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With lots of subjects to keep the President occupied, stocks open higher but USD lower in a week with a dozen Fed speeches scheduled

By Nick Parsons

US stock markets continue to gyrate, though the high-low range for the Dow Jones Industrial Average this last week was ‘only’ 540 points with 50 points for the S&P 500 index. Overnight in Asia and this morning in Europe, futures markets are indicating the DJIA up 160 points with the S&P500 around 17 points higher. Against this background, the performance of the US Dollar continues to be pretty subdued. For all the worries about trade, tariffs, China, Russia and Syria, the entire range over the last 3 weeks for the USD index has been barely 1 ½ points. The first trading session of the week in Asia saw just one-tenth of a point separate the high and low but during the European morning, the USD has run into some selling pressure with its index down more than a quarter of a point from Friday’s close.

The external environment for the US Dollar will probably be dominated by the events in Syria over the weekend and the international reaction to them, both politically and economically. All things equal, the biggest beneficiaries of a sharp reduction in global risk appetite are often the countries which run significant current account surpluses - Japan and the European Union – though the Eurozone is currently going through a relatively soft patch of economic data and its Central Bank is very publicly divided on the outlook for monetary policy. With so many subjects jostling for the President’s attention at the moment, it may be that the concerns over trade, tariffs and the economy get pushed a bit lower down his ‘to do’ list.

In terms of US economic data, a somewhat quieter week is in prospect. We’ve already had the CPI numbers, the labor market report and the Minutes of the last FOMC meeting. This week we have retail sales and business inventories on Monday, industrial production on Tuesday and the Philly Fed Survey on Thursday. There is a huge volume of Fed-speak to look forward to, also, with a dozen scheduled speeches in addition to the release of the Beige Book on Wednesday. After today’s numbers, the Atlanta Fed will be updating its forecast of Q1 GDP (currently 2.0%) later this afternoon. The USD index opens this morning in North America around 89.10.

The Canadian Dollar had another good week, with USD/CAD down a net 1 ½ cents over the whole period but more than 2 ½ cents down from the week’s high to low. From a high last Monday around 1.2815, by Wednesday afternoon in New York, the pair was down to 1.2565 and on Friday morning it hit a low of 1.2555 - the lowest since mid-February – before rallying more than half a cent into the close of business. AUD/CAD hit a 2-month low around 0.9760 whilst GBP/CAD hit a 4-week low of 1.7820. This morning in Europe, the CAD has improved only very slightly against an under-pressure USD which means it is lower on most of its major crosses.

The highlight of this week will be the Bank of Canada monetary policy meeting on Wednesday. Canada's central bank has hiked rates three times since July 2017, while the U.S. Federal Reserve raised its benchmark rate last month and is due to raise rates twice more this year. The Bank of Canada has said it will be cautious in considering future moves. According to a Reuters poll at the weekend, the BoC is likely to raise interest rates twice more this year as the economy regains momentum in the current quarter but will hold them steady at its April 18th meeting. Twenty-seven of 29 economists surveyed said rates would remain on hold at 1.25 percent. Economists as a group trimmed their first-quarter growth forecast to 1.8% from 2.0% in the previous poll. But the survey concluded that slowdown will be temporary, with expectations for the second quarter bumped up to 2.4% from 2.0%.

The NAFTA trade agreement could be renegotiated in the next few weeks, U.S. Vice President Mike Pence and Canada’s Prime Minister Justin Trudeau said Saturday in Peru, avoiding new political opposition that could emerge during Congressional and Mexican elections later this year. “I’ll leave this summit very hopeful that we are very close to a renegotiated NAFTA… there is a real possibility that we could arrive at an agreement within the next several weeks,” Pence told reporters at the Summit of the Americas in Lima. Mr. Trudeau said, “There is a desire and a recognition by all three NAFTA partners that the timelines imposed upon us by both the upcoming, the imminent Mexican elections and the upcoming American midterms, means that we have a certain amount of pressure to try and move forward successfully in the coming weeks.” The Canadian leader will be in London for the Commonwealth heads of government meeting this week. The Canadian Dollar opens in North America at USD/CAD1.2605, AUD/CAD0.9800 and GBP/CAD1.8040.

The EUR rose to its peak on Wednesday last week of USD1.2385; its highest in exactly two weeks. A sharp sell-off on Thursday dragged the pair down to 1.2305 before a quarter of a cent rally on Friday saw the EUR end the week around 1.2330. After a very quiet Asian trading session, traders in Europe have pushed both the EUR and GBP sharply higher this morning, with EUR/USD up almost half a cent to 1.2370 and EUR/CAD touching 1.56 for the first time since last Wednesday.

Ahead of a meeting between German Chancellor Angela Merkel and French President Macron on Thursday, Reuters this morning has details of a paper from her Conservative supporters in the new coalition which stresses that individual euro zone member states must remain liable for their own risks. “Our guiding principle is that the assumption of risks by a member state must be accompanied by the liability of that state… Financial aid will only be granted with strict conditions,” the proposal said, insisting that lawmakers in the German Bundestag must retain the right to decide on granting financial aid to other euro zone member states. “We must not overstretch the European Union, because disappointment among citizens over Europe would weaken the successes and acceptance of the European idea,” it added.

