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USD hits a 3 ½ month high. ECB Press Conference will drive EUR/USD today

By Nick Parsons

The US Dollar continues what has been a virtually uninterrupted advance over the past 10 days. Yesterday its index against a basket of major currencies opened around 90.40 and reached a high late in the London afternoon of 90.80; its best level since January 12th. It has broken above its 100-day moving average and now eyes the 200-day measure at 92.00. The move has been so dramatic because it was largely unanticipated and flies in the face of many (indeed most) bank strategists who have been calling the USD relentlessly lower all year. We may now have to wait until they turn bullish before expecting the Dollar to reverse lower!

US President Donald Trump and French President Emmanuel Macron continue their mutual love-in with the President tweeting enthusiastically about their great relationship. In his address to the US Congress, however, Mr. Macron denounced protectionism and nationalism and said the United States should step up its engagement with the world - a direct challenge to Trump’s calls for withdrawal from the Paris climate pact and international trade agreements. “The United States is the one who invented this multilateralism. You are the one now who has to help preserve and reinvent it,” he said. Mr. Trump has tweeted that he will be interviewed on TV today at 8am local time so be prepared for any number of foreign or domestic policy headlines.

After a lull in the US economic calendar, there are plenty of numbers scheduled for release today with weekly initial jobless claims, wholesale inventories and the durable goods orders. Once these are out of the way, the Atlanta Fed will be updating its estimate of first quarter GDP which currently stands at an annualized pace of 2.0%. This will be the last update before the official Q1 numbers are published tomorrow. The USD index opens this morning in North America around 90.80.

The USD/CAD exchange rate is still firmly stuck on a 1.28 ‘big figure’ where it has been for every single minute since mid-morning in North America on Monday. Optimism around a possible NAFTA agreement has helped cap the upside even as a sharp decline in oil prices has been seen over the past two days. Keeping up with the US Dollar means the CAD has strengthened on all its crosses with GBP/CAD down at 1.7890, AUD/CAD at 0.9720 and NZD/CAD at just 0.9075.

Canadian Foreign Minister Chrystia Freeland said yesterday that good progress has been made at the NAFTA trade talks on the key issue of auto rules, though the threat of proposed U.S. steel and aluminum tariffs coming into force next week clouded the mood. According to Reuters, Freeland, U.S. Trade Representative Robert Lighthizer and Mexican Economy Minister Ildefonso Guajardo met for a second straight day in a push to seal a quick deal on revamping the North American Free Trade Agreement. She told reporters, “There is a very strong, very committed, good-faith effort for all three parties to work 24/7 on this and to try and reach an agreement… “I think we made some good progress. We’re very much working on a set of proposals based on the creative ideas the U.S. came up with in March and I think there was good constructive progress.”

Bank of Canada Governor Stephen Poloz yesterday faced the Committee on Banking, Trade and Commerce. It wasn’t scheduled until 4.15pm local time, which meant that his remarks came just after financial markets close for the day. Mr. Poloz said he was "much more encouraged" about the economy than he had been when he last talked to the committee in November 2017. Pressed by one senator about what she called the bank's ‘fairly rosy’ outlook that it issued on April 18, he replied, “When we describe the economy, as you say, in rosy terms, it is, I would say, more like finally positive terms… For the economy as a whole, it has put the adjustments to the oil price shock behind us, but we still have softness in several areas of the country." The Canadian Dollar opens in North America at USD/CAD1.2850, AUD/CAD0.9720 and GBP/CAD1.7890.

The Single European Currency hasn’t had a great week, with EUR/USD down 2 ½ cents from last Thursday’s high just above 1.2410. It had a modest rally into Tuesday’s New York close at 1.2240 but was then sold again yesterday, hitting a low of 1.2160; just under its low back on March 1st. Overnight in Asia, the euro has tried to rally but – like the GBP – is finding it hard to get much upside traction against the USD even as it improves on its other major crosses. EUR/USD hasn’t been back on a 1.22 handle for 24 hours.

Germany’s GfK survey of consumer confidence was released this morning. A rather downbeat survey noted, “The increasingly insecure state of geopolitics now also seems to be influencing the mood of consumers.” GfK forecasts a decrease in consumer climate for May of 0.1 points in comparison to the previous month to 10.8 points although after the previous month’s stable development, economic optimism suffered a setback in April. The economic expectation indicator fell 8.5 points, falling to 37.4. At this level, it is barely seven points higher than at the same time last year. Its Press Release said, “The escalation of the Syrian crisis and the protectionist trade policies of the United States are worrying consumers and could now also affect Germany’s previously excellent economic prospects. This development has also been exacerbated by major fluctuations in the stock markets, which also indicate an emerging insecurity among market participants and more turbulent times ahead.”

There is an ECB meeting in Frankfurt today with ECB President Draghi holding a Press Conference which starts as usual at 2.30pm Central European Time. The current stance of ECB policy is that the risks to the economic outlook are ’balanced’, but that geopolitical risks add to global trade uncertainties. Mr, Draghi has characterized the Council’s stance as requiring patience, persistence and prudence and it would be a big surprise to see him deviate much from this script. Indeed, on what could be a very dull meeting in terms of potential market reaction, the main focus is probably again on what color tie he will wear! We haven’t seen a blue one for the last 6 meetings, perhaps because observers spotted that this had been worn on all four occasions when monetary policy was changed in 2015 and 2016… The EUR opens in North America today at USD1.2175 and EUR/CAD1.5645.

