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USD gets a lift after CPI figures and FOMC Minutes. Yet more soft economic numbers weigh on EUR

By Nick Parsons

The most surprising thing about US equity markets today is that as we write this commentary, both the S+P 500 Index and Dow Jones Industrial Average are pretty much unchanged, stuck in very narrow ranges over the past 12 hours. Whereas for the whole of last year, the S&P 500 gained or lost more than 1% on a single day only eight times - the least since the mid-'60s - there have already been twenty-seven 1% moves in the first 67 trading days of 2018. As for the currency, having broken down briefly on to an 88 ‘big figure’ on Wednesday, the USD index against a basket of major currencies is up around a quarter of a point today to 89.30.

The latest US inflation figures came in pretty much in line with consensus expectations, albeit the headline CPI number fell -0.1% against a median forecast of unchanged on the month. The annual rate rose as expected from 2.2% in February to 2.4%. Stripping out the often-volatile food and energy components, core CPI rose 0.2% on the month to take the annual rate up from 1.8% to 2.1%. The main reason for the jump in the annual rate is fairly well-known; this time last year saw some aggressive price reductions for cellphone plans and as the falls now drop out of the y/y calculation, so the annual rates jump. Fed Chair Jerome Powell explicitly referenced this in his speech last Friday. Just because it is well known by policymakers and analysts doesn’t mean that everyone is aware of it, though. With both the headline and core measures now above 2%, surveys of consumers will now be very closely watched for any sign that they are revising up their own expectations of future inflation because of what is happening currently. If they do, then investors will have to start thinking about 3, rather than 2 more Fed hikes for the rest of 2018.

Arch-dove Neel Kashkari, President of the Federal Reserve Bank of Minneapolis, is due to speak this afternoon and we’ll also have the latest weekly initial jobless claims numbers. Otherwise, the economic data calendar in the United States looks pretty thin on Thursday and investors, instead, will be more focused on the POTUS Twitter feed to see which of the current disputes with China, Russia and Syria are most likely to be escalated. The USD index opens this morning in North America around 89.30.

Having only just been knocked out of top spot on our leaderboard by the AUD and NZD on Tuesday, the Canadian Dollar took gold medal position on Wednesday; up against every one of the major currencies, we follow closely here with gains between one and three-tenths of a percentage point. USD/CAD fell to a low of 1.2555; its lowest since February 19th whilst GBP/CAD hit a fresh 1-month low around 1.7820. Overnight in Asia and this morning in Europe, the CAD’s performance has been much less impressive; unchanged against the GBP and EUR but down against the US and New Zealand Dollars.

After a decent run of economic data recently, the Canadian Dollar got a further boost on Wednesday from higher global oil prices. As major news agencies all reported that Saudi Arabian defense forces had intercepted missiles of the capital Riyadh, West Texas Intermediate Crude (WTI) prices jumped above $67 per barrel; the highest since December 2014 whilst gold jumped $17 per ounce to $1,356. This lifted the Canadian stock market even as US indices gave up early gains and moved into the red. US President Donald Trump had earlier warned Russia of imminent military action in Syria over a suspected poison gas attack and blasted Moscow for standing by Syrian President Bashar Assad.

Today we’ll have fresh data on new home prices and on Friday it’s nationwide home sales. The Bank of Canada has raised its benchmark interest rate three times since July to 1.25%. Money markets, as well as economists polled by Reuters, expect the central bank to hike twice more this year. It is against this background that a CIBC Capital Markets report says an estimated 47% of all existing mortgages will need to be refinanced this year, up from the 25 to 35% range in a typical year. The bank says borrowers in recent years have taken on mortgages with two- or three-year durations, which are now up for renewal alongside the typical five-year mortgages. New lending rules introduced this year stipulate that homeowners looking to renew their uninsured mortgage are subject to a new stress test, unless they stick with their existing provider, reducing their ability to seek out a more competitive rate. The Canadian Dollar opens in North America at USD/CAD1.2590, AUD/CAD0.9760 and GBP/CAD1.7850.

The Single European Currency finished in second place to the Canadian Dollar on Wednesday as investors wondered whether Mr Nowotny’s remarks on Tuesday might, in fact have been part of some cunning plan to introduce the idea of a 20bp rate hike without Mr Draghi himself having to be implicated and blamed for a policy U-turn. Conspiracy theorist love these mind-games and we’ll never have a definitive answer, though EUR/USD did manage to extend gains up to a high just above 1.2385; its highest level in two weeks before closing at 1.2365. Overnight in Asia and this morning in Europe, the euro has lost ground and is almost half a cent below yesterday’s best levels.

Eurozone industrial production was much weaker than expected in February, as a jump in energy output failed to offset a slump in the production of capital goods and consumer goods. The European Union’s statistics office Eurostat said industrial production in the 19 countries sharing the euro fell 0.8% m/m for a 2.9% y/y rise, much weaker than the +0.1% m/m increase which had generally been expected. The softness in February was due to falling production in all categories — intermediate goods, capital goods and durable and non-durable consumer goods — except energy, the output of which surged 6.8% on the month after a 1.1% monthly drop in January. By country, weakness in Italy and Germany offset strength in Spain and France. Elsewhere, big declines in Portugal and Ireland were the main constraints, while production rose solidly in the Netherlands.

Today brings speeches from the ECB’s monetary policy heavyweights Coeure and Weidmann and the European Central Bank will publish its account of the March monetary policy meeting. The EUR opens in North America today at USD1.2335 and EUR/CAD1.5525.

