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USD has a very good week. GBP plunges after poor GDP data. AUD and NZD finish up from their worst levels, EUR ends mixed after ECB meeting

By Nick Parsons

The US Dollar had a very good week, despite some signs of the rally beginning to fade on Friday. Its index against a basket of major currencies opened at 89.95 but rose persistently and without interruption to a high on Friday – immediately after the Q1 GDP figures were released – of 91.50. This was its best level since way back on January 12th when the ECB first mooted the idea of changing its communication on monetary policy. The USD finished the week at the top of our performance table, up against every one of the major currencies we follow closely here.

The yield on US 10-year Treasuries yesterday this week broke above 3.0% for the first time since January 2014, reaching a high of 3.03% on Thursday although it is worth noting that 30-year yields are actually around 15bp lower than their highs earlier this year. There is nothing magical about the 3% threshold, other than a change of ‘big figure’ which of itself draws plenty of media interest. At their highs, yields were up 63bp since the beginning of this year as the bond market faced up to the prospect of higher inflation, much greater supply from an increase in government borrowing, and a US Central Bank which is reducing the amount of bonds it bought during the period of Quantitative Easing. In equity markets, 179 of the companies which comprise the S&P 500 index reported their Q1 earnings last week but despite a 60-point plunge on Tuesday, the index actually finished exactly unchanged from Monday’s opening level.

Ahead of the first quarter GDP report on Friday, the last iteration of the Atlanta Fed’s so-called “GDPNow model” had estimated growth at an annualized pace of 2.0%. The actual number released by the Commerce Department was 2.3% so the actual ‘miss’ by the model was less than one-tenth of a percentage point before annualization. Growth in consumer spending, which accounts for more than two-thirds of U.S. economic activity, slowed to a 1.1 percent rate in the first quarter. That was the slowest pace since the second quarter of 2013 and followed the fourth quarter's robust 4.0% which had been boosted by post-hurricane spending. Business investment slowed to a 4.7% rate in Q1 after double-digit growth in the second half of 2017. There is a distinct seasonal quirk which has led to Q1 numbers being systematically under-reported with a sharp bounce higher seen in Q2 each year. Most analysts estimate this effect to be around 0.9% so the reported outturn of 2.3% is actually a pretty good number. The USD index ended off its highs at 91.10 but still up over a full percentage point on the week.

The Canadian Dollar pretty much kept pace with the buoyant US Dollar last week. USD/CAD opened on Monday at 1.2760 and at the start of trading in North America that day moved on to a 1.28 ‘big figure’. Quite remarkably, that is where it stayed for the entire week with a low of 1.2820 on Tuesday and a high on Friday morning of 1.2895 before closing in New York at 1.2830. This amazingly steady performance dragged AUD/CAD down half a cent to 0.9725 with NZD/CAD down more than a cent to 0.9080.

In a week of very little fresh incoming economic data, the highlight was Bank of Canada Governor Stephen Poloz giving testimony to the Committee on Banking, Trade and Commerce on Wednesday afternoon. 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."

Whilst most attention in bond markets has been in the United States, where ten-year yields of 3.03% are the highest since January 2014, they’ve also been rising in Canada too. Yields on two-year and five-year government debt have reached the highest since 2011, surging 120 basis points since June, keeping the differential with the US broadly stable. The market consensus is for two more rates increases, most likely in July and either in October or December, according to overnight swaps data, although Bank of Canada Governor Stephen Poloz appears in no rush to validate these expectations. “What I don’t want is for people to be spending this entire year asking me what I’m up to because inflation is above target… You need once in a while to remind people that there’s a range and that’s okay, the policy allows for this. We’re not violating our target in some way.” The Canadian Dollar ended the week at USD/CAD1.2830, AUD/CAD0.9725 and GBP/CAD1.7680.

The EUR had a fairly poor week which was made less bad by its rally on Friday against the US Dollar and British Pound. EUR/USD opened on Monday at 1.2280 and steadily lost a full cent ahead of the ECB Meeting on Thursday. It fell a net 75 pips on the day after Mario Draghi’s Press Conference and reached a low on Friday afternoon of 1.2065; its weakest since January 12th. A subsequent rally of just over half a cent saw the pair end the week at 1.2130 for a loss over the period of 1½ cents. AUD/EUR ended the week unchanged at 0.6250 having been at 0.6195 on Wednesday, whilst NZD/EUR finished 25 pips lower at 0.5840.

