At the end of last week the pound was briefly unsettled by the resignation of the health minister. It rediscovered its equilibrium over the weekend when a replacement was swiftly chosen. That equilibrium carried through: sterling was on average unchanged against the majors. In general it lost ground to the safe-havens and edged ahead against the commodity-oriented currencies.
Sterling felt no real effect from the UK economic data. Nationwide’s report of a 13.5% annual rise for house prices was not a surprise and nor was the slight pickup in mortgage approvals. Similarly, the 1.6% shrinkage of gross domestic product in the first quarter was close to forecast. In a valedictory address Bank of England Chief Economist Andy Haldane warned that the threat of a rapid increase in prices was “rising fast” but this, too, left the pound unscathed.
The euro had a no more exciting week than the pound but it did have slightly better outcome, strengthening by an average of 0.2%. It was a third of a cent higher against the pound and lost almost one US cent. Since the beginning of the year the euro has fallen an average of 0.4%, losing four US cents and giving up just over four and a half cents to sterling.
Economic data from the Eurozone made little difference to the currency. The flash estimate of Euroland inflation put it at 1.9%, exactly in line with the European Central Bank’s target of “below but close to 2%”. Investors seemed unimpressed: the euro lost ground following the data, though not necessarily because of it. German import prices were up by an annual 11.8% while export prices rose by a more modest 4.2%. The rise in import prices was the biggest since 1981, with a doubling of energy prices mostly to blame. The European Commission’s business and consumer surveys showed “economic sentiment hitting a 21-year high in the EU and the euro area”, with industry confidence at a record high.
The US dollar was the week’s top performer by quite a stretch, rising an average of 1% against the other major currencies. It took a cent and a half off sterling, leaving it down by a cent for the first half of the year. As it has been for the last few months, the main driver for the dollar was the market’s suspicion that the “transitory” inflation endorsed by the Federal Reserve will turn out to be rather longer-lasting. That suspicion was fed this week almost every day. At the end of last week the Bank of America said it “expects U.S. inflation to remain elevated for two to four years” and former Treasury Secretary Larry Summers thought it would still be “pretty close” to 5% at the end of this year.
Fed Governor Christopher Waller, acknowledged on Tuesday that circumstances could combine to make a rate increase necessary next year: “I’m not ruling it out”, he told a reporter. The following day, Dallas Fed President Robert Kaplan advocated an early start to the tapering process, not least to avoid more dramatic adjustments if it were to be delayed. While Mr Kaplan sees an “upside risk” to his forecast that inflation will fall to 2.4% in 2022 from 3.5% this year.
The Canada Day holiday on Thursday pretty much made it a three-day week for the Loonie. On average it was unchanged against its peers, down by three quarters of a US cent and flat against the pound. In the first half of the year the Canadian dollar was the top performer, strengthening by 5.2% against the major currencies. Some of the credit for that must go to the Bank of Canada, which was among the first central banks to signal a wind-down of monetary stimulus. Some must also go to the price of oil, which has gone up by 58% since the turn of the year and by 93% over the last 12 months.
A dearth of Canadian economic statistics left investors with just three to consider. April’s 0.3% contraction in GDP was no surprise, given the renewed Covid restrictions which were put into effect. Rather more interesting – though with less market impact – were Canada’s industrial product and raw materials price indices. They looked aggressive, with costs 40.1% higher on the year and factory gate prices up by 16.4%. The price of sawn softwood (lumber) increased by an annual 235.5%.
The Aussie shared last place for the week with the Norwegian krone, losing an average of 0.6%. It is unchanged against the NZ dollar. From the beginning of the year the AUD is very slightly lower on average, having lost two and a third US cents and given up seven cents to sterling. This week the mood was driven mainly by the hopes and fears of investors with respect to central bank monetary policy, especially that of the US Federal Reserve. With the exception of the Fed chairman, just about every comment from the US central bank in the last couple of weeks has nodded to the possibility that rates will begin to rise next year.
There was not much for investors to play with among the Australian ecostats. The most interesting among them were the purchasing managers’ index readings from the Australian Industry Group and Markit. The first rose to 63.2, a record high. The second was a point down from the previous month’s record high. Records or not, they were both very strong readings despite Covid restrictions in Victoria.
The Kiwi and the Aussie huddled together at the back of the field with the Norwegian krone, losing an average of 0.6% to the other major currencies. The AUD and NZD are also unchanged against one another since the turn of the year, both very slightly lower against the majors. Their common problem this week was a concern that the US Federal Reserve – and perhaps other central banks – are getting closer to turning off the money tap that has kept asset prices aloft for years. In the last couple of days two Fed bosses spoke openly about the possibility of interest rates going up next year.
There was not much help from the NZ ecostats. The loudest message in the ANZ New Zealand Business Outlook was that prices are rising: “Inflation pressures remain intense, Retail pricing intentions soared”. The report also said that business confidence fell three points to a net -0.6”. Separately, ANZ reported that consumer confidence was flat at 114 in June, “a little under its historical average of 120”. Intriguingly, “CPI inflation expectations jumped 0.7% pts to 5.1%, a record high in data that starts in 2010”.