The British Pound ebbed and flowed quite a bit on Wednesday. At times it was out at the top of our one-day performance table but ultimately ended somewhat mixed; little changed against the USD and EUR, up against the Australian and New Zealand Dollars and down against the CAD. GBP/USD reached a one-week high of 1.4215 before closing around 1.4175. In Europe this morning, the Pound fell to a low of USD1.4150 then rallied around a quarter of a cent but is still firmly below GBP/CAD1.80.

In economic news, the UK’s property surveyors have issued the most downbeat assessment of the housing market for five years. The well-respected Royal Institution of Chartered Surveyors survey said that in March demand from buyers fell for the 12th month in a row, new instructions from sellers declined for the seventh consecutive month, and prices were flat nationally. RICS measures confidence in the property market by balancing surveyors seeing price rises against those seeing price falls. It said the figures were the lowest since 2013 with declines in London and the southeast being offset by gains in the East Midlands, Northern Ireland and Wales. The RICS Chief Economist said, “The findings provide little encouragement that the drop in housing-market activity is likely to be reversed anytime soon… Apart from the implications, this has for the market itself, it also has the potential to impact the wider economy contributing to a softer trend in household spending.”

The British Chambers of Commerce today published what it claims to be the UK’s largest and most authoritative private-sector business survey. Based on the responses of over 7,100 businesses, the survey shows that UK economic growth remained subdued in the first quarter of 2018, despite a strong export performance. It reported that fewer firms in the manufacturing sector saw an increase in domestic orders, and the balance of firms reporting an increase in domestic sales is now at its lowest level since Q4 2016. ““What growth we see in the UK economy is due principally to strong global trading conditions, rather than domestic demand, which remains muted. Uncertainty, recruitment difficulties and price pressures remain persistent concerns for businesses of every shape and size, even if short-term confidence levels remain resilient. Even with a standout performance from manufacturing exporters able to reap the benefits of lower Sterling, the UK economy as a whole is treading water, rather than powering ahead.” The British Pound opens in North America this morning at USD1.4185, GBP/EUR1.1495 and GBP/CAD1.7855.

Wednesday was a day of very tight ranges for the AUD/USD pair, with its entire high-low range across the three main time zones covered by just 30 pips and a close in New York almost exactly where it had begun the day at 0.7760. Overnight in Asia and this morning in Europe, the pair has edged gradually lower but found some support just above 0.7740.

In his speech in Perth yesterday, RBA Governor Phil ‘slow and gradual’ Lowe gave a thorough assessment of the economic differences, and similarities, across Australia’s major States. In aggregate, he noted, “the overall picture for the national economy is one of gradual improvement: businesses are feeling better than they have for some time and they have increased their investment and hiring. It is therefore reasonable to expect that economic growth in 2018 will be stronger than the 2.4 per cent outcome we saw last year.” However, one of his main themes nationally – not just in Western Australia – was “slow growth in wages. Wage increases around 2 per cent have become the norm in many parts of the country. This is in contrast to the 3 to 4 per cent increases that were the norm for most of the past two decades. This change is having a sobering effect on the finances of many households. It is also contributing to inflation being low. The latest data suggest that the rate of wages growth has now troughed, with a pick-up evident in the most recent quarter. A further lift is expected, but it is likely to be only gradual.”

On monetary policy specifically, the Governor said, “it is more likely that the next move in the cash rate will be up, not down, reflecting the improvement in the economy. The last increase in the cash rate was more than seven years ago, so an increase will come as a shock to some people. But it is worth remembering that the most likely scenario in which interest rates are increasing is one in which the economy is strengthening and income growth is also picking up… The Reserve Bank Board does not see a strong case for a near-term adjustment in monetary policy.” The Australian Dollar opens in North America this morning at USD0.7750, with AUD/NZD at 1.0500 and AUD/CAD0.9760.

Price action in the New Zealand Dollar across the three major time zones on Wednesday was identical to that of its Aussie cousin: down against the USD in the first part of the day and a recovery during the New York session, all contained within a relatively narrow 30 pip trading range before closing almost exactly unchanged on the day around 0.7360. The Kiwi Dollar has had a good day so far on Thursday morning with the AUD/NZD cross trading down on to a 1.04 ‘big figure’ for the first time since July last year.

The speech today from RBNZ Assistant Governor and Head of Economics John McDermott focused on the evolution of the monetary policy framework over time rather than any fresh message about how the policy itself might currently be changing. In terms of the new arrangements announced by the Labour Government, the Reserve Bank of New Zealand Act will formalize a monetary policy committee (MPC), and add members from outside the Bank, ‘externals’, onto the committee. The Act will allow the MPC to have between five and seven members, but there will be seven initially, and there will always be more internal than external members. All members will be nominated by the Reserve Bank Board and appointed by the Minister of Finance. Details of the first Charter are yet to be determined, but the Minister intends for the MPC to aim to reach decisions by consensus, and for non-attributed votes to be published where there is not consensus. The Minister also intends for non-attributed records of meetings to be published that reflect any differences of view among the MPC.

Statistics New Zealand this morning published March credit card spending numbers. Seasonally adjusted total retail spending on credit and debit cards increased 1.0% during the month, beating consensus estimates of a 0.5% monthly gain. Core retail spending, excluding fuel and vehicles, rose 1.6%. Card-holders across all industries made 151 million transactions in the month. The average value of $49 was unchanged on the year and down from $50 in February. The Kiwi Dollar opens in North America at USD0.7380 and NZD/CAD0.9290.