The recent run of softer economic data in the Eurozone continued with Tuesday’s German ifo survey. The Press Release from the ifo left no room for doubt about the economic situation. It noted, “High spirits among German businesses have evaporated. The Business Climate Index for Germany fell to 102.1 points in April from 103.3 points in March. The indicator for the current business situation fell and expectations also deteriorated. The German economy is slowing down.” By sector, the manufacturing business climate deteriorated for the third consecutive month. Assessments of the current business situation declined but nevertheless remain at a high level. Business expectations dropped to their lowest ebb since August 2016. In services, meantime, the index dropped markedly. This was primarily due to far less optimistic future business expectations.

Commenting about the European Central Bank’s interpretation of the economic data, Mr Draghi said, “The bottom line of this discussion is in my view, it’s basically caution in reading these developments, caution tempered by an unchanged confidence in the convergence of inflation to our inflation aim.” He pointed to temporary factors such as bad weather, the early Easter timing and strikes but had to acknowledge the slowdown was widespread across EU countries and sectors. “The interesting thing is that we didn’t discuss monetary policy per se,” he said. “It’s quite clear that since our last meeting, broadly all countries experienced, in a different extent of course, some moderation in growth or some loss of momentum.” The usual anonymous ECB sources were quoted on newswires after the Press Conference had finished saying policymakers were keen not to upset investor expectations for a gradual withdrawal of the ECB’s monetary stimulus, despite some concerns about the state of the economy. The euro ended the week at USD1.2130, AUD/EUR0.6250 and NZD/EUR0.5840.

The British Pound had an ultimately terrible week which ended on Friday with the biggest one-day fall of the year and sent the GBP into equal bottom place with the Kiwi Dollar. GBP/USD began on Monday around 1.4010 but then slipped below 1.40 and remained there all week. Just before the Q1 GDP numbers on Friday morning, the pair stood at 1.3910 but after a very soft set of data it plunged to a low of 1.3755; its lowest since early-March. The GBP crashed on all its crosses with GBP/AUD and GBP/NZD both down 2 ½ cents on the day.

The Office for National Statistics reported that UK gross domestic product (GDP) was estimated to have increased by just 0.1% in the first quarter of 2018, after rising +0.4% in the fourth quarter of last year. This was the slowest pace of growth since Q4 2012, with construction being the largest downward drag on GDP, falling by 3.3%. The annual rate of growth fell from 1.4% to 1.2%. Most worryingly, the ONS said that, “While some impacts on GDP from the snow in the first quarter of 2018 have been recorded for construction and retail sales, the effects were generally small, with very little impact observed in other areas of the economy.” Details showed production increased by 0.7%, with manufacturing growth slowing to 0.2%; slowing manufacturing was partially offset by an increase in energy production due to the below-average temperatures. The services industries were the largest contributor to GDP growth, increasing by 0.3% in Q1, although the longer-term trend continues to show a weakening in services growth.

The GDP figures cast huge doubt over the Bank of England’s forecasting ability and the prospects of a hike in interest rates in May which it has clearly been communicating for the last few months. Indeed, in the whole period since it was made independent in 1997, it has never raised rates when the latest quarterly GDP reading was less than 0.4%. Raising interest rates with quarterly growth of just 0.1% when the inflation rate is falling sharply is not the way any sensible Central Bank should behave, especially one which claims to be guided by incoming data as well as its estimates of future growth in the economy. The Bank’s short-term reading of the UK economy has been shredded by the GDP numbers and its credibility will surely take another downward lurch whether it proceeds with or backs off a May rate hike. The pound ended last week at USD1.3780, GBP/AUD1.8165 and GBP/NZD1.9450.

In a week which was divided into two parts by the ANZAC day holiday on Wednesday, the Aussie Dollar fell steadily and persistently against a rampant US Dollar. AUD/USD began at 0.7675 and without any reversal of note, was sold down to a low around 0.7535 on Friday morning in Europe; its weakest since mid-December. The pair then recovered almost half a cent in the Northern Hemisphere day to end the week in New York at 0.7685. The AUD/NZD cross rate rose from 1.0640 on Monday morning to a high of almost 1.0730 on Thursday before finishing at exactly 1.0700. GBP/AUD, meanwhile, rose from 1.8255 to a high of 1.8460 before plunging on Friday to 1.8175.

