The WorldFirst Team take a look at the key economic trends of March and consider the many diverse events set to shape global currency markets in April.
AUD: New Month, New Lows
Month in review
The Aussie Dollar continued its losses from February, falling another 1.5c against the USD during March, to hit fresh 2018 lows against the greenback.
Mid-month, the AUD briefly climbed back above 79c for about an hour, as U.S. retail sales dropped 0.1%, marking three consecutive months of decline for the first time since April 2012. This added to some of the strength gained from the U.S. missing average earnings expectations and thus lowering the probability of a fourth rate hike this year. On another note, President Trump’s Twitter account went into overdrive during March, at one point stating that he is “…working on a security agreement so we don’t have to impose steel or aluminium tariffs on our ally, the great nation of Australia.”
Since then, the AUD did a good job to dig in its heels, as fears of an international trade war applied strong downward pressure. Although Australia is said to be exempt – our biggest trade partner – China, is feeling the wrath of one of their largest trade partners. China has since retaliated applying tariffs to 128 imported U.S. products, amounting to approximately $3billion.
Falling commodity prices have put further pressure on the AUD, with iron ore shipments (based on value) falling 23.7% year on year. The last time Australia was making this little money from iron ore was in February 2016, with the price of iron ore falling 12% this month alone.
China’s retaliation of tariffs on U.S. imports may not be the final play by either party, in an attempt to benefit from any changes to imports/exports, although rather than being the biggest winner it looks increasingly likely that they may have to settle for being the smallest loser. As China exports approximately $400billion more to the U.S., than it imports (annually), it would seem that the power still remains firmly in the hands of the United States. Any further implications to the bottom line of our biggest trade partner can have a substantial effect on the AUD, less profit in China means less spending on imports from Australia. The main data to start this month will be Australia’s retail sales on April 4 and the U.S. unemployment rate and hourly earnings on April 6.
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USD – Let the Trade War Begin
Month in review
Despite the geopolitical rumbling of the start of a trade war the, USDX (US dollar index) was surprisingly muted. From peak-to-trough, the USD traded within a 1.5% range, finishing the month modestly down. GBP was the best performer against the USD, having its best month since Brexit – ending March up 1.7%.
The Swiss franc and Krona were the worst performers against the USD, ending the month down 1.5% & 1.34% respectively. President Trump really started to exercise his executive powers in March, beginning with imposing aluminium and steel tariffs, in what appeared to be a tactical move which came during the NAFTA negotiations, however, the largest steel and aluminium importers in Canada and Mexico were exempt.
We also had more shuffles in the Cabinet, with Gary Cohen, a former Goldman Sachs executive and free trade champion, leaving and being replaced by former CNBC host, Larry Kudlow. NFP numbers blitzed on the upside, however, wage growth – which was the catalyst earlier in the year for the volatility and equity sell off – slowed to 2.6%. We also saw the beginning of the much anticipated trade war between the US & China. Sectors covered by the proposed US tariffs include products used for robotics, information technology, communication technology and aerospace. Whilst the Chinese increased tariffs by up to 25% on 128 US products, from frozen pork and wine, to certain fruits and nuts.
Trade protectionism will remain in the spotlight. The US Trade Representative has until Friday 6th April to publish the list of Chinese products subject to tariffs, bringing headline risk back as markets start to assess the effects of the imposed tariffs and China’s likely response. With the list at hand, the market will assess the effects of the tariffs and the possible further Chinese retaliation.
The main data releases are the ISM PMIs and the employment report. The ISM manufacturing index is expected to moderately slide from its strong 60.8 reading in February to 59.5.
In contrast, the market is expecting a slight improvement in the ISM non-manufacturing Index. The employment report is expected to show a resilient job market, with relatively subdued wage pressures. Non-farm payrolls are forecast to increase by 200k, the unemployment rate to decrease to 4.0% and average hourly earnings to increase to 2.8% y/y.
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GBP – Strong Support on Sterling
Month in Review
Sterling continued to dominate the basket of currencies last month, in particular against the Aussie dollar, as market participants began to take their focus off the politics and re-adjusted their attention on the economic performance of the UK Economy. This has been the biggest move on sterling to the upside since the UK decided to leave the European Union in 2016.
Looking at GBP/AUD a little closer over the month, support began to come in hard and heavy, on the back of news that a deal on the Irish border was close. Support came in at the 1.77 mark with a consistent, strong upward trend, testing as high as 1.8485 on March 28th.
