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A week jam-packed with top-tier economic releases!


The US Dollar started the week at the top of our performance table, following the release of the first quarterly GDP report on Friday, May 27th. Ahead of the release, the latest iteration of the Atlanta Fed’s 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 over the past few years with a sharp bounce higher seen in Q2. Most analysts estimate this effect to be around 0.9% so the reported outturn for Q1 of 2.3% is actually a pretty good number.

Crucially this week, the aluminum and steel tariffs proposed by the Trump administration, set to be imposed come May 1st until June 1 were delayed. The main reason for the extension is that principle agreements have been made with Europe, Argentina, Brazil and Australia. Canada and Mexico are in negotiations with the United States on NAFTA which will cover cross-border trade between the three countries. Treasury Secretary Mnuchin will be traveling to China this month to hash out a trade agreement of some sort in hopes to calm a potential trade war which has only been a war of words; with no implementation. Closer to home, the Federal Reserve left rates unchanged in line with expectations, with market participants looking to the statement for cues to trade off of. The report referenced that inflation was moving toward the Fed 2% target at a manageable pace, signaling that the Fed has room to tighten further down the road without the worry of inflation running away. It has been noted that economic growth in the US and inflation pressure will warrant the Fed to continue on its tightening path through the latter part of this year. The greenback made initial gains against it trading peers before settling down to levels before the announcement.

Capping off the week, the focus then shifted to US jobs with Non-Farm Payroll and Unemployment rate releases early Friday. US non-farm payrolls rose by 164,000 (up from 103,000 yet shy of a190,000 forecast) and the US unemployment rate fell 20 basis points to 3.9% when markets had been looking for a lesser decline to 4%. As a result, the USD strengthened to EUR0.8360 before closing out the week.

The Canadian Dollar pretty much kept pace with the buoyant US Dollar this week, opening at USD/CAD1.2855. With the NAFTA agreement at the forefront of everyone's mind, Ms Rona Ambrose, a member of Canada’s NAFTA Advisory Council, spoke on TV before the week began. She said, “A great deal of progress has been made, specifically around rules of origin for automotives and I think that bodes very, very well for the negotiations… The rules of origin around automotives and making more parts and cars in North America, has always been the sweet spot to get to Donald Trump. It’s a difficult part to get through, and if we can get through this, which it looks like we have, I think it’s a very good sign... If he can say, 'We've reached some kind of an agreement or framework where we can build more cars, build more American parts in North America, in the United States,' that’s a great sign to his voters about more jobs.”

Elsewhere, we saw the Israeli Prime Minister speaking on television citing Iran’s ten years of nuclear deception; this sent oil prices higher to 69 dollars a barrel for WTI however, oil prices retraced 1% as Netanyahu’s comments were not seen as groundbreaking in the region. Canadian gas prices range in Ontario at 1.37 a liter while in Vancouver they are seeing price hit 1.60 a liter.

Locally, Bank of Canada Governor Stephen Poloz delivered a message on Canadian household debt and the takeaway was that the Bank will be monitoring the size of the debt and will take this into a count on future interest rate hikes. The Central Bank is also cognizant of various factors in the economy such as NAFTA, US Trading Policy, and competition which are keeping interest rates low now. Poloz said these factors would fade over time and the need for continued monetary stimulus will diminish, and the policy rate will naturally rise. The Bank of Canada is due to release its interest rates on May 30th the day before 1st quarter GDP the main BOC metric on forecasting future rate hikes.

Another fairly poor week for the EUR; the economic slowdown in the Eurozone of late has seen a lot of last year’s gain erased, and persistently under-target inflation isn’t helping its cause either. There has been quite a lot of soft activity survey evidence over the past few months, both at the individual country level and in aggregate across the Eurozone. Whether it’s the ifo, GfK, Markit or INSEE, the reports have all indicated a slower pace of economic activity after the buoyant end to 2017 and the strong start to 2018 seen in January. 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.”

Mid-week, the EURUSD closed below its 200-day moving average an essential support level of 1.20, as USD strength continued against almost all other currencies. The pair is now flat on the year and the next few months could be challenging as it seems the European Central Bank, is in no hurry to discuss the end of their Quantitative Easing program, which doesn’t bode well for the Euro’s near-term view.

Unemployment and GDP data came as expected but that didn’t help the Euro, which was probably also affected by weakness in some Eastern European currencies after the European Commission proposed fund cutting to bloc countries in their new budget. CPI releases missed target, with the overall reading slipping to 1.2% and the core reading dropping to 0.7% from 1%. With inflation persistently under target the question remains what taper will be announced by the ECB at their June meeting, will they stop altogether or decide to extend for 3-6 months at a lower level?

