British Pound (GBP)
The British Pound starts this Monday morning after a good week, finishing higher but off its best levels against nearly all the major currencies. It began last week around USD1.3940 and by Thursday morning touched a high just under 1.4175 before closing on Friday in New York around 1.4130. Against the Antipodean currencies, GBP/AUD started at 1.8075 and by Friday evening in North America hit 1.8360; its highest level since the EU referendum back in June 2016. GBP/NZD, meantime, rose from 1.9310 at the start of the week to a high on Wednesday of 1.9630 before giving back just over one cent of its gains into the New York close on Friday. Overnight in Asia, GBP/USD has been back testing the highs against a somewhat weaker US Dollar, though early strength in stock index futures has helped underpin the traditionally risk-sensitive AUD and NZD.
After last week’s positive news from the UK and EU on a Brexit transitional agreement running until December 31st 2020, there’s still a lot of detail to be agreed, most notably on the very tricky issue of the land border between Ireland (which is in the EU) and Northern Ireland which will not be. Talks will begin in Brussels today which are aimed at reaching a deal on what will happen here. The Brexit Secretary David Davis has said the UK will agree to a ‘backstop’ text for the Irish border, but not the one proposed by the EU. In February, it was proposed Northern Ireland stay in the customs union or single market if there was no other way to maintain a soft border but Mr Davis said on TV on Sunday that it was “overwhelmingly likely” that the border issue would be solved in the context of a trade and customs agreement. He said trusted trader schemes and technological options would be able to maintain an invisible border. “There are ways of dealing with this. You can’t just say ‘we haven’t done it anywhere else’ – we haven’t attempted to do it anywhere else.”
By Friday of this week, there will be less than one year to Brexit on March 29th 2019 but it will still be the dominant theme for UK politics, economics and financial markets. The Bank of England has done its best to maintain a sense of normality; assuming a smooth transition and preparing the ground for the second interest rate rise of the current cycle. Indeed, the 7-2 split at last week’s MPC meeting with two members voting for an immediate rate hike was the exact same tactic employed in September last year to prepare the market for a rate hike in December. The Bank of England has revised down its forecast for quarter-on-quarter GDP growth in Q1 to 0.3%, from 0.4% and said that it would be “difficult to quantify” the damage that the bad weather would do to Q1 GDP. Retailers will be hoping for a significant pick-up in both temperature and activity over the Easter weekend. GBP/USD opens in Europe this morning in the high 1.41’s with GBP/EUR in the mid-1.14’s.
United States Dollar (USD)
The US Dollar ended lower after what was yet another week of high political and economic drama. Say what you will about the Trump Presidency, it’s never dull… The US Dollar’s index against a basket of major currencies opened the week around 89.80. If fell half a point on Monday, rallied back to 90.00 for the first time in three weeks on Tuesday then tumbled almost a full point to a low on Thursday morning of 89.05. A near-half point rally was then entirely reversed on Friday and having reached a low of 89.00, it ended only a few pips above this level. In the first trading session of the week in Asia, the USD has slipped against the GBP and EUR and its index is around 10 pips lower at 88.95; its lowest level since February 20th.
Last week was the worst weekly performance by the US stock market since January 2016 with the Dow Jones Industrial Average finishing at a four-month low. As the Facebook story broke last Monday, the DJIA was down 500 points intra-day and more than $100bn was wiped off the value of technology shares. It ended the day down 330 at 24,610. Tuesday brought a 100-point gain and Wednesday a 100-point loss. On Thursday President Trump announced the US Trade Representative’s “Section 301” investigation into alleged misappropriation of US intellectual property by China and the DJIA fell 325 points, followed by a further 420 points loss on Friday. The picture is just as bad for the S&P 500 Index which fell six per cent on the week. Indeed, the S&P 500 has closed lower than the midpoint of its daily range for 10 straight days, the longest stretch since at least 1982. The index closed on Friday at 2,588.26, hovering just above its 200-day moving average and its decline since March 9th was its third dip of at least 5 percent in the past two months.