The next ECB Council Meeting is on Thursday April 26th so there are only another four days before it goes into self-imposed radio silence on the subject of monetary policy. Incoming economic data this week include Germany’s ZEW survey on Tuesday, Eurozone CPI on Wednesday and then the current account numbers on Thursday. The EUR opens in North America today at USD1.2365 and EUR/CAD1.5590.

The British Pound opens after a very good week which saw GBP/EUR break out of its 2018 range from roughly 1.1200-1.1475 and move on to a 1.15 ‘big figure’ for the first time since June last year. This pushed the GBP higher across the board and it finished the week just behind the CAD as the second-strongest of all the currencies we follow closely here. GBP/USD gained just two cents to a 10-week high of 1.4285 last Friday and in Europe this morning it has extended this move to a best level around 1.4310.

Notwithstanding the softness of incoming economic data, Bank of England MPC members continue to argue the case for a rise in interest rates, with markets pricing a more than 50% probability of a hike in May. There is plenty of top-tier economic data scheduled this week. According to the Sunday Times, “figures out on Tuesday are expected to show that average wages in February climbed 3% on a year earlier, the first time pay growth has outpaced the rise in consumer prices since January last year.”

Notwithstanding the softness of incoming economic data, Bank of England MPC members continue to On Wednesday, March CPI figures are expected to show the annual rate of inflation remained unchanged at 2.7%; hence the talk of a rise in ‘real wages’ for the first time since January 2017. It will be fascinating to see what happens should CPI instead fall to 2.6%. In theory, this ought to reduce the likelihood of a rate hike from an inflation-targeting Central Bank, though there will doubtless be calls that an even bigger rise in real wages should be met with a rate hike. On Thursday, we’ll see the impact of the dismal UK weather on retail sales, with consensus looking for a fall of -0.2% on the month. The British Pound opens in North America this morning at USD1.4305, GBP/EUR1.1570 and GBP/CAD1.8035.

The Australian Dollar had a pretty good week which saw it rally all the way to a high on Friday of USD0.7805; the first time back on 78 cents in just over two weeks. A more defensive tone in equities in the last trading session of the week took around 40 pips off AUD/USD which finished on Friday around 0.7765 for a net gain around one cent. After a very quiet session in Asia, an early dip in Europe this morning was quickly reversed and the Aussie Dollar opens in North America up against the NZD, USD and CAD but down against the EUR and GBP.

The monthly economic cycle continues its normal rhythm with the Minutes of the March RBA meeting tomorrow and the latest labor market data on Thursday. Investors might need a thesaurus for more synonyms of the words ‘slow’ and ‘gradual’ but these are likely to be the Central Bank’s main message on the economy and monetary policy for some time to come. Even the employment numbers will be far from conclusive for what matters as much as the number of people in work, is how much they were paid and whether this then translates into higher consumers’ expenditure and more generalized upward pressure on prices. There are many dots to be joined between a rise in employment and a rate hike.

As well as a focus on domestic economic indicators, Tuesday will bring the Q1 GDP report in Australia’s largest trading partner. The Chinese economy is expected to have grown at an annualized pace of 6.8% in the first quarter, whilst we’ll also see monthly data on retail sales, industrial production and fixed investment. The other external unknown will be the performance of asset markets. Falling equities and higher volatility are generally a drag on the Aussie Dollar (and, of course, vice-versa), though a rising gold price could help mitigate some of the negative impact. The Australian Dollar opens in North America this morning at USD0.7770, with AUD/NZD at 1.0585 and AUD/CAD0.9795.

The New Zealand Dollar last week reached a best level of USD 0.7395; its highest since February 16th before slipping back around half a cent to close around 0.7345. The first trading session of the new week in Asia was unusually quiet, but the NZD then ran into selling pressure during the European morning which pushed it down below Friday’s low and leaves it as the worst performer on the day so far. As we have seen many times, though, things can change very quickly for the flightless bird and it would take a brave trader to bet on either NZD/USD or NZD/CAD being on the same big figure at the end of business today.

The main focus for investors this week will be on Thursday’s CPI report. Given its broad and in-depth coverage of the New Zealand economy, and the detail and colour which it always provides in even the most esoteric data releases, it is still a source of some puzzlement that Statistics New Zealand doesn’t produce monthly inflation data. For an island nation with only 4.6 million people, it really shouldn’t be too difficult to give a more timely snapshot of prices; especially given that its Central Bank is mandated to hit an inflation target. Anyhow, consensus expectations for Q1 are for a 0.5% q/q increase to take the annual rate down from 1.6% to 1.1%, although one of the biggest banks locally, BNZ, has penciled in a quarterly rise of just 0.3%.

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-produce 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 USD0.7345 and NZD/CAD0.9250.