Sterling had a disconcertingly interesting week, changing direction half a dozen times, sometimes in response to political and economic developments and sometimes despite them. The eventual outcome was neutral, in that the pound was on average unchanged on the week. Very occasionally the moves came after the release of UK economic statistics, but the evidence of cause-and-effect was hard to spot.
The Bank of England played a part more than once. Its Quarterly Bulletin concluded that the risks are “skewed to the downside”. Chief Economist Andy Haldane told an audience that the media are too pessimistic about the outlook and that “now is not the time for the economics of Chicken Licken”. On Thursday, within the space of four hours, sterling dropped a cent and made it back. The fall was sparked by news that the EU had begun legal proceedings against the UK for disregarding the Withdrawal Agreement, and by the fear that it would scupper a Brexit deal: The recovery came after a story that there was a 70% chance of a deal.
The common thread running through the euro’s week was inflation or, more exactly, the lack of it. Spain reported that consumer prices fell by a provisional 0.6% in the year to September. In Germany the preliminary inflation reading was -0.2% and today’s pan-Eurozone figure is forecast to be -0.2% as well. Persistently low inflation is not unique to the Eurozone and the European Central Bank is not the only one agonising about what to do. On Wednesday, President Christine Lagarde said in a wide-ranging speech that she is considering a shift from targeting 2% on a six-weekly basis to looking instead at average inflation over time. The US Fed has previously made similar noises, so expect other central banks to follow suit.
At a political level, the collective EU stimulus package agreed more than two months ago has yet to get off the blocks. EU leaders are divided about how to link disbursement of the funds to the observance of democratic values. The Washington Post pessimistically argues that “Europe can have stimulus or the rule of law, not both”. Neither the ECB nor the stalled stimulus package had any immediate impact on the euro. It is an average of 0.3% lower, down by that much exactly against the USD and GBP.
An eventful week for the dollar took it a net 0.7% lower, on average, against the other majors. It lost almost a cent to sterling and two fifths of a cent to the euro. Almost every day some statistic or event emerged to deliver another blow. At the weekend, the New York Times reported that the President had paid little or no income tax in the last 15 years. On Tuesday night, the first election debate descended into chaos as the President tried to prevent his opponent being heard. Two days later Trump revealed that he and the First Lady had contracted Covid-19 and would be self-isolating.
The original game plan was that investors would focus today on the US employment data and the expected 850k increase in nonfarm payrolls. News of the President’s incapacity has kicked that one into the long grass, and attention has now turned to the likely outcome of the election on 3rd November.
Unlike the antipodean dollars, the Loonie was in the back half of the field, adding a fifth of a US cent and losing a third of a cent to sterling. It lost an average of 0.4%. The stuttering oil price did the CAD no favours, as WTI crude fell a net 7% to a two-and-a-half-week low.
Few though they were, the Canadian economic data were on balance helpful. GDP grew 3.0% in July following a 6.5% increase in June. Over 70% of the March-April slump has been retraced, leaving activity about 6% below February’s pre-pandemic level. The pace of recovery is slowing, and varies considerably from sector to sector, yet all 20 industrial sectors posted increases in July. The agriculture, utilities, finance and insurance, real estate rental and leasing sectors all surpassed their February pre-pandemic levels, joining retail trade which did so in June. There was also support from the manufacturing purchasing managers’ index, which came in a point higher on the month at 56. The report noted stronger new order growth, a rise in employment and new work expanding at the fastest pace in more than two years.
Although the Northern Scandinavian crowns, the SEK and NOK, led the way by quite a margin, the AUD took third place with the NZD close behind. It strengthened by an average of 0.4%, adding three quarters of a US cent and adding two thirds of a cent against the GBP. After a hiccup on Friday, the Aussie made quite steady upward progress against the USD.
The Aussie’s performance against the USD and GBP owed far more to the trials and tribulation of those two currencies than it did to domestic issues and data. Nevertheless, there were more than the usual number of Australian ecostats. They did not tell a particularly coherent story. International trade dwindled in August as imports and exports both fell. Building permits fell 1.6% in August after a 12.2% jump in July. Australia’s two manufacturing PMIs came in at 46.7 and 55.4, both lower on the month. Retail sales fell 4% in August, much as expected.
In fourth place, hard on the heels of the AUD, the Kiwi strengthened by 0.3% on average against the major currencies. To a large extent, the relative success of the antipodeans was the result of a drift from risk-off to risk-on among investors, which at the same time relegated the safe-haven Japanese yen and US dollar to the back of the field. The NZD added two thirds of a US cent and went up by half a cent against the GBP.
NZ economic data were no more plentiful – or significant - than usual. Total filled jobs, the number of people in work, rose in August largely due to positions in education and training. Building permits recovered by 0.3% in August after falling 4.6% in July. ANZ’s monthly Business Outlook described firms as “hanging in there”, with business confidence “a smidgen lower” than the provisional reading at 28.5%. Consumer confidence was steady at 100 in September, well below its historical average of around 120, and close to the 2009 average.