In the period since his election victory in November 2016 to the stock market peak in early February, President Trump tweeted about the rally more than 60 times, often appearing to take credit for it. The POTUS Twitter feed has been noticeable quiet on the subject since then. The last tweet on the market came shortly after the fall in early February, warning investors they were making a “big mistake” for selling stocks despite “good news” about the economy. As at Friday’s close, the market was still just above the February low. The futures market this morning in Asia has thus far confounded some of the more alarmist comparisons with the ‘Black Monday’ Crash of 1987. As we write this commentary, the DJIA is up 200 points with the S+P 500 up 23 points. Of course, all this could change in an instant and measures of volatility such as the VIX remain very elevated. Against this very nervous background in asset markets, the USD index opens in Europe this morning at 88.95.
Euro (EUR)
The EUR ended a volatile week higher against the US, Australian and New Zealand Dollars but down against the GBP and CAD. EUR/USD began the week around 1.2280 and rose on Monday as the US stock market tumbled. A much weaker than expected ZEW survey sent the euro tumbling on Tuesday but as the USD fell immediately after the FOMC announcement on Wednesday, EUR/USD rallied sharply, moving to a high on Thursday morning of 1.2380. By that evening it was back on a 1.22 ‘big figure’ before then rallying on Friday to end the week around 1.2355. In Asia overnight, the EUR has added another quarter of a cent to a 10-day high of 1.2375.
The economic data in the Eurozone have gradually eased back during the course of Q1. The ZEW research institute said in its monthly survey last week that economic sentiment among investors dropped to 5.1, its lowest reading in a year and a half. The ‘flash estimate’ of the Eurozone composite PMI, meantime, fell to 55.3 in March, down from 57.1 in February. This was the lowest since January of last year and signaled a second successive monthly easing in the rate of expansion. Completing a poor set of survey data, The Munich-based Ifo economic institute said that its business climate index, based on a monthly survey of some 7,000 companies, fell to an 11-month low of 114.7 from 115.4 in February.
There is more survey evidence to come on Tuesday this week when the Eurozone business and consumer confidence numbers are published. The ‘flash estimate’ of German CPI is out on Wednesday and consensus expectations suggest there may finally be some pick up with the annual rate of inflation set to rise from 1.2% to 1.6%, largely due to favourable base effects from a year ago rather than an immediate acceleration in price pressures now. It is otherwise a pretty quiet week for economic data across Continental Europe whilst the only scheduled ECB speech is on banking supervision rather than monetary policy. The EUR opens in London this morning at USD1.2375 with GBP/EUR in the mid-1.14’s.
Australian Dollar (AUD)
The Aussie didn’t just end lower against the USD last week. It was the worst performer of all the major currencies we follow closely here after a dive in the last hour of trading in New York. AUD/USD began the week around USD.0.7715, hit a low around lunchtime on Wednesday in Europe of 0.7677 but then rallied sharply immediately after the FOMC announcement as the USD was sold heavily. From a high of 0.7780 on Thursday morning, however, a near-1,000 point drop in the DJIA over the next two days saw the Aussie fall almost a cent to end the week around 0.7705. After the first trading session of this new week, a rally in stock-index futures and continued support for the gold price have helped lift the AUD a little and it has clawed its way back on to a US 77 cents ‘big figure’.
There has been plenty of news out of Australia over the past 24 hours, even if none of it has been directly related to the currency. The first Formula 1 Grand Prix of the new season in Melbourne, the first ever non-stop Quantas flight between Australia and London and the scandal around the cricket team in South Africa are much more interesting than whether the AUD goes up or down a cent; especially in a week when there’s little or no fresh incoming economic data. The weekly consumer confidence numbers are due on Tuesday, whilst private sector credit and job vacancies are released on Thursday ahead of the Good Friday holiday.
The one word which has come to define RBA Governor Phil Lowe’s view on the Australian economy is ‘gradual’. If we had to chose two words, they’d be ‘slow and gradual’; a phrase which runs through his speeches and the RBA’s commentaries on the economy. Assistant Governor Christopher Kent, the RBA’s Head of Economics, is due to make a speech on Tuesday and it would be a great surprise if there was much change in this description of the economic or monetary policy outlooks. The currency, instead, will more likely be driven by global risk appetite, volatility in asset markets and the extent to which safe-havens such as gold can find any support. The Australian Dollar opens this morning in Europe in the low-USD 77’s with GBP/AUD at 1.83.
