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Chinese President Xi plays down trade war talk. US stocks rally sharply. USD a touch lower, GBP rallies on more rate hike talk

By Nick Parsons

The USD held very steady throughout Monday’s Asian session and the European morning with its index against a basket of major currencies at 89.75; pretty much where it had closed on Friday evening. From around 7am New York time, however, the USD began a more broad-based sell-off as both GBP/USD and EUR/USD found some good buying interest. By the end of the day, the USD index had lost almost half a point from its intra-day high to 89.45. Overnight, it has slipped only very marginally as investors await the next ‘Tweetstorm’ from the President; whether it be on China, NAFTA, Syria or indeed any other topic.

After a weekend when he had sounded a bit more conciliatory on trade, President Trump once again took to Twitter to criticize current international trade arrangements. “When a car is sent to the United States from China, there is a Tariff to be paid of 2 1/2%. When a car is sent to China from the United States, there is a Tariff to be paid of 25%. Does that sound like free or fair trade. No, it sounds like STUPID TRADE - going on for years!” Yesterday, the US stock market was at one stage up around 1.5% with the DJIA up more than 400 points before a late sell-off in the last hour of trading saw all the gains erased. Overnight in Asia, the DJIA has regained 300 points. It really is quite wild and totally unpredictable.

Overnight, Chinese President Xi Jinping gave a keynote speech at the Boao Forum – often referred to as the Chinese version of the Davos Forum, which is taking place on the tropical island of Hainan - where he addressed the trade situation. Xi called for an upholding of the multilateral trade system and said dialogue was the way to resolve disputes, diffusing trade tensions with the U.S. He vowed to open sectors of China’s economy from banking to auto manufacturing, increase imports and expand protection to intellectual property: "China does not seek trade surplus. We have a genuine desire to increase imports and achieve greater balance of international payments under the current account." He said countries should "stay committed to openness, connectivity and mutual benefits, build an open global economy, and reinforce cooperation within the G-20, APEC and other multilateral frameworks. We should promote trade and investment liberalization and facilitation, support the multilateral trading system… This way, we will make economic globalization, more open, inclusive, balanced and beneficial to all." The USD index opens this morning in North America around 89.40.

After its very good week as optimism grew on a NAFTA agreement and incoming economic data held up pretty well, the Canadian Dollar had another good day on Monday, tying for top spot on our one-day performance table with the NZD. Its strong showing didn’t seem on the cards after the first 12 hours of the day, when USD/CAD had drifted up from 1.2780 to 1.2840 but in the North American afternoon, USD/CAD fell over a full cent and printed on a 1.26 ‘big figure’ for the first time since late February. This morning in Europe, the Canadian Dollar has barely budged from Monday’s closing levels.

The Bank of Canada’s Quarterly Business Outlook Survey noted that, “business sentiment continues to be positive, supported by healthy sales prospects. Due to recent strong demand, capacity and labor pressures are evident in most regions. Forward-looking sales indicators remain positive across most regions and sectors. Some firms expect a moderation in sales activity from high levels in the past year or a gradual slowing of the pace of the recovery in the energy sector. Although less so than in recent surveys, intentions to increase investment continue to be widespread. Employment intentions are solidly positive, based on firms’ plans for hiring to support expected sales growth or to expand operations.” Overall, it concluded, “Business Outlook Survey indicator continues to be high, signaling positive business sentiment.”

For the rest of the week ahead, the data focus is mostly on the housing market. Today brings building permits, Thursday is new home prices and Friday is nationwide home sales. The Canadian Dollar opens in North America at USD/CAD1.2695, AUD/CAD0.9805 and GBP/CAD1.7985.

Like most of the other major currencies, we follow closely here, the euro spent the first 12 hours of the week moving essentially sideways in relatively tight trading ranges. At the start of business in North America, however, the EUR/USD pair caught a decent bid and moved up more than half a cent from 1.2265 to a high just above 1.2325. During this move, the EUR remained steady against the GBP but fell back against the CAD, AUD and NZD. This morning in Europe, EUR/USD has traded largely sideways in a range from 1.2305-1.2330 with EUR/CAD at 1.5635.

After a recent run of soft Eurozone data – both in survey evidence and hard output numbers – this morning’s data on French industrial production came as something of a relief with a +1.2% m/m increase in February. Scratching below the surface, however, details showed the headline figure was flattered by an 11.3% m/m jump in energy output as a result of the exceptionally cold weather, whilst activity elsewhere was pretty patchy. Manufacturing of machinery and equipment fell 2.8%, transport equipment fell 3.2% whilst manufacturing overall fell -0.6% after a -1.0% drop in January. Construction, meantime, rose 2.8%; only partially reversing the 7.5% tumble the previous month.

Speaking to the European Parliament, the ECB’s outgoing vice president Vitor Constancio said the European Central Bank should be cautious and avoid tightening its ultra-loose monetary policy too fast. “Inflation, which is our objective, has not yet responded completely to what we wish to see. We have confidence that inflation will continue to evolve...(but) we should be cautious in order to avoid that some early, strongly restrictive policy could derail this development.” This morning, his colleague Ewald Nowotny offered the ‘insight’ that, “The normalization [of monetary policy] requires a delicate balancing of measures as well as careful sequencing in time,” saying there were risks to both being too aggressive with the process or starting it too late. As for the impact of trade tariffs, “The direct effects might be on the exchange rate side but this is difficult to see or to forecast because today we have so many linkages, we have long production chains...It might have negative effects on financial stability, but effects on monetary policy are not very clear.” The EUR opens in North America today at USD1.2325 and EUR/CAD1.5640.

