On a day of high political drama in the United States, the opening of the cash equity market in the United States on Tuesday coincided with the peak in the AUD/USD exchange rate just under 0.7895. The DJIA had rallied almost 650 points from last Thursday’s intra-day low; at which point AUD/USD stood around 0.7775. As the stock market yesterday suffered a 250 point drop in the space of just a few hours on news that Secretary of State Rex Tillerson had been fired, so the AUD/USD slipped back; albeit demonstrating some resilience given the scale of the stock market reversal.
The highlight in Australian economic news was the well-respected NAB monthly business survey. The business conditions index moved 3 points higher to +21. This is a record high since the monthly survey commenced in March 1997, although the same measure in NAB’s quarterly survey reached this level in 1994. In contrast, the business confidence index declined by 2 points to +9. According to NAB, “The fall in confidence may reflect the turbulence seen in international financial markets in early February, but confidence remains above average suggesting that the impact was relatively limited”. The strength in business conditions was broad-based with all major industry groups reporting above-average conditions. NAB noted, “The gap between the best and the softest performing industries is at a relatively low level with even the underperforming retail sector recording its highest reading in eight months. That said, the trend down in personal & recreational services over the past four months needs to be watched closely as it could indicate that softness in consumer spending is broadening beyond retail.”
It is striking that even a record high for NAB’s business conditions sees the bank hedging its bets on the interest rate outlook. It recently removed one of the two hikes in its 2018 forecast profile and now says, “We expect by late 2018 the RBA will feel relaxed enough about the domestic fundamentals to cautiously start withdrawing the stimulatory policy stance it is currently running. However, it will depend heavily on the data flow and the risk is that the RBA will delay rate rises until early 2019.” The Australian Dollar opens in Asia this morning at USD0.7855, with AUD/NZD at 1.0720 and GBP/AUD1.7775.
AUD / NZD
Expected Range: 1.0665 – 1.0795
Volatility has resumed in the New Zealand Dollar which once again topped the table at the end of the global trading day on Tuesday. NZD/USD is back on a 73 cents handle and the high in the European afternoon around 0.7350 was the best level in almost three weeks. AUD/NZD is down more than half a cent to 1.0720 whilst NZD/CAD is up more than a full point from Monday’s close at 0.9500.
The Reserve Bank of New Zealand’s (RBNZ) outgoing governor said on Tuesday that the bank’s use of macroprudential tools had successfully insulated the financial sector from the risks of a hot housing market and that its policy toolkit should be expanded. Governor Grant Spencer said that a planned review of the bank’s use of macroprudential policy in 2018, five years after it was first adopted, should consider the ways in which the success of the tools could be built on. “While we stated at the outset in 2013 that LVRs (loan to value restrictions) would be temporary, I believe there is a case to consider maintaining a policy infrastructure of this sort, with policies being adjusted through time between binding and non-binding settings.” Mr. Spencer also recommended the introduction of a new committee to make decisions around macroprudential policy, which would sit alongside the bank’s monetary policy committee, with some overlap in members.
The RBNZ slightly eased back some of its LVR restrictions in January after a sharp slow-down in house price inflation towards the end of 2017. House prices have since recovered, growing at an annual rate of around 6.5 percent for the past three months. The timing of Mr. Spencer’s speech is very interesting, coming on the day before the always-fascinating REINZ house price report is released and should keep the topic very much a live one for debate. The New Zealand Dollar opens in Asia this morning at USD0.7325 and AUD/NZD1.0720.
GBP / AUD
Expected Range: 1.7605 – 1.7870
The British Pound couldn’t quite make two consecutive days at the top of the table, knocked into second place on Tuesday by the ever-volatile New Zealand Dollar. GBP/USD actually spent most of the Asian session and European morning in a fairly tight range, unchanged from the previous New York close at 1.3900 at the moment UK Chancellor Phillip Hammond stood up to present the inaugural Spring Statement to the House of Commons. By the time he had finished, ‘cable’ stood at 1.3965 and went on to a day’s best of 1.3985.
We wrote here yesterday that, “There is the chance of a rare upgrade to UK economic forecasts after the incoming data over the past few months have shown the Office for Budget Responsibility was too pessimistic in its assumptions on UK productivity.” That is exactly what happened, albeit the upward revisions were only very small and from an exceptionally weak starting point. What really grabbed the attention was how upbeat the Chancellor was; as if he had been practicing really hard for quite some time. Often accused of being an Eeyore (the pessimistic, gloomy, depressed, old grey donkey who is the friend of Winnie-the-Pooh in the children’s books by A.A. Milne), Mr. Hammond began by insisting, “I am at my positively Tigger-like best” (As this character says, bouncing is what Tigger does best). He proceeded to read a series of five-year economic growth forecasts which should reduce any adult to tears of sadness, not joy: 1.5%, 1.3%, 1.3%, 1.4% and 1.5%. This will be the first time in 70 years of five consecutive years of growth below 2%, but the Chancellor made it sound like the winning lottery numbers; hailing a 0.1% upward revision to the 2018 number.
