Daily Brief

Relief rallies

Kiwi bounces back

On Monday-Tuesday the NZ dollar was the weakest among the majors. Over the last 24 hours it shared the lead with the Swedish krona, with Norway’s krone only millimetres behind. The US dollar came last, for the second time in three days, while sterling beat the euro and franc by a quarter of a cent each.

By and large it looked like a risk-on tilt, motivated by the imminent end of the pandemic lockdown in, among others, Australia and New Zealand. Specifically for the Kiwi, there was also help from NZ trade data and from various economists who cast doubt on the idea of negative interest rates this year. New Zealand’s exports hit a record in March, which impressed investors more than the fact that March’s deficit was wider than for the same month last year. The Kiwi added two and a third cents against sterling and strengthened by an average of 0.7%

The Swedish krona’s success arose from the Riksbank’s decision not to lower interest rates. Although unlikely, a cut had been a possibility on Tuesday morning. Governor Stefan Ingves kept the idea on the table but said he preferred to pursue quantitative, rather than qualitative easing.


More red than green

As on Monday, more than one of yesterday’s data exceeded expectations. That did not, however, go for US consumer confidence or UK retail sales. Despite the odd flash of promise the overall economic picture remained bleak.

The CBI’s Distributive Trades Survey noted an “historic slide in retail sales” in a survey conducted between 27 March 2020 and 15 April. Two thirds of retailers said the tragic Covid-19 pandemic was having a “significantly negative” impact on domestic sales and more than a third said they had shut down UK activity completely. Nearly all retailers (96%) reported cash flow difficulties.

For the US dollar the two most relevant ecostats were the Conference Board’s index of consumer confidence and the Richmond Federal Reserve’s manufacturing survey. Confidence “weakened significantly” in April following a sharp decline in March. At 86.9 the index was 31 points lower on the month. The Richmond Fed’s manufacturing index “plummeted” 55 points to -53, its lowest reading and biggest monthly drop ever. The US dollar took last place for the day, losing three fifths of a cent to sterling.


US growth and rates

With Australian inflation already out of the way (headline CPI was 2.2% higher on the year) the biggest items on today’s agenda are US second quarter gross domestic product and the Federal Open Market Committee’s monetary policy decision and press conference. To a large extent, both have been overtaken by events.

With the Fed now making big decisions outside its traditional meeting schedule and the funds rate already at rock bottom it is unlikely that any significant policy change will come from today’s meeting. The one to watch will be Jerome Powell’s press conference, when he will surely be asked to sketch out the possible future course of rates and to comment on the depth and shape of the recession.

Ahead of the FOMC, the GDP figures will reveal the size of the economic contraction in Q1. The consensus among economists is that GDP shrank by 1% in the quarter or, as the Americans prefer to describe it, an annualized 4%. That number will, of course, pale into insignificance when the Q2 data come out in three months’ time.

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