Canadian Dollar (CAD)
After its very poor performance year-to-date in 2018, the Canadian Dollar had a very good week; almost managing the rare feat of topping our one-day table for three consecutive days from Tuesday to Thursday. From a high last Monday morning of USD/CAD1.3120, it was downhill all the way (stronger CAD) to a low on Friday around 1.2830 after stronger than expected Canadian inflation data. The GBP/CAD cross rate hit 1.84 last Monday – its highest since the EU referendum back in June 2016 – before then falling to a low last Friday around 1.8150.
There seemed plenty of positive hints about NAFTA on both sides of the US-Canada border last week, with trade representatives talking about flexibility shown by the US after its specific exemptions from steel and aluminium tariffs for Canada, Mexico and others. The Globe and Mail newspaper, citing unidentified sources, reported the U.S. had altogether dropped its demand for 50 percent U.S. content in vehicles. Traders rushed to cover short positions in the Canadian Dollar on Wednesday and Thursday and on Friday the currency was given a further lift by stronger than expected inflation figures. Statistics Canada reported that CPI rose 2.2% on a year-over-year basis in February, following a 1.7% increase in January and compared to consensus expectations of a 2.0% annual rate. All eight major components increased year over year in February.
The main economic data to be published this week come on Thursday when we have the monthly GDP data as well as industrial raw materials prices. There’s nothing from the Bank of Canada until well after the Easter break but looking at interest rate markets, the probability of a hike in May rose to 82 percent after Friday’s CPI release, from 74 percent before the data were published. The Canadian Dollar opens in Europe this morning with USD/CAD in the high-1.28’s and GBP/CAD in the low-1.82’s.
New Zealand Dollar (NZD)
The New Zealand Dollar opened last Monday around USD0.7220. It fell to a low just under 0.7160 at lunchtime in Europe on Wednesday but recovered all its losses – and more – to a high of 0.7270 in New York on Friday before a last-hour drop to close around 0.7235. The main feature of the week, however, was the Kiwi’s performance against the Australian Dollar. The AUD/NZD cross fell to a near 8-month low around 1.0635 on Monday and after rallying a full cent on Wednesday, returned to test and then break this level on Friday. Elsewhere on its crosses, GBP/NZD rose from 1.9300 on Monday to 1.9630 on Wednesday before then falling over a cent into the end of the week. After the first 10 hours of trading in this new week, the NZD has been the best performer so far, rising between one and two-tenths against all the currencies we follow closely here.
The New Zealand has a new Central Bank Governor from today, having had a new Government for almost six months. The Government has already made clear its wish to change the mandate of the RBNZ to focus on employment as well as inflation. Earlier this morning, Finance Minister Grant Robertson and new Governor Adrian Orr revealed the new Policy Targets Agreement (PTA) they have signed, along with the outcomes of phase-1 of the RBNZ Act review. The new PTA re-iterates the goal of keeping annual CPI inflation between 1 percent and 3 percent over the medium term, with a focus on the mid-point of 2 percent. But along with a goal of maintaining price stability, the RBNZ will have a goal of “supporting maximum sustainable employment within the economy.”
As well as a change in its mandate, the RBNZ will also shift responsibility for interest rates away from the Governor himself to a newly-formed Monetary Policy Committee. The MPC will have seven members: four internal at the bank and three external, along with a non-voting observer from the Treasury. On the inclusion of external, expert, members on the Monetary Policy Committee, Mr. Robertson said this would help ensure a “diversity of perspectives is harnessed in the decision making” whilst the presence of the Treasury official “was the subject of significant discussion during the first phase of the review.” As Mr Orr very diplomatically put it, “What the new PTA does is make the employment side far more transparent and the Reserve Bank will be obliged to talk openly and transparently about how its short-term considerations have been taken into the decision-making framework when setting interest rates.” The Kiwi Dollar opens in London this morning at USD 72 cents with GBP/NZD in the high-1.94’s.