Weekly Brief

Sunlit uplands


It was a busy little week for the pound, by the end of which it was firmer against all but the Northern Scandinavian crowns. It strengthened by an average of 0.3% against the other majors. Sterling’s success owed nothing to the UK economic data, which were few and miserable. Figures last Friday showed retail sales falling 5.1% in March, the biggest ever monthly fall. The 32.6% jump in alcohol sales was of little consolation. Tuesday’s Distributive Trades Survey from the CBI told a similar story for April, with a “historic slide in retail sales” and 39% of retailers shutting down completely.

On the positive side there were two upbeat stories. On Monday the chancellor launched a “Bounce Back” microloan scheme for small businesses which will offer a “simple, quick and easy” for firms to borrow between £2k and £50k. The loans will be guaranteed 100% by the government so the banks should not get in the way. On Thursday the prime minister revealed that the rate of infection “R0” for the tragic Coronavirus had fallen below the magic level of one, meaning the pandemic has passed its peak in Britain. Employing a trope from the Brexit days Johnson spoke of “the sunlight and pasture ahead of us”.



The European Central Bank decided on Thursday to increase support for the euro zone’s commercial banks. In an extension to the TLTRO III long-term refinancing operations, and with new PELTROs (pandemic emergency longer-term refinancing operations), the ECB will pay qualifying banks to take loans as long as they pass the money on to worthy corporate borrowers. The ECB stopped short of ramping up its asset purchase scheme but implied that could be done if necessary.

Among the observations in the ECB statement was a projection from the bank’s own economists that “area gross domestic product could fall by between 5% and 12% this year”. What would have sounded far-fetched at the beginning of the year looked entirely credible in light of the statistics released earlier in the day. French GDP fell 5.8% in the first quarter and Euroland as a whole contracted by 3.8%. Italian GDP shrank by 4.7% in Q1, a development which might have been a factor in the decision of Fitch to downgrade the country’s credit rating to BBB-, one level above “junk”.  The euro was not unduly perturbed by any of this: it was only a whisker behind sterling and picked up one and three quarter US cents.



After a week in the lead the dollar slid to the back of the class. Losing almost two and a quarter cents to sterling and falling by an average of 1.5%. None of the narrative from the States was especially helpful to the currency: the ecostats looked flaky, the Federal Reserve was downbeat and the president was a veritable fount of misinformation. At the end of last week Trump suggested injecting disinfectant to cure Covid-19, attracting ridicule on all sides. The Federal Reserve chairman’s contribution was altogether more measured. As the Fed kept monetary policy unchanged Jerome Powell downplayed expectations of a rapid bounce back from recession. The consensus among analysts is that US interest rates could stay close to zero for five more years.

The US economic data included nothing to change that impression. The Conference Board’s index of consumer confidence and the Richmond Federal Reserve’s manufacturing survey both looked shabby. 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. Weekly jobless claims indicated the loss of around 20 million jobs in April. GDP decreased at an annual rate of 4.8% in the first quarter, equivalent to a QoQ contraction of 1.2%.



The Canadian dollar contended with the Japanese yen for the penultimate spot ahead of the US dollar. In the end the Loonie just got the edge to finish in antepenultimate place, two fifths of a cent ahead of the Greenback and more than two cents lower against sterling. Although there were a couple of Canadian ecostats they were mostly of only passing interest. Raw material prices fell 15.6% in March and industrial product prices were down by 0.9% on the month. They were big falls: the last time raw materials fell by as much was in December 2008 during the global financial crisis. However, both numbers were severely affected by the fall in oil and energy prices. The 38.1% decline in crude energy prices was the biggest since it began to be measured in 1981.

As the United States and Europe were reporting GDP for the first quarter, Canada was no further down the line than February. The Canadian economy stagnated during the month, having been expected to expand incrementally.



Having turned the corner in mid-March the Australian dollar continued to build on its success in April. It did not perform brilliantly well in the week just ended but it still achieved an above-average performance, adding one US cent and just about keeping up with the pound. The Aussie managed to stay mostly out of the headlines, with only a few significant economic statistics. Inflation accelerated from 1.8% to 2.2% in the first quarter, beating forecast. At 1.8% the Reserve Bank of Australia’s trimmed mean measure was also higher on the month and above forecast, though it is probably not so elevated as to dissuade the RBA from easing, if that is what it wants to do.

April’s purchasing managers’ index readings for the manufacturing sector did not look as shabby as some of their equivalents from Europe. AiG’s performance of manufacturing index was 18 points lower on the month at 35.8 as a result of the “toughest manufacturing conditions since the global financial crisis”. Markit’s PMI was five points lower at 44.1, a record low. New home sales “fell sharply in March down 23.2% compared to February, as consumer confidence fell away”.



New Zealand’s dollar did slightly less well than the Australian one, losing a third of a cent to sterling and strengthening by one US cent. Like the Aussie, the Kiwi enjoyed a reversal of its previous bad fortune in mid-March as investor sentiment improved. Since then it had recovered by 10% from its lows against the US dollar. Although it showed an upward tilt in the last week, progress was sporadic. Sentiment was the main driver. Investors have set their optimistic sights beyond the horizon in anticipation that the global lockdown will soon end.  It is already being wound down in NZ, with schools and restaurants beginning to reopen.

That did not prevent the NZ dollar from taking a tumble on Monday night following an economic commentary from Westpac. The bank’s economists believe the Reserve Bank of New Zealand will lower its Official Cash Rate to -0.5% by the end of the year. Investors were not enthusiastic about the prospect. The Kiwi recovered the following day when competing economists poured cold water on the idea of negative rates and exports were reported to have hit a record in March. A survey carried out by ANZ when the lockdown was still in full swing came up with results that were “slightly less bleak” than previously.

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