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A crazy, wild week in the stock market but currencies relatively stable as investors weight up trade, tariffs and the global economic outlook

By Nick Parsons

Despite an especially wild week for US stock markets, its currency was remarkably stable this last week with its index against a basket of major currencies contained within a range of less than one percentage point for the entire period. It opened on Monday at 89.65 and hit its low for the week later that day around 89.45. From then on, and despite all the talk of tariffs and trade wars and huge volatility in equity markets, the USD rose gradually to a best level on Friday morning of 90.17; its highest since March 1st. As non-farm payrolls fell short of consensus estimates with a monthly rise of just 103k, the USD lost almost half a point to end the week around 89.75; just one-tenth higher than where it had begun on Easter Monday.

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 but rallied to be around 2% lower at the close. On Tuesday, the Trump administration imposed 25% tariffs on some 1,300 industrial, technology, transport and medical products to try to force changes in Beijing’s intellectual property practices. “This level is appropriate both in light of the estimated harm to the U.S. economy, and to obtain elimination of China’s harmful acts, policies, and practices,” the U.S. Trade Representative’s office said in a report. As the US stock market dived on Wednesday – dragging all global equity indices lower in its wake – the Presidents 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.” The DJIA rallied 800 points from its low on Wednesday!

With all the focus on tariffs and trade over the past few weeks, Thursday brought a timely reminder of why President Trump is so agitated about the subject. The US trade deficit grew by 1.6% in February from $56.7bn to $57.6bn and was the highest monthly trade deficit in ten years, going back to the GFC in 2008. Away from trade, there was plenty of other 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. On Friday, the labour market report showed just 103,000 k=jobs were created in March compared to expectations of a 195k increase. The unemployment rate held steady at 4.1% and though earnings ticked up to 2.7%, this was still below the level which prompted the stock market panic at the start of February. Nonetheless, the DJIA fell more than 500 points on Friday. The USD index ended the week around 89.75.

The US Dollar had a steady week, but the Canadian Dollar had an even better one as optimism grew on a NAFTA agreement and incoming economic data held up pretty well. USD/CAD began on Monday at 1.2900 and though it moved up to 1.2940 on Monday’s stock market rout, this proved to be the high of the week. The pair fell 1 ½ cents by the close of business on Tuesday then extended the move to a low on Friday around 1.2740; its lowest level since the end of February. GBP/CAD fell below 1.80 for the first time in three weeks whilst AUD/CAD fell below 98 cents.

A Bloomberg story on Tuesday claimed, “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.” A spokesman for Canada’s Foreign Affairs Minister, Chrystia Freeland, would not comment on reports other than to say, “Canada is committed to concluding a modern, mutually beneficial NAFTA as soon as possible.” 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.” 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.”

Away from NAFTA and back on the economy, the Canadian manufacturing PMI index rose slightly to 55.7; its 25th consecutive month above 50. Markit said, “The headline PMI reading in March was supported by a robust and accelerated rise in production volumes across the manufacturing sector… with sustained pressure on operating capacity as highlighted by another solid rise in backlogs of work. A number of survey respondents noted that sales growth had outstripped production capacity at their plants in recent months.” Friday’s employment report showed Canada's economy added 32,000 new jobs in March, but the jobless rate remained steady at 5.8 percent. The economy added more than 68,000 full-time jobs last month, but more than 35,000 part-time jobs were lost. The Canadian Dollar ended a good week at USD/CAD1.2780, AUD/CAD0.9810 and GBP/CAD1.8005.

The EUR didn’t have a great week and though to some extent it was rescued by Friday’s US labour market report, it still finished up as the weakest of the major currencies we follow closely here. EUR/USD began on Monday at 1.2325 but this proved to be within just 15 pips of its best level of the week, reached in thin holiday trading conditions. A succession of economic data disappointments pushed the Single European Currency ever-lower and it reached a low of 1.2220 on Friday morning; its weakest level in more than a month before rallying around half a cent during the New York session.

In 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.”

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.” On Friday, German industrial production fell much more than had been expected. Output fell by 1.6% in February after rising by a revised 0.1% in January, data from the Economy Ministry showed. February’s drop was the biggest since August 2015 and compared with a consensus forecast for a rise of 0.3%. A breakdown of the data showed a big slump in the production of capital goods, down 3.1% on the month, with output of consumer goods falling 1.5% and intermediate goods down 0.7%. Construction activity was also weaker overall. The euro ended the week at USD1.2280, AUD/EUR0.6250 and NZD/EUR0.5920.

