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It’s Friday the Thirteenth, what could possibly go wrong?

By Nick Parsons

We noted here yesterday that for the S&P 500 Index, there had already been 27 1% moves in the first 67 trading days of 2018. After Thursday’s price action, it’s now 28 from 68 as the index had another 30-point high-low trading range. It was also a pretty good day for the US Dollar which responded positively to the higher US CPI figures (albeit in line with consensus forecasts) and a slightly more ‘hawkish’ tone from the FOMC Minutes. The USD index rose to a best level in the European afternoon of 89.55 before giving back a little of these gains into the New York close. After a fairly subdued start to Friday in Asia and Europe, the USD index stands at 89.30.

During a meeting with Republican senators on Thursday, President Trump is said to have asked Larry Kudlow, his national economic council chairman, and the US trade representative Robert Lighthizer to take another look at the Trans-Pacific Partnership – a deal he once called Republicans “stupid” for endorsing. Back in April 2015, he tweeted, “The Trans-Pacific Partnership is an attack on America's business. It does not stop Japan's currency manipulation. This is a bad deal.” In the current mood of increasing tensions over trade between the US and China, however, it is thought this may offer the US greater leverage in negotiations with Beijing. Yesterday, Trump tweeted, “Would only join TPP if the deal were substantially better than the deal offered to Pres. Obama. We already have BILATERAL deals with six of the eleven nations in TPP, and are working to make a deal with the biggest of those nations, Japan, who has hit us hard on trade for years!”

There are no US economic statistics released today so the Presidents Twitter feed could again be the main source of market-moving news. From the Fed, both Rosengren and Bullard are scheduled to make speeches. The USD index opens this morning in North America around 89.30.

After its pretty good run recently, the Canadian Dollar on Thursday gave back a small portion of its gains. USD/CAD moved up from an opening level of 1.2580 to a high in the European afternoon of 1.2620 and the CAD lost ground against the GBP, AUD and NZD; finishing second from bottom on our one-day chart. Overnight in Asia and this morning in Europe, however, USD/CAD is back below 1.26 and trading at levels last seen in mid-February.

In an interview with The Times newspaper, Canadian Prime Minister Justin Trudeau said there is “no way” the White House will extend steep tariffs on American imports of steel and aluminium to include countries like Britain and Canada and said Canada was confident that its exemption will be extended as it renegotiates the North American Free Trade Agreement with the US and Mexico. “The other story in this is the number of governors, industry leaders and business people and congress members in the United States who have assured me that there’s no way that this will move forward because it would be so detrimental to the exact families and workers that the president so relied upon for his electoral success… “So we take seriously the deadlines and the positioning of the American administration, but we are confident that the Canadian exemption to steel and aluminium tariffs is secure.” Asked about the present dispute between the US and China, he said that Canada would continue to sign more trade agreements “even as the world is perhaps going through questions about globalization”.

The Canadian leader is due to attend the Summit of the Americas in Peru over the coming days before flying to London for the Commonwealth heads of government meeting next week. The Canadian Dollar opens in North America at USD/CAD1.2565, AUD/CAD0.9800 and GBP/CAD1.7950.

The euro had a pretty poor day on Thursday. During the European morning a soft set of economic numbers knocked EUR/USD a quarter of a cent lower whilst the European Central Bank’s account of the March monetary policy meeting took it down a further 20 pips to an intra-day low just above 1.2300; matching its lowest level on Tuesday. Thus far today, all the trading in EUR/USD has been confined to a 25 pip range from 1.2320 – 1.2345 will little enthusiasm to push it one way or another.

Whereas the US FOMC was unanimous in its view on the economy and inflation, the ECB is still deeply split. Its account of the March Council Meeting said, “The view was put forward that the Governing Council’s criteria for a sustained adjustment in the path of inflation could be assessed as close to being satisfied over a medium-term horizon. However, the broadly agreed conclusion was that the evidence for a sustained rise in inflation towards levels consistent with the Governing Council’s inflation aim was still not sufficient.” As for the exchange rate, “Some caution was voiced, as the more recent developments in the euro exchange rate and in financial conditions in part reflected changing perceptions about monetary and fiscal policies, domestically and globally, as well as rising risks of protectionism and heightened market sensitivity to communication, rather than further improvements in domestic economic fundamentals."

In today’s economic news, final German CPI figures for March confirmed the initial estimate of a rise in the annual rate of inflation from 1.4% to 1.6%. The core rate was unchanged at 1.6%. Higher services inflation, driven by a seasonal boost to airfares and accommodation due to the early Easter, were offset by a sharp fall in inflation of clothing and shoes. The cost of housing and utilities was 1.5% higher and that of Recreation and Culture by 1.8%. The EUR opens in North America today at USD1.2335 and EUR/CAD1.5505.

The British Pound had an initially mixed day on Thursday but as the euro came under heavy selling pressure in the afternoon, GBP/EUR broke out of its 2018 range from roughly 1.1200-1.1475 and moved on to a 1.15 ‘big figure’ for the first time since June last year. This pushed the GBP higher across the board and the pound ended the day clearly at the top of the FX leaderboard. This morning in Europe it has extended its gains against everything except the Aussie Dollar and GBP/USD is testing the 2018 high of 1.4300 reached back in late-January.