Sterling’s decent continued this week as the latest HIS Markit/CIPS Manufacturing PMI numbers released on Tuesday missed their target, pushing cable below 1.37 for the first time since early January. The report came in at 53.9 a 17 month low for a sector which had held up well since the Brexit vote, aided by sterling’s fall in value after the referendum. The report’s authors advised “While adverse weather was partly to blame in February and March, there are no excuses for April’s disappointing performance, making the chances of a near-term interest hike in interest rates by the Bank of England look increasingly remote." With a slowing economy and inflation falling faster than expected, the pound has tanked against the dollar dropping around seven cents since April 17th.

On the flip side of the coin, there was some good news for the pound mid-week, as the monthly Markit/CIPS UK Construction PMI showed a strong rebound for April after March’s dismal, snow affected reading. The survey printed 52.5 up from 47 in March however the authors noted it was “difficult to gauge underlying momentum” given how poorly the sector was hit by the Beast from the East. There was also a rebound in the Markit/CIPS UK Services PMI following March’s disappointing reading with the gauge pushing up from 51.7 to 52.8 in April. Markets had penciled in 53.5 so the miss saw a modest sell off in the pound with GBP/USD dipping back under 1.36 however the reaction was pretty muted. The report’s authors noted: “The overall expansion signalled by the three surveys in April was the second-weakest since the Brexit vote, pointing to a quarterly rate of GDP growth of around 0.2% at the start of the second quarter….The disappointing services data will add to expectations that the MPC will take its finger firmly off the rate hike trigger. Any further slowing will also raise questions as to whether the November rate hike may have been ill-timed.”

To cap off the week, the results of the UK local elections were announced with the Labour taking control of Tower Hamlets, but failing to take other target councils in London, while the Conservatives have lost control of two councils overall. The Lib Dems gained four councils, two of them in London, the UKIP lost over 120 councillors and the Greens have a net increase of eight councillors. GBP/USD closed the week under 1.36.

Having capitulated versus a rampaging US Dollar the week before, the bumpy ride continued for the Australian Dollar, which succumbed to selling pressures on approaches towards the 0.7580 mark. Numbers from China lent some support, with manufacturing conditions showing a slight easing in April. Whilst ongoing fears of trade battles between two of the world’s largest economies, The United States and China continue to sit front and centre of investor’s mindsets, slowing export order growth last month still wasn’t enough to signal a broader contraction in the metric which is closely tied to a barometer of underlying business conditions. 

Elsewhere, the Reserve Bank of Australia kick-started proceedings and aligning to expectations, left interest rates on hold at a record low of 1.5 percent. This is the 19th consecutive month at that level. With supporting commentary offering up very little new insight, policymakers re-confirmed the view that any shift towards tighter monetary settings would be gradual, allowing labor markets and inflation to return to target.

Lastly, recording another impressive trade surplus in March, accounts released by the Australian Bureau of Statistics showed Australia’s trade surplus rose to $1.527 billion in seasonally adjusted terms. Comfortably exceeding expectation, additional positivity was thrown into the mix domestically following the release of numbers which revealed dwelling approvals rose by 0.2 percent in March.  The AUD ended last week at USD 0.7503, with AUD/NZD at 1.0687 and GBP/AUD1.7857.

The theme of the week for the NZD continued to be the strength of the US Dollar, which showed no sign of easing. The NZD has now been pushed to critical support levels not seen since December 2017.

With the release of ANZ’s latest survey earlier in the week, business confidence eased further in April with a net 23% of businesses showing pessimism about the year ahead, down 3 points from March. All sectors are in the red, with services the least pessimistic and agriculture the most. Agriculture did manage a small gain on March, but construction plummeted to its lowest level since 2008. Firms’ views of their own activity (which has the stronger correlation with GDP growth), eased from +22 to +18. Manufacturing and agriculture lifted; construction fell a startling 38 points – excluding this sector the aggregate eased only 1 point. Taken in conjunction with the week before last's consumer confidence survey, the analysts at ANZ reckon their composite growth indicator, “has now dipped to around 2% y/y growth. We think the economy has more in the tank to keep growth above that, but with consumer confidence dipping and business growth indicators still languishing, it won’t necessarily be as smooth sailing as it has been.”

Although overshadowed, it wasn't all bad news for the NZD this week. The NZ unemployment rate hit the lowest level in a decade at 4.4% (total Jobs for the quarter grew by 15,000 jobs and 0.6% for the quarter) and a positive monthly reading of ANZ Commodity prices in April gained 1%. The primary catalyst for the increase was a boost in dairy and aluminum prices after trade tensions between USA and China.