The main highlight of the week was the long-awaited Q1 CPI report on Tuesday. Australian CPI figures are just like London buses - you wait ages for one to come along then four come at once! Dealing with all of them in turn, the quarterly increases showed headline CPI up 0.4%, the weighted and trimmed means both up 0.5% and the ‘core CPI’ which the RBA targets also up 0.5%. Whilst the headline rate was unchanged in year-on-year terms at 1.9%, the core rate rose from 1.9% to 2.0%; finally hitting the lower band of the RBA’s 1-3% target range for the first time in two years. The headline rate was very slightly below consensus expectations as seasonal increases in health and utilities were offset by lower retail and international travel prices whilst rents helped lift the core rate. Looking in detail at all the component parts of the CPI, the number of items which rose 0.6% or more during the quarter (and which NAB note correlates well with core inflation) fell from just over 40% to around 35%.

Data from the Australian Bureau of Statistics this week showed that for the first time on record, Sydney’s population grew by more than 100,000 people in one year. Sydney’s population hit 5.1 million at June 2017, an increase of 101,600 people (2 percent) since June 2016. But it was Melbourne that recorded the largest - and fastest growth - of Australia’s capital cities in 2016-17, increasing by 125,400 (2.7 percent) to reach 4.9 million. Together, Sydney, Melbourne and Brisbane accounted for over 70 percent of Australia’s population growth in 2016-17. Darwin, Adelaide and Perth, on the other hand, experienced relatively low rates of population growth, each at 1 percent or less. The AUD ended last week at USD0.7585, with AUD/NZD at 1.0700 and GBP/AUD1.8175.

The New Zealand Dollar had another very poor week and would have finished bottom of the table had it not been for Friday’s collapse of the GBP which took GBP/NZD back to where it began and meant both currencies shared the bottom spot on the week. NZD/USD began at 0.7215 and – like its Aussie cousin – was sold steadily and relentlessly down to a low on Friday morning in Europe of 0.7045; a fresh low for 2018 and its weakest since December 27th. By the close of business, the pair had rallied around 40 pips to 0.7085; a net loss of almost 1 ½ cents. The GBP/NZD cross rose from 1.9450 on Monday to 1.9750 on Friday but then collapsed 3 cents on the day to finish back at 1.9450.

The notable feature of the Kiwi decline was that it came without any major news or incoming economic data and nothing of note from the RBNZ. Stats NZ released their always fascinating visitor arrivals data this week. These showed 3.82 million visitors arrived in New Zealand in the year to March 2018; an increase of 276,200 (8 percent) from the previous year. The statisticians said, “Two-thirds of this rise was due to more visitors from Australia, China, the United Kingdom, and the United States… Over half of all overseas visitors were holidaymakers, and over one-quarter were visiting friends and family.” The top source of visitor arrivals in March 2018 was Australia, at 37% of all visitor arrivals followed by China and the US with 11% and the UK with 7%. In other data, New Zealand’s goods trade deficit reached a near 10-year high in the March 2018 quarter. The goods trade shortfall reflects high fuel imports and a fall in dairy, meat, and forestry exports. In the March 2018 quarter, there was a seasonally adjusted goods trade deficit of $1.8 billion. The March 2018 quarter’s deficit was the largest since the June 2008 quarter, and the 16th consecutive quarterly deficit since the March 2014 quarter.

The latest ANZ consumer confidence numbers show consumer confidence has dipped, although the analysts there noted, “the catalyst is not immediately clear.” The labour market is strong, wages look set to rise, and the housing market is relatively steady. The fall appears to reflect increased wariness of what the future may bring; perceived current conditions remain strong. The ANZ-Roy Morgan Consumer Confidence Index fell 7.5 points from 128.0 to 120.5 in April. This is just above the average of the series since its inception in 2004. The Current Conditions Index fell 5 points to 123.1 in April, while the Future Conditions Index fell 9 points to 118.7. The NZD ended the week in New York at USD0.7085 and AUD/NZD1.0700.