US equities raced higher today leading to an improvement in risk appetite that lifted all of the major currencies. USD/JPY held onto its gains but the strongest rallies were seen in euro, the Australian and Canadian dollars. Investors were pleased to hear that lawmakers in Washington reached an agreement in principle that would keep the government running. Although President Trump said he’s not thrilled with the deal, he also doesn’t expect another shutdown, which is the closest we’ll probably get to him saying that he’s receptive of the tentative agreement. Investors were also happy to hear that he’s open to letting the March 1st deadline for China tariffs to slide. With everything moving in a promising direction, safe haven flows into the US dollar eased today. AUD is up the most thanks to stronger business confidence and the news on China-US trade talks but the downtrend remains intact as the economy and housing market slowed. According to the latest reports, home loans fell three times more than expected.
The New Zealand stabilized above the 100-day SMA but the lack of gains reflects the market’s concerns about tonight’s Reserve Bank of New Zealand rate decision. The last time the RBNZ met, they were not impressed by the recent data improvements and said they are not taking a rate cut off the table because its been a challenge to lift inflation further and if GDP falls short of forecast, they may have to resort to easing. Fast forward 3 months and the outlook has only worsened. Labor market conditions deteriorated significantly in the fourth quarter with the unemployment rate ticking back up to 4.3% from 3.9%. Job growth was less than expected and the participation rate declined in Q4 as average hourly earnings growth slowed to 1% from 1.4%. Although dairy prices rebounded the softness in consumer spending, inflation and housing market activity will keep the RBNZ on hold for the foreseeable future. As a result, there’s very little reason for the Reserve Bank to upgrade their optimism. Instead we expect the RBNZ to express the same concerns about domestic and global growth as the RBA, ECB, BoE and FOMC.
Sterling ended the day lower after Theresa May asked lawmakers for another 2 weeks before they hold a meaningful vote on taking over Brexit process. She said ” We now all need to hold our nerve to get the changes this House requires and deliver Brexit on time.” With 45 days to go, May is running out of time and sterling traders are running out of patience. The price action tells us that investors are still holding out hope for an agreement but all signs from the EU and various factions of the UK government suggests otherwise. UK inflation numbers are due for release tomorrow and the risk is to the downside after BoE Governor Carney spoke of a temporary dip in prices.