British Pound (GBP)
Today is a public holiday in both China and Japan so FX trading has been relatively light in the Asia session overnight. The British Pound resumed after a 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. Just before the Q1 GDP numbers on Friday morning, GBP/USD 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. For the moment, the forced resignation of the Home Secretary, Amber Rudd, has had little impact on the currency but to the extent that it focuses the mind on political uncertainty in the UK, it could be yet another negative factor to weigh on the pound.
The Q1 GDP figures cast huge doubt over the prospects of a hike in interest rates at next week’s MPC meeting 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%. Only a couple of weeks ago, the market-derived probability of a 25bp rise in Bank Rate was a little over 85%. Today, it is barely 20%, with plenty of analysts now saying there’ll be no increase at all during 2018.
With Q1 now out of the way, markets will be looking to see how the second quarter has begun, both for the consumer and for businesses. This week will bring April’s manufacturing PMI on Tuesday and the service sector PMI on Thursday, whilst tomorrow we’ll have the mortgage approvals data. There are no UK economic numbers scheduled for release today and, instead, politics is likely to dominate the domestic news agenda. The Pound opens in Europe this morning with GBP/USD at 1.3780 with GBP/EUR at 1.1365.
United States Dollar (USD)
The US Dollar starts after a very good week in which 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.
We often comment here on the excellent real-time GDP estimates produced by the Atlanta Fed. Obviously, at the start of each quarter, there is little hard data to go on other than the momentum of the previous three months but as the quarter evolves, and more income data is released, the model becomes increasingly accurate and useful. Ahead of the first quarter GDP report on Friday, 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.
With the first day of the new month tomorrow, the week ahead is an especially busy one in terms of top-tier economic data releases. Monday brings the personal income and income expenditure figures, as well as the deflator numbers which are the Fed’s targeted measure of inflation. On Tuesday we have the ISM manufacturing report with the service sector version released on Thursday. Finishing the week Friday, we have the US labour market report, with markets anxiously awaiting updates on employment and average earnings. In between all this, there’s an FOMC meeting on Wednesday, albeit there are no new economic projections and no Press Conference scheduled. Market-derived probabilities show only a 6% chance of a rate hike at the May 2nd meeting, though a June 13th hike is more than fully discounted; at 93% chance of a 25bp move and a 7% chance of 50bp. The USD index opens in Europe this morning at 91.10.
Euro (EUR)
The EUR opens after a fairly poor week which was made less bad by its rally on Friday against the US Dollar and British Pound. EUR/USD opened last Monday at 1.2280 but ended the week at 1.2130 for a net loss over the period of 1½ cents. Against the pound, GBP/EUR moved up from 1.1400 to a high of 1.1510 just ahead of the UK GDP figures but then plunged to finish the day around 1.1370; its lowest level in 6-weeks. Overnight in Asia, both EUR/USD and EUR/GBP have traded in very tight ranges and are little changed from Friday’s closing levels.
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.”
The week ahead will provide a good test of whether the ECB’s cautious optimism is, indeed, the correct assessment. On Wednesday, we have the Q1 GDP figures. The fourth quarter of 2017 had shown the strongest growth in around 6 years, with a +0.6% q/q increase. Consensus expectations for the first quarter are for a more modest +0.4% q/q pace of growth with the annual rate easing a touch from 2.7% to 2.6%. On Thursday, the final April CPI figures are released. The so-called ‘flash estimate’ had shown the headline rate at 1.3% with the core just 0.9%. The EUR opens in London this morning at USD1.2130 with GBP/EUR at 1.1365.
Australian Dollar (AUD)
In a week which was divided in to 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 0.7585. GBP/AUD, meanwhile, rose from 1.8255 to a high of 1.8460 before plunging on Friday to 1.8175. This Monday morning has begun on a soft note for the Australian Dollar which opens around a quarter of a cent down from Friday’s close.
In the first economic numbers of the week, total private sector credit grew +0.5% in March after a 0.4% increase the previous months. The detail of the numbers, however, showed that personal credit fell for a second consecutive month, whilst housing and businesses both showed an increase. If the RBA is indeed going to raise rates this year – and there is still a big split of views on this between analysts locally – then metrics around consumer credit, retail sales, household consumption, average earnings and confidence are going to have to show more signs of growth than are currently evident. Without such upward pressures, the gap between Australian and US interest rates will widen still further and continue to weigh down on the Aussie Dollar.
The week ahead could be a really busy one in terms of local and international news. The first Tuesday of the month of course brings an RBA Board Meeting, with Governor Phil ‘slow and gradual’ Lowe speaking afterwards at a dinner in Adelaide. The year passes quickly and it’s time already for a new Quarterly Statement of Monetary Policy on Friday with updated forecasts on GDP, inflation and unemployment. Offshore, there’s an FOMC meeting on Wednesday and on Friday we have the US labour market report, with markets anxiously awaiting updates on employment and average earnings. The Australian Dollar opens this morning in Europe at USD0.7570 with GBP/AUD at 1.8210.
Canadian Dollar (CAD)
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 meant that Friday’s plunge in GBP/USD was matched by a similar drop in GBP/CAD which fell from 1.7900 to a low around 1.7675.
As talks on renegotiating the NAFTA agreement head towards their denoument, Ms Rona Ambrose, a member of Canada’s NAFTA Advisory Council, spoke on TV this weekend. 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.”
Although the US labour market report will be released on the first Friday of the month of May, Canada’s employment numbers won’t be out until Friday 11th. Instead, the economic highlight locally will be the monthly GDP figures for February which are published on Tuesday. This will come an hour or so before Aprils manufacturing PMI survey and ahead of a speech by Bank of Canada Governor Stephen Poloz at 2.30pm local time. He’ll be speaking to the Yellowknife Chamber of Commerce on the topic “Canada’s Economy and Household Debt: How Big Is the Problem?”. The Canadian Dollar opens in Europe this morning with USD/CAD in the mid-1.28’s and GBP/CAD at 1.7695.
New Zealand Dollar (NZD)
The New Zealand Dollar had another very poor week and would have finished bottom of the table had it not been for Friday’s collapsed of the GBP which took GBP/NZD back to where it began and meant both currencies shared bottom spot on the week. NZD/USD 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 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 last Monday to 1.9750 on Friday but then collapsed 3 cents on the day to finish back at 1.9450.
ANZ’s latest survey this morning shows business confidence eased further in April. A net 23% of businesses are pessimistic 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 last week’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.”
For the rest of this week, the major economic theme is likely to be the labour market. On Wednesday, we have the quarterly employment and private sector wage data, whilst Thursday brings April’s job advertisement numbers. The data will be especially interesting in the context of the changed RBNZ mandate which now explicitly references employment as well as an inflation target. The Kiwi Dollar opens in London this morning at USD0.7080, with GBP/NZD around 1.9475.