According to the Bank of England’s Quarterly Survey of Credit Conditions, banks and building societies reined in their lending to consumers during the first three months of 2018 at the fastest rate since the credit crunch. The survey showed that consumer lending tightened by an aggregate of 38.7%, the largest fall on record and the fifth consecutive quarterly decline. The steep fall was partly due to a drop-off in approvals by lenders, with successful credit card applications down 26.2% and other forms of unsecured lending falling 13.2%. The availability of credit to businesses was reported to be unchanged in the first quarter, with no change expected in the next three months.

After a pretty poor run of data on sales and output and some pretty downbeat surveys of economic activity in the UK, the focus next week will be on inflation. Most particularly, investors will be looking for any sign that the much-threatened hike in interest rates in May might be postponed until later in the Summer. CPI in February fell more than expected to an annual pace of 2.7% and though consensus looks for it to be unchanged in March, any undershoot might well lead analysts to push back the timing of the next 25bp increase. The British Pound opens in North America this morning at USD1.4285, GBP/EUR1.1580 and GBP/CAD1.7935.

Thursday was another day of very tight ranges for the AUD/USD pair, though with a near 400-point rally in the DJIA, it really should have done somewhat better. Having opened around 0.7755, only 25 pips separated the high and low of the day and by the close of business, the AUD finished marginally down against the USD, a little more against the CAD, GBP and NZD but up against a very weak EUR. This morning in Europe, the Aussie Dollar has rallied up to US 78 cents for the first time in a month and AUD/CAD is back up at 98 cents to leave the AUD the best performer on the day so far.

Overnight we have seen the latest monthly figures from Australia’s largest trading partner. China reported a surprise monthly trade deficit in March, the first time in 13 months, as exports dropped while import growth accelerated due to robust domestic demand. China's trade balance swung to a deficit of $4.98 billion from a $33.7 billion surplus in the previous month. The country last reported a monthly deficit, of $11 billion, in February 2017. Exports declined 2.7% in March from a year earlier, following a 44.5% surge in February, the General Administration of Customs said. Imports in March expanded 14.4% from a year earlier, compared with a 6.8% increase in February. The monthly numbers in the first quarter of any year should always be treated with some caution as they can be distorted by the timing on the Lunar New Year holidays. Taking the quarter as a whole, exports rose 14.1% from a year earlier, while imports climbed 18.9%, resulting in a surplus of $48.39 billion.

In its latest Financial Stability Review released this morning, the RBA says strong global economic conditions over the past six months suggests asset prices have surged because investors "see little chance of adverse outcomes". It warns that "Investors have also taken on more risk in recent years, making them more susceptible to large losses if there were a generalized fall in asset prices… The falls in global equity prices in recent months have provided a timely reminder that asset prices can fall quickly with price movements exacerbated by pro-cyclical investor behavior.” Although the review says Australia's financial system remains ‘resilient’ in its ability to withstand shocks, it does raise concerns about high levels of household debt. "The high level of household indebtedness increases the risk of a rise in household financial stress amplifying a shock to the economy… The higher debt levels raise concerns about the resilience of a range of borrowers to any adverse shocks, particularly as global monetary policy accommodation starts to be unwound." The Australian Dollar opens in North America this morning at USD0.7805, with AUD/NZD at 1.0560 and AUD/CAD0.9800.

Unlike its Aussie cousin, the New Zealand Dollar did make a fresh high against the USD on Thursday, extending its gains to a high around 0.7385. This outperformance saw the AUD/NZD cross trade down on to a 1.04 ‘big figure’ for the first time since July last year. Overnight in Asia and this morning in Europe, the AUD has fought back to lift the cross up to 1.0560. NZD/USD has been up to a high of 0.7395 but hasn’t yet made it on to what would be its first time at US 74 cents since February 16th.

Amidst all the negative stories globally about trade and tariffs, there’s a rare bit of good news overnight from New Zealand as Prime Minister Jacinda Ardern heads off on her first official trip to Europe. Former Trade Minister Todd McClay said he'd heard from some ‘pretty good contacts’ that the European Council was likely to meet at the end of May. "It's my expectation that unless something disastrous happens they are likely to give the European Commission permission to formally start the negotiations for New Zealand." The Prime Minister is to meet her French counterpart Emmanuel Macron in Paris on Monday and the German chancellor Angela Merkel in Berlin on Tuesday. Ms Ardern said she would be strongly making New Zealand's case for an EU trade deal in both those meetings. "We're one of just a handful of [World Trade Organisation] members who do not have either the beginning of a negotiation or an agreement… There's a real opportunity there to try and move these things along."

In economic news this morning, New Zealand’s manufacturing PMI for March was 52.2. This was 1.1 points lower than February, and the second consecutive decrease in overall expansion levels for 2018. The analysts at BNZ who co-produced the index noted, “The new-orders index was also a tad below normal although, at 53.8, was still clearly expansive. The PMI employment index, however, at 53.5, was ahead of its long-term average… The weak spot in March’s PMI was its production index. With a seasonally adjusted outcome of 50.8 this was close to stalling. Compare this to February’s 53.7 and the exceptionally high reading of 61.0 back in November and a sense of sharp deceleration arises… we expect manufacturing to be flat in Q1 GDP and pick up in Q2.” The Kiwi Dollar opens in North America at USD0.7395 and NZD/CAD0.9280.