of Statistics a surplus of $825 million was reported in seasonally adjusted terms, topping forecasts for a smaller figure of $725 million. January’s trade surplus, originally reported at $1.055 billion, was revised down to show a surplus of $952 million. Over the month, exports rose very slightly to $34.23 billion whilst imports were $33.4bn. If the performance over the last two months continues into March, then external trade could make a positive contribution to Q1 GDP, having subtracted around 0.5% in Q4 2017.

In separate data, the Australian Performance of Services Index rose by 2.9 points to 56.9 in March. This was the highest monthly result in the PSI since December 2016 and marks thirteen months of positive results. All five of the activity sub-indexes expanded. Deliveries were robust over the month rising to 61.3 points, as were new orders at 59.0. Stocks (55.0) lifted over the month while Sales (55.0) also edged higher. Employment continued to grow rising one point to 54.9 in March, marking ten months of growing employment. The Australian Dollar opens in North America this morning at USD0.7685, with AUD/NZD at 1.0550 and AUD/CAD0.9820.

Normal service was resumed in the New Zealand Dollar on Wednesday. It seems that almost every day this most volatile of the major currencies is either top or bottom of our one-day performance table. Yesterday it was in top spot, falling less than the Aussie Dollar in the equity-driven sell-off and almost keeping up with it during the astonishing subsequent rally. NZD/USD rallied from 0.7260 to 0.7310 which at one point pushed the AUD/NZD cross down to a 9-month low of 1.0530. Having reached a best level in Asia around 0.7320, NZD/USD opens this morning around 0.7280.

The latest monthly QV House Price Index released this morning shows nationwide residential property values for March increased 7.3% over the past year which is the fastest rate since June 2017. Values rose 1.2% over the past three months. The nationwide average value is now $677,618. QV said that, “Residential property value growth remains subdued compared to recent years but March has seen the usual seasonal pickup in sales volumes and activity. With restrictions on finance being eased by the retail banks, it’s been a little easier for some investors and home buyers to gain finance to purchase. First home buyers appear to be capitalizing on subdued investor activity and some are finding they can purchase more easily without the same level of competition from multiple property owners if they are not already priced out of the market.”

In separate figures also released today, ANZ’s index of job advertisements increased 0.9% m/m in March, after falling 1.2% in February. The annual growth rate increased to 6.1%, but remains well below the strong rates seen during 2016. The ANZ analysts said, “We are not surprised to see job ads growing at a modest pace. It reflects the maturity of the economic cycle, with the labor market tight and skilled labor difficult to come by. The current pace of growth is consistent with our forecast for moderating employment growth.” The New Zealand Dollar opens in North America today at USD0.7280 and NZD/CAD0.9305.