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US transition begins

Solid sterling

After two days in the lead, sterling paused for breath on Monday, but did not exactly settle back with its pipe and slippers. The pound shared third place with the AUD, two fifths of a cent lower against the NZD and narrowly behind the CAD. Its support came from a lack of bad news rather than anything particularly positive.

The provisional UK purchasing managers’ index readings for manufacturing and services came in at 55.2 and 45.8 respectively. Manufacturing was a point and a half higher on the month, as a result of stock-building ahead of Brexit proper at the end of December. The services sector suffered from shut-downs in leisure and hospitality, and experienced the sharpest slowdown since May. It was enough to pull the composite index down by nearly five points. Nevertheless, weak as they were, the numbers were still better than forecast.

Bank of England Governor Andrew Bailey told Parliament’s Treasury Committee that “the economic cost of a no-deal Brexit would be bigger in the long term than the damage caused by Covid-19”. Sterling did not flinch: Investors had figured that out already and, anyway, they still expect a deal. There was a similar lack of surprise when the Prime Minister announced that, at the end of the current lockdown, there would be a return to the tiered system abandoned three weeks ago.


Dollar fights back

The consistent message from financial markets in recent months has been that investors care more about politics and the pandemic than they do about historical economic statistics. There was an unexpected departure from that philosophy yesterday when the provisional American PMIs came in above forecast.

The flash PMIs were not huge, with manufacturing at 56.7 and services at 57.7. They were, however, the highest readings in more than five years and the composite was more than ten points ahead of the UK and the Eurozone. The EUR and GBP both dropped a cent against the USD. Sterling is a net dozen ticks higher on the day while the euro is down by quarter of a US cent.

There was also some progress on the US political front. On Sunday, the US President unceremoniously fired Sydney Powell, one of the lawyers who had been boosting his claim that foreign communists had redirected millions of his votes to Joe Biden. Yesterday, he took the further step of allowing the General Services Agency to proceed with facilitating the transition to a Biden administration.


House prices and the RBNZ

It emerged overnight that NZ Finance Minister Grant Robertson had written to Reserve Bank of New Zealand Governor Adrian Orr, asking him to consider adding house prices to the bank’s monetary policy criteria. Mr Orr wrote back to say he would think about it.

There is cross-party support in Parliament for action to curb runaway house prices, and Prime Minister Jacinda Ardern said recently that the house price index “just cannot keep increasing at the rate that it is”. Any action by the RBNZ would inevitably involve some sort of tightening, so the Kiwi strengthened on the news, becoming the day’s top performer.

The Australian dollar also popped higher immediately ahead of London’s opening. Although the timings do not match, it is likely that the move was the result of a speech by Reserve Bank of Australia Deputy Governor Guy Debelle a couple of hours earlier. Although he does not expect a rate hike for three years or more, neither is he convinced that negative rates would help.

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