The Chancellor promised Britain that, “our best days lie ahead of us” and said he would use the budget this autumn to set out his expenditure expectations for 2020 and beyond, with a full spending review next year, after Brexit. If the public finances continued to reflect the improvements outlined in his Statement, he said the government would “have capacity to enable further increases in public spending and investment in the years ahead.” Rarely has such poor news been so well received; both by backbench MP’s and a usually more skeptical foreign exchange market. The GBP opens in Asia this morning at USD1.3965, GBP/AUD1.7775 and GBP/NZD1.9060.
AUD / USD
Expected Range: 0.775 – 0.7895
The US Dollar fell even as stocks turned sharply lower on Tuesday, on news that President Trump had fired his Secretary of State, Rex Tillerson. The Dollar’s index against a basket of major currencies had risen a couple of tenths in Asia to 89.65 and held that level until lunchtime in Europe. By noon in New York, however, it had fallen almost half a point to a 6-day low of 89.65 and the DJIA had tumbled 250 points from earlier levels.
It wasn’t just the fact of Mr Tillerson’s departure, but the way it had been announced with the Secretary of State on learning of his fate from the POTUS Twitter feed. President Trump subsequently told reporters that he and Tillerson disagreed on Iran, that he made the North Korea decision himself and thinks Tillerson will be "much happier now." Trump said "I wish Rex Tillerson well… I very much appreciate his commitment and his service and I wish him well. He’s a good man… We got along actually quite well but we disagreed on things.” The Trump White House has seen 24 departures in its first 417 days - a rate of around one senior position every 17 days (and more first-year departures than any other president in at least 40 years). A chief of staff, press secretary, three communications directors, a chief strategist, a health secretary, and now a Secretary of State and Personal Assistant are among those who have left the Trump administration.
Amidst all the political dramas, the economic numbers seem like something of an after-thought. The Labor Department said its Consumer Price Index rose 0.2% last month after jumping 0.5% in January, taking the annual rate to 2.2%, up from 2.1% as the weak reading from last year dropped from the calculation. Excluding the volatile food and energy components, the CPI rose 0.2% after increasing 0.3% last month to leave the annual rate unchanged at 1.8%. After the inflation numbers, on Wednesday we have retail sales and then towards the end of the week it’s housing and industrial production data. The USD index opens in Asia around 89.30.
AUD / EUR
Expected Range: 0.6380 – 0.6395
The euro was very much out of the spotlight for most of Tuesday though a late rally as the US Dollar struggled took EUR/USD back on to a 1.24 handle for the first time since last Thursday’s ECB Council meeting. For the 12 hours of trading in Asia and the European morning, just 25 pips separated the high and low for EUR/USD and it settled around the mid-point of its range, lacking both direction and momentum until the announcement of the sacking of the US Secretary of State. By the close in New York, however, the EUR was challenging the GBP for second place on our one-day performance table.
The leader of Italy’s far-right League, which emerged the largest conservative party in national elections on March 4, said on Tuesday that he did not see the country suddenly leaving the euro. “The euro is and remains a flawed currency,” League leader Matteo Salvini told reporters in Strasbourg, repeating his common line but, “There is no unilateral and improvised exit on the horizon,” he added. Salvini campaigned on rewriting European Union budget rules in order to make drastic tax cuts, and on mass deportations of irregular migrants but has not yet been invited by Italian President, Sergio Mattarella, to try to form the next Government.
The main events economic in the Eurozone come today with the final German CPI numbers ahead of those for the wider Eurozone on Friday. There are plenty of Central Bank speakers on Wednesday too, with President Draghi, Vice President Constancio and Chief Economist Peter Praet all scheduled to talk. The euro opens in Asia today at USD1.2390, AUD/EUR0.6340 and NZD/EUR0.5915.
AUD / CAD
Expected Range: 1.0130 – 1.0250
The GBP could quite make two consecutive days at the top of our performance table but the Canadian Dollar has made back-to-back appearances at the bottom. USD edged gradually higher in Asia and the European morning then jumped from 1.2840 to 1.2925 as headlines from Bank of Canada Governor Stephen Poloz’s speech began to hit the newswires. By the end of the day, AUD/CAD was nudging 1.02 and NZD/CAD was almost at 95 cents.
In a speech which focused on labour market slack, the Governor said Canada is at the “sweet spot” of the business cycle where growing demand is actually generating new capacity as companies invest to meet sales, a process he said the Bank of Canada has an “obligation” to nurture. The increased investment, meanwhile, will help bring more people into the work force - such as women, youth and the long-term unemployed. “Put it all together, and it is not much of a stretch to imagine that Canada’s labour force could expand by another half a million workers. To put this thought experiment into perspective, this could increase Canada’s potential output by as much as 1.5 per cent, or about $30 billion per year. That’s equal to a permanent increase in output of almost $1,000 per Canadian every year, even before you factor in the possible investment and productivity gains that would come with such an increase in labour supply. Clearly, that is a prize worth pursuing.”
On monetary policy, Poloz said, “It should be clear that there are likely to be significant economic benefits associated with allowing the economy to find its way to a higher, more productive economic equilibrium, if this can happen within our inflation-targeting regime… “We cannot know in advance how far the capacity-building process can go, but we have an obligation to allow it to occur.” This doesn’t sound like a man in any hurry to raise interest rates, hence the slump in the Canadian Dollar which opens in Asia this morning at USD/CAD1.2970, AUD/CAD1.0190 and NZD/CAD0.9495.
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