The British Pound had a poor week until a powerful late rally after the US labor market report on Friday lifted the so-called ‘cable’ rate by more than a full cent. GBP/USD began the holiday-thinned week at 1.4030 and in often volatile and choppy trading as a result of soft incoming UK economic data, eventually reached a high on Thursday morning in Asia around 1.4095. A move lower on Thursday was made worse by a further wave of selling once the technical support level from the previous Friday’s low at 1.4015 was broken and GBP/USD fell to a low for the week of 1.3985. It stayed around this level until lunchtime on Friday then rallied more 100 pips on to a 1.41 ‘big figure’ after the US employment numbers were published.

There were lots of economic surveys released this last week. On Tuesday, 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. On Wednesday, the Construction PMI fell sharply from 51.4 in February to 47.0 in March, to register below the 50.0 no-change threshold for the first time in six months. Moreover, the latest reading signaled the fastest overall decline in construction output since July 2016. The detailed release noted, “The overall reduction in construction output was driven by the sharpest drop in civil engineering work for five years in March. Commercial activity also decreased during the latest survey period, with the rate of decline the most marked since September 2017.”

On Thursday, 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. Completing a poor run of UK data, figures out last week showed sales of new cars in the UK plunged in March as economic uncertainty weighed on demand and consumers turned their backs on diesel, extending the run of falling sales to 12 months. A total of 474,069 new cars were driven off the forecourts of car showrooms last month, down 15.7% compared with March 2017 and the sharpest monthly fall since April last year. Taking the first quarter as a whole, sales were down 12.4% in Q1, compared with the same period last year, with 720,000 vehicles driven off UK forecourts. The pound ended last week at USD1.4090, GBP/AUD1.8360 and GBP/NZD1.9375.

The Australian Dollar had a mixed week which felt more volatile than it actually was. Easter Monday was a holiday locally and across most of Europe but Asian markets were open, as were those in the United States. AUD/USD opened at 0.7685 and hit its low of the week just above 0.7660 around lunchtime in New York on Monday as US equity indices plunged. A stunning rally on Tuesday helped lift risk appetite and the AUD to 0.7705, whilst gains extended to a best level for the week of 0.7725 during the Asian morning on Thursday. Having fallen back to 0.7660 by Thursday’s close, the AUD ended the week around 0.7675.

To no-one’s surprise whatsoever, the RBA on Tuesday 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 that, “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.”

On Wednesday, news came that retail sales rose 0.6% during the month of February after an upwardly-revised +0.2% gain in January. Household Goods and Clothing & Footwear both rose 1.1% in the month, Cafes, Restaurants and Takeaway Food rose 0.7%, while Food Retailing and the catch-all Other Retailing rose 0.3% and 0.2% in the month. In separate data, building permits fell by 6.2% to 18,700 in February though much of the decline came in the highly volatile apartment sector where permits were down more than 16% over the month following a more than 40% surge in January. The value of all building approved in February rose 4.3%, with a surge in non-residential building (+22.6%) more than outweighing the decline in value of residential construction (-4.3%). Australia recorded another large trade surplus in February, continuing the solid run of results seen since late 2016. A surplus of $825 million was reported, topping forecasts for a smaller figure of $725 million. 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. The AUD ended last week at USD0.7675, with AUD/NZD at 1.0555 and GBP/AUD1.8360.

The New Zealand Dollar had a much wider trading range than its Australian cousin this last week, even though there wasn’t much headline-grabbing news locally. NZD/USD began the week at 0.7235 and during the dramatic sell-off in US equities on Monday, hit a low for the week just above 0.7200. From then on, it was virtually a non-stop climb all the way up to a best level on Thursday around 0.7320 which at one point pushed the AUD/NZD cross down to a 9-month low of 1.0530. An 80-pip slide in NZD/USD saw it print a low on Friday of 0.7245 before a modest rally into the close at 0.7275 and a net gain on the week a little over a quarter of a cent.

Figures out Wednesday morning showed New Zealand consumer confidence lifted slightly in March, continuing to recover from last year's weakness as house price growth expectations rose. The ANZ Roy Morgan consumer confidence index rose to 128 in March from 127.7 in February. The current conditions index rose 0.4 points to 127.7 while the future conditions index gained 0.2 points to 128.2. The latest monthly QV House Price Index released on Thursday showed 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 pick-up 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 on Thursday, 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 NZD ended the week in New York at USD0.7275 and AUD/NZD1.0555.