The British Pound had a strangely mixed day on Monday. By lunchtime in London it was up against everything except the NZD but by the close of business in New York, it had given up all its earlier gains against the EUR and was down also against the CAD and AUD. The so-called ‘cable’ rate hit a session high just below 1.4160 in the European afternoon but then slipped back around a quarter of a cent to 1.4135 with GBP/AUD losing a full cent in just a few hours to 1.8345. This morning in Europe, GBP/USD extended yesterday’s gains to a high just below 1.4180 but is still below GBP/CAD1.80.

In an interview with Reuters, Bank of England MPC member Ian McCafferty said that UK interest rates should be raised again without delay. “We shouldn’t dally when it comes to tightening policy modestly.” McCafferty said he could not be certain about whether to vote again for a rate rise until May’s policy meeting, but there had been no data or Brexit developments so far to make him think he was wrong in March to vote to raise rates to 0.75 percent. Speaking in his office in the BoE on Monday... McCafferty said that as well as the boost from the world economy’s strong recovery, he thought there was now no slack left in Britain’s labor market. Unemployment at its lowest rate since 1975, skill shortages and signs that employers were resorting to higher wage offers to lure staff from rival firms or stop them from leaving would also create inflation pressure. “It’s not wages suddenly bursting away, but it gives you a modest upside risk.” Known as one of the BoE’s most hawkish policymakers, McCafferty said there had been a case for following up November’s rate move with another hike as early as February. But he held off to avoid surprising households who had been told by the BoE that it plans to raise rates only gradually.

The Guardian newspaper reports that according to a Deloitte survey of chief financial officers (CFOs) at some of the UK’s biggest businesses, companies are now less pessimistic about Brexit after ministers agreed the terms of a transition period with Brussels to smooth Britain’s exit from the EU. Reflecting the views of 106 companies, including almost a quarter of the FTSE 100, the survey found a fifth of business leaders were more optimistic about their firm’s prospects than they were three months ago. On a scale of 0 to 100 for the risks facing their business, the CFOs assigned a rating of 56 for Brexit versus 57 for weak demand as a result of sluggish growth in the economy. Deloitte said this was the first time since the spring of 2016 – before the EU referendum – that Brexit had fallen behind any other potential risk facing businesses, although admitted that some of the weakness seen in the economy will have come as a result of the vote to leave the EU. The British Pound opens in North America this morning at USD1.4170, GBP/EUR1.1495 and GBP/CAD1.7975.

Two waves of selling during the European morning on Monday sent AUD/USD down (just) through last week’s 0.7660 low and dragged the Aussie lower on all its major crosses. Yet, during the New York session as the USD initially fell against the EUR and GBP, so the AUD then rallied very sharply and retraced all the way up to USD0.7710. Overnight and in Europe this morning, the AUD rally has extended to a high of USD0.7735 which means it has covered the whole of last week’s trading range in less than 36 hours!

The keenly-awaited NAB Business Survey showed the business conditions index declined by 6 points to +14, although it remains well above its historical average. The business confidence index fell by 2 points to +7, and it is now only just above its historical average of +6. Leading indicators in the survey softened this month, with capacity utilization easing slightly, while forward orders gave up much of last month’s spike. Final product price inflation remains muted and retail prices declined. However, purchase cost growth has been moving higher since late 2016. NAB noted that, “The gradual trend rise in purchase costs provides a tentative sign of inflationary pressures, although it would need to keep rising to provide a convincing signal that core CPI inflation is about to move back within the RBA’s target band.”

NAB’s conclusion on the Survey was that “The results for March do not change our outlook for the Australian economy. The strength in business conditions and leading indicators are consistent with stronger economic growth in coming quarters and the Survey employment index is pointing to strong jobs growth which should reduce unemployment, and put gradual upwards pressure on private sector wages. We expect that towards the end of this year the RBA will be in a position to start increasing the current emergency low policy rate although it will depend heavily on the data flow – particularly for wages and inflation - and the risk is that any action by the RBA will be delayed”. The Australian Dollar opens in North America this morning at USD0.7725, with AUD/NZD at 1.0520 and AUD/CAD0.9800.

Given the continued volatility in the New Zealand Dollar, it did not come as any great surprise to see it topping our one-day chart after the first 12 hours of trading on Monday, even though there had been no fresh local news. By the end of the day in New York, it was sharing top spot with the Canadian Dollar with both up between three and six-tenths of a point against the other major currencies whilst AUD/NZD touched a fresh cycle low around 1.0505. Overnight in Asia and in Europe this morning, NZD/USD has broken above last week’s high and its best level just above 0.7345 is the highest since March 14th.

The latest NZIER Quarterly Survey of Business Opinion (QSBO) shows businesses continue to expect a deterioration in economic conditions over the coming months. Business confidence had fallen sharply in the December 2017 quarter in the wake of the new Labour-led Government taking office, and this pessimism has carried over into the first quarter of 2018. A net 9 percent of businesses expect worsening economic conditions over the coming months – slightly less than the 11 percent in the previous quarter. This continued pessimism about the economy remains in contrast to firms’ expectations about demand in their own business, which continues to hold up. A net 15 percent of businesses nationwide reported a lift in demand in their own business in the March 2018 quarter. The NZIER noted, “Continued weak profitability appears to be a key contributor to this pessimism, and businesses are not optimistic this will improve. Cost pressures have intensified, and businesses have not been able to fully pass these on in the form of price increases.”

In a Reuters survey of 37 analysts out at the end of last week, the median forecast put the currency at $0.72 for one month, three months and six months, ticking up to $0.74 in one year. While the median forecasts were narrowly spread, there was far more variety at the extremes, with the highest prediction for 12-months out at $0.8000 and the lowest at $0.6500. As New Zealand is being lashed by violent storms as strong winds and heavy rain pour across the country today, the Kiwi Dollar opens in North America at USD0.7345 and NZD/CAD0.9315.