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Markets awaiting next news on trade and tariffs. USD steady amidst more soft Eurozone data

By Nick Parsons

Although last week was an especially wild one for US stock markets, its currency was remarkably stable with the US Dollar’s 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. Overnight in Asia and this morning in Europe, it has again been very steady at this level.

Last week brought a timely reminder of why President Trump is so agitated about trade. The US 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 103k 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.

Following the regular monthly rhythm of PMI numbers at the very start of the month, then the employment report (usually) on the first Friday, next up it’s the inflation figures; an especially market-sensitive subject at present. After PPI figures on Tuesday, Wednesday brings the CPI data. Consensus expectations are for the headline rate to edge up from 2.2% to 2.3% with the core, ex-food & energy, measure seen rising from 1.8% to 2.1%. The Federal Reserve Bank doesn’t have a CPI target – instead it focuses on PCE – but numbers above 2% for both the headline and core will cement expectations of further monetary policy tightening whatever the wild day-to-day fluctuations of the US stock market. The USD index opens this morning in North America around 89.75.

The Canadian Dollar had a very good week 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 the initial 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 before ending the week at 1.2770. GBP/CAD fell below 1.80 for the first time in three weeks whilst AUD/CAD fell below 98 cents. Overnight in Asia and this morning in Europe, trading in the Canadian Dollar has been pretty subdued though where changed, it is generally a little weaker than Friday’s closing levels.

According to CBC News, China's ambassador to Canada says he hopes Canada will side with his country as "strong defenders of free trade" in the escalating trade battle between his country and the United States. "China hopes that Canada will hold the justice, stand at the right side of history and work with China to safeguard the multilateral trading system," said Ambassador Lu Shaye on TV over the weekend. "I think Canada [taking] a neutral position is a help to China… We know the U.S. is the unique, only neighbor of Canada, and Canada has many problems with the U.S. We have noted that the position of the Canadian government is objective ... It's very good. Naturally, we hope Canada can do more. But we respect the Canadian position. Confronted with the current wave of protectionism set off by the United States, Canada and China should further work together to promote the FTA process between our two sides, and resist trade protectionism with concrete actions. China is willing to initiate the process with Canada at any time."

Away from NAFTA, 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. For the week ahead, the data focus is mostly on the housing market. Tuesday brings building permits, Thursday is new home prices and Friday is nationwide home sales. Before then, the BoC today releases its quarterly Senior Loan Officer Survey which, as it describes itself, “gathers the perspectives of respondents on price and non-price terms of business lending and on topical issues of interest to the Bank of Canada”. The Canadian Dollar opens in North America at USD/CAD1.2795, AUD/CAD0.9815 and GBP/CAD1.8045.

Although EUR/USD was to some extent rescued by Friday’s US labor market report, the euro still finished up as the weakest of the major currencies we follow closely here. A succession of economic data disappointments pushed the Single European Currency ever-lower and it reached a nadir of 1.2220 on Friday morning; its weakest level in more than a month before rallying around half a cent into the New York close. Overnight in Asia and this morning in Europe, EUR/USD has been stuck in a narrow 20 pip range from 1.2265-85.

In economic data this morning, the headline Sentix investor sentiment index fell to 19.6 in April from 24.0 in March, below the consensus, 20.8. The Press Release noted, “The good weather period for the economy in the euro area is coming to an end. The overall index fell by 4.4 points to 19.6 index points. The third decline in a row is due to a significant deterioration in economic expectations, which fell by 5.8 points and are negative again for the first time since July 2016. The first mover among the leading indicators thus again points out an economic slowdown at a very early stage. Even though the current situation is still rated as excellent at +43 points, the prospects for the future have become massively gloomier… The customs disputes, fueled by U.S. President Donald Trump, are leaving their traces.”

The next ECB Council Meeting is on April 26th but this won’t be one of the four occasions each year at which updated economic projections are published. Though the main focus at the beginning of the year was how the ECB would signal and/or accelerate the ending of its QE programme, the softness of recent economic data makes this a much less urgent consideration. In any case, President Draghi already dealt with this quite skillfully at the last meeting by signaling that QE would not be increased in size. In a week which is quite light for new incoming data, there are plenty of ECB speakers to listen out for, starting today in Brussels with Vitor Constancio then in Frankfurt with Peter Praet. The EUR opens in North America today at USD1.2275 and EUR/CAD1.5715.

A summary of the British Pound last week would have looked very different at lunchtime in London on Friday than it did by close of business in New York. The GBP had a pretty poor week until a powerful late rally after a softer than expected US labor market report lifted the so-called ‘cable’ rate by more than a full cent. Overnight in Asia and this morning in Europe, the pound has extended its gains against all currencies other than the New Zealand Dollar, with GBP/USD reaching a high of 1.4115 before settling back to exactly 1.4100.