At the very beginning of this week, the British Pound fell below USD1.40 and has stayed there ever since. This was all about the US Dollar rather than the Pound, however, and the GBP is up against all the other major currencies this week, even though it lost a bit of ground on Wednesday to the Canadian Dollar as well as the USD. Overnight in Asia, GBP/USD initially recovered around a quarter of a cent off its lows but was sold again in the European morning down to a low of 1.3905; its weakest since March 13th.

According to the trade association UK Finance, British banks approved fewer mortgages for home-buyers last month than they did a year ago while credit card lending growth held broadly steady. Banks approved 37,567 mortgages for house purchase last month, down from 38,035 in February and 10 percent less than in March 2017. There was a rising trend in mortgage approvals for the first three months of 2018 although the number is slightly lower than the same period in 2017. Seasonally adjusted net credit card lending increased by just 10 million pounds on the month - the smallest rise since April 2016 - though the annual growth rate was little changed at 5.8 percent.

Separate figures from the Society of Motor Manufacturers and Traders show output from British car factories plunged by 13 percent in March. In the first quarter of 2018, 440,000 cars rolled off British assembly lines, nearly 30,000 fewer than a year ago. The cumulative 12-month sum has fallen to 1.64 million. The SMMT said, “A double-digit decline in car manufacturing for both home and overseas markets is of considerable concern… It’s vitally important that the industry and consumers receive greater certainty, both about future policies towards diesel and other low-emission technologies, and our post-Brexit trading relationships and customs arrangements.” The British Pound opens in North America this morning at USD1.3925, GBP/EUR1.1435 and GBP/CAD1.7895.

The last few days have been pretty difficult for the Aussie Dollar. AUD/USD fell from a high of 0.7680 on Monday morning in Europe to a low on Wednesday afternoon just above 0.7650; its lowest level since December 12th and is threatening this level once more at the North American open. The only consolation for our Australian clients is that the currency has outperformed its Kiwi neighbor with AUD/NZD up on a 1.07 ‘big figure’ for the first time in almost 5-weeks. Against the Canadian Dollar, however, AUD/CAD is down at 0.9715 and might break on to 96 cents for the first time in more than five months.

According to what is billed as an exclusive in the Sydney Morning Herald, “The European Union is preparing to launch trade talks with Australia in June to strike a deal that would add $15 billion to both economies, including a push for more rights to geographic names such as parmesan cheese and Parma ham that are essential to European food brands. The EU’s lead trade negotiator, Cecilia Malmstrom, said she hoped to visit Australia within weeks to start talks on a free trade agreement, which are likely to be authorized to proceed on May 20. Ms. Malmstrom told Fairfax Media the agreement would serve a “strategic” purpose by creating a “circle” of allies to remove barriers at a time when US President Donald Trump has imposed steel tariffs that could trigger a trade war. “The most important thing right now, with growing protectionism in the world and uncertainties coming from traditional allies, is to expand this circle of friends,” the EU trade commissioner said in an exclusive interview.

Earlier this morning, NAB released their Quarterly SME Survey which complements the bank’s comprehensive Quarterly Business Survey (QBS) covering larger businesses. Small and Medium Enterprise (SME) business conditions were unchanged in Q1 2018 at +12, while SME business confidence declined 2pts in Q1 to +6pts. According to Alan Oster, NAB Group Chief Economist “SME business conditions remained at their highest level since the GFC and while SME business confidence slipped in the March quarter it too remains above average… Across industries, health again reported the strongest business conditions. While retail continues to be the weakest sector, there has been a large fall in property services conditions, likely reflecting the cooling in housing markets.” The Australian Dollar opens in North America this morning at USD0.7565, with AUD/NZD at 1.0705 and AUD/CAD0.9710.

The New Zealand Dollar has had a totally dismal run over the past 10 days and on both Tuesday and Wednesday it once again finished bottom of our one-day performance table. Indeed, over the past five trading days, NZD/USD has traded on ‘big figures’ of 73, 72, 71 and now 70 US cents. An overnight low just below 0.7060 is a fresh 2018 low and is the weakest for the pair since back on December 27th last year. This leaves NZD/CAD down at 0.9070; its lowest since February 8th.

The weakness of the Kiwi Dollar has come despite the second highest 10-year bond yields in developed markets. Whilst all attention has been on US 10-year breaking through 3.0% and trading up to a 4-year high of 3.03%, New Zealand’s equivalent bond is now yielding 2.92%, just 11 basis points under the US. Of course, investors trading currencies don’t take positions for a decade and don’t do their funding in the 10-year maturity but don’t be surprised – when the Kiwi eventually turns – to hear talk of its attractive long-term interest rates. For the moment, we’re in that phase of the cycle where the NZD is falling simply because it’s falling: momentum-driven algorithmic strategies exaggerate the move even without fresh incoming economic news flow to validate it. Perhaps we have to see the NZD/USD below 70 cents for fundamental investors to step in on the other side of the trade.

After yesterday’s ANZAC day holiday, the next focus of attention locally in New Zealand will be the trade figures on Friday as well as the April consumer confidence numbers. The Kiwi Dollar opens in North America at USD0.7065 and NZD/CAD0.9075.