The previous week’s training paid off for sterling and it was the winner over the last seven days, strengthening by an average of 1.9% against the other major currencies. The Japanese yen was in second place, 0.5% behind.
Last Friday Fitch lowered Britain’s credit rating from AA to AA-. It went on to downgrade three rail infrastructure agencies and 18 banking groups as a logical corollary to the sovereign downgrade. It was a sign of the times that investors were not the slightest bit concerned. The sudden leap in government borrowing, as a result of the sweeping stimulus measures announced over the last couple of weeks, made a downgrade all but inevitable. Even though Fitch has not made a similar move on US debt, investors are in no doubt that the same thing will take place on a global scale as countries spend money to mitigate the effect of the tragic pandemic. There were no other data or events to trouble the pound: Wednesday’s manufacturing purchasing managers’ index for March was a little better than forecast (though far from good) at 47.8.
It was not a good week for the euro, which went down by an average of 1.1%. The euro lost three and a third cents to sterling and two and a quarter US cents. Among the major currencies only the Swedish krona had a (very slightly) worse week. Economic data from the Eurozone were mostly pre-pandemic, so were only vaguely interesting. The European Commission confidence surveys for March were a little more relevant but many of their components were less reliable than usual, due to containment measures.
The euro’s real problem was the inability of euro zone members to agree on a collective fiscal stimulus scheme along the lines of those put in place by Britain, the United States and others. The Covid-19 mitigation effort in Euroland currently operates on national lines, with Germany pumping in €750 billion for Germany for example. Investors would like to see the sort of cooperation which, many argue is necessary for the survival of the currency union, if not the EU itself.
Where Europe struggles to get its stimulatory act together, America has got well into the swing. At the end of last week, after much wrangling, the president signed a $2 trillion stimulus bill which will, among other things, send a $1,200 to all those earning up to $75k a year. Only a matter of days later there was talk of more of the same. The president wants to spend another $2 trillion on infrastructure and industries that were overlooked last week want a piece of the action.
If evidence were needed to highlight the urgent need, the last two weeks have brought a huge increase in unemployment. It was noted here last week that jobless claims had jumped 3.3 million in seven days. Yesterday’s initial claims were twice as many. In a fortnight 10 million Americans have registered as unemployed. And that figure does not include those who were unable to register because the system was overloaded. The data did not damage to the dollar though: it is an average of 1% firmer, in third place behind sterling and the yen.
Roughly in the middle of the field the Loonie and the Kiwi were unchanged against one another, slightly ahead of the Swiss franc and behind the Aussie. The Canadian dollar lost nine tenths of a US cent and gave up three and three quarter cents to the British pound. There was a degree of confusion last Friday when the Bank of Canada announced another half-percentage-point rate cut, together with a large-scale asset purchase programme intended to support the functionality and liquidity of provincial government funding markets. Investors eventually decided it was a good thing and the Loonie prospered.
Oil prices were an issue for the Canadian dollar, initially because they fell to an 18-year low and later because they jumped after the US president claimed to have struck a deal with Russia and Saudi Arabia to reduce supply. Trump’s tweet was worth a quick $4 – 18% - to WTI crude and served to support the Loonie but did not take it far.
On average the Aussie was just about unchanged on the week against the other majors. It lost half a US cent and fell three and a half cents against sterling. In essence, it did well over the weekend and began to head lower on Wednesday. Its ebb and flow coincided with the general attitude of the market towards risk. Last Friday’s confirmation of the €2 trillion US stimulus package was of particular help, while a pessimistic comment from the US president sent in on a downward spike on Wednesday. Speaking of the Covid-19 pandemic Trump told people to prepare for a “very painful” few weeks.
The Australian purchasing managers’ index readings for March were mixed. AiG’s performance of manufacturing index was nine points higher at 5.07 while the equivalent Markit PMI was down half a point at 49.7. AiG attributed the improvement to stockpiling of food and toilet paper. Markit blamed the decline on “record falls in output and new orders”. The services PMI was a point lower at 38.5.
As is often the case, the NZ dollar did not have much of a life of its own. Like the Aussie, its ups and downs were mostly the result of external events and investor sentiment. A case in point was the downward spike on Wednesday. When the Australian dollar reacted to the US president’s warning of a “very painful” few weeks ahead, the Kiwi inevitably followed it lower and matched its recovery half an hour later. On the week the Kiwi lost three quarters of a US cent and gave up four and a half cents to the British pound.
As for domestic economic data, there were two. Building permits went up by a monthly 4.7% in February. ANZ’s monthly Business Outlook for March “made for dreadful reading”: “Headline business confidence plummeted 45 points to -64in March, close to a record low. A net 27% of firms expect weaker activity for their own business (down 39), the lowest read ever (the survey began in 1988).