Figures out this morning show house prices strengthened in March to post their biggest monthly gain since August, according to Halifax, the UK’s biggest mortgage lender. The average price of a UK home rose 1.5% in March to hit £227,871, the highest recorded price. Prices in the three months to March were 2.7% higher than a year earlier, up from the 1.8% annual growth recorded in February. However, Halifax warned that monthly changes could be volatile. Prices fell 0.1% between January and March compared with the previous three months, the second consecutive quarterly decline.

There isn’t a meeting of the Bank of England’s Monetary Policy Committee until May 10th. Commenting last week on what the PMI surveys might mean for the Bank of England, CIPS said, “A strong rebound is likely to be needed to ensure the majority of policymakers feel the economy is ready for another hike in interest rates.” For the moment, however, there’s no sign that the MPC is being deflected from what looks like a pre-ordained decision to raise rates another 25bp. We won’t see that latest monthly inflation numbers until April 18th and this week’s scheduled data are on industrial production and overseas trade and so unlikely to shift market expectations very much at all. The British Pound opens in North America this morning at USD1.4100, GBP/EUR1.1485 and GBP/CAD1.8060.

The Australian Dollar had a mixed week which felt more volatile than it actually was. AUD/USD opened at 0.7685 ended the week around 0.7675; almost exactly where it had begun with a total high-low trading range of less than one cent. Overnight in Asia and this morning in Europe, AUD/USD initially rallied to be just under 77 US cents but two waves of selling subsequently sent the pair down through last week’s 0.7660 low and have dragged the Aussie lower on all its major crosses.

On the political front, Reuters reports that, “Australian Prime Minister Malcolm Turnbull’s coalition government on Monday lost a 30th straight major opinion poll, a symbolic defeat that intensifies pressure on him after he used the same milestone to oust his predecessor. Although Australia is a year away from a general election, the widely watched Newspoll, published in The Australian newspaper leaves Turnbull facing questions about his future. Three Australian prime ministers have been ousted by their own parties since 2010, dumped by colleagues after their popularity began to wane.” In economic data, this second week of April brings the NAB business survey on Tuesday and the Westpac consumer survey on Wednesday morning. During the afternoon on Wednesday, RBA Governor Phil ‘slow and gradual’ Lowe is speaking in Perth on “Regional variation in a National Economy” so the second part of this week will probably see quite a few bank research notes on differences between the States in this geographically-vast country.

Looking at the current state of play amongst the major banks’ interest rate forecasts, the two most aggressive forecasts for 2018 have already been scaled back. At the beginning of the year, both NAB and ANZ had two rate hikes penciled in for H2. Back in early February, ANZ dropped one of these hikes from its forecast profile whilst NAB did the same at the end of that month. Both Westpac and CBA see the RBA on hold throughout 2018, whist Westpac don’t have the first interest rate hike coming until 2020. This week’s scheduled economic data are unlikely to prompt any revisions to the forecasts. The Australian Dollar opens in North America this morning at USD0.7660, with AUD/NZD at 1.0510 and AUD/CAD0.9805.

The New Zealand Dollar had a much wider trading range than its Australian cousin last week, even though there wasn’t much headline-grabbing news locally. From Monday’s low just above 0.7200, 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. Given the continued volatility in the NZD, it should come as no great surprise to see it topping our one-day chart so far today, even though there has been no fresh news. NZD/USD is just under US 73 cents, whilst AUD/NZD has printed a fresh cycle low of 1.0505.

The main attention in New Zealand this week will be on the REINZ Quarterly Survey of Business Opinion, usually abbreviated to the QSBO. Begun in 1961, it is New Zealand's longest running and most comprehensive business survey which covers manufacturers, builders, architects, wholesalers and retailers, and service sector firms. Information from these industries provides useful indicators of future investment patterns, and the likely direction and composition of economic growth in coming quarters. The last QSBO back in January had showed a sharp drop in business confidence following the General Election, with a net 11 percent of businesses expecting economic conditions to deteriorate over the first half of 2018 and Tuesday’s update will be watched closely for signs of improvement amongst NZ businesses.

The next RBNZ monetary policy decision doesn’t come until May 10th. At its last meeting on March 22nd, the RBNZ kept the Official Cash Rate unchanged at 1.75%. It noted that, “GDP was weaker than expected in the fourth quarter, mainly due to weather effects on agricultural production. Growth is expected to strengthen, supported by accommodative monetary policy, a high terms of trade, government spending and population growth. Labour market conditions are projected to tighten further… Monetary policy will remain accommodative for a considerable period. Numerous uncertainties remain and policy may need to adjust accordingly.” For the week ahead, it appears that the uncertainties mostly come from overseas, and in particular what the US may or may not do next in its trade spat with China. The New Zealand Dollar opens in North America today at USD0.7290 and NZD/CAD0.9330.