Brexit has been a constant headache for the pound, and in my opinion, has undervalued sterling to a great extent. On the upside, the next technical break is expected around the 1.87 break, if markets continue to pile support in for sterling.
‘Super Thursday’ produced little surprise to markets in March, with the bank holding firm on its key interest rate, however, given the current high reading of inflation (currently sitting at 3%, well above the bank’s target rate of 2%) the Bank of England has signalled that a consistent trend of rate rises is on the cards in the short term, according to Governor Mark Carney.
On the back of this, final GDP figures released for Q4 indicated that that growth had somewhat slowed for 2017, mainly on the back of strong inflation that has put the squeeze on UK households. The medium term growth outlook is expected to come in around 1.5% to 1.6% for 2018. This is mainly due to inflation forecasts being expected to miss the bank’s target once again (predicted to come in at 2.7% for 2018, according to PWC).
Looking to April, manufacturing PMI figures have shown a positive outlook in the sector, coming in at 55.1 and beating expectations. It’s important to note that any reading above 50 is deemed as growth in the sector.
Construction PMI figures, released on 5th April, should give some indication of the demand for properties and commercial real estate post the decision to leave. This is a sector which has struggled for some time now. Expecting to come in at 50.9, from a previous 51.4 for February.
Other key releases from the UK are inflation figures on 17th April, Retail Sales on 19th April and finally, preliminary GDP figures are released on 27th April.
Taking a high-level view of the data for this month, there looks to be some downside risk for sterling, with GDP and inflation coming into key focus. However, don’t forget Brexit (if you thought I had forgotten). Talks are due to finalise on the Irish border this month.
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Euro – Draghi’s Hand Being Forced
Month in review
Euro buyers once again spent the month scratching their heads, and more importantly asking the question, why is the single currency so strong?
In early March, the AUD/EUR pairing showed brief signs that it was on the recovery following the European Central Bank’s monthly policy meeting. All signs pointed towards President Mario Draghi reiterating the expectation that steps would be taken towards normalising monetary policy, however, the Euro was sent peddling after suggestions that the ECB’s policy would remain ‘reactive’. This phrase essentially lends towards the willingness to increase the timeframe, or even size of the QE asset purchasing program if necessary.
Unfortunately for investors, this Aussie rally was short lived as the ECB shot back into the spotlight for Euro traders amidst reports policy setters openly discussed how to go about raising interest rates. This news plunged the AUD/EUR pair to its lowest level since February 2016, whereby markets prepared for the first interest rise in 2019. There are signs, however, that this may happen sooner and more aggressively than originally expected.
Sparking interest in the future of Eurozone interest rates and the exchange rate, were reports ECB policy makers are now toying with the idea of shifting their debate to the expected path of rate hikes once QE has come to an end. Most now believe this should happen in 2018, leaving the door wide open for a rate rise next year.
The Euro has defied all expectations so far this year, but the threat of extending the program beyond 2018 has long ensured the currency’s run higher has ultimately been kept under control.
Eurozone inflation data will be the short term release to look for, with higher inflation being a key requirement for the European Central Bank to end its stimulus program and start raising interest rates. The current inflation target sits just below 2.0%, although the ‘timing effects’ of Easter may distort the posted figure.
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NZD – Volatile Month for the Kiwi
Month in review
Against the USD, the Kiwi has consolidated the gains made at the end of last year, but it has been a volatile month. With New Zealand’s second biggest trading partner finding itself in the crosshairs of President Trump, the NZD has seen some relative swings as risk aversion has come into the markets. Within this ‘risk-off’ environment, it has done well against the AUD firming up a 2% move and approaching the high for the year.
Recent weaker than expected inflation data, as well as New Zealand’s late cycle economic position and currency overvaluation, (almost 7% above its REER average) will make further gains against the USD difficult in the near term. The interest rate differential is also likely to widen as the RBNZ will most likely keep rates on hold while the fed hikes a further 2-3 times this year.
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These comments are the views and opinions of the author and should not be construed as advice. You should act using your own information and judgement. Whilst information has been obtained from and is based upon multiple sources the author believes to be reliable, we do not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute the author’s own judgement as of the date of the briefing and are subject to change without notice. Please consider FX derivatives are high risk, provide volatile returns and do not guarantee profits.