Weekly Brief

Supply constraints and cheap US dollars


Like several other currencies, the pound spent the week busily going nowhere. At a domestic level, the politicians were focused on the withdrawal from Afghanistan. The Bank of England’s only contribution was the announcement of a new chief economist, Huw Pill, who brings with him a reputation for monetary policy hawkishness. The UK economic data (GBP) were uncontroversial too, and sterling drifted an average of 0.2% lower against the major currencies, showing no sense of purpose. It added two thirds of a US cent (USD) and was unchanged against the euro (EUR).

The Bank of England’s money and credit report (GBP) showed a £1.4 billion repayment of mortgage debt in July and a lack of appetite for new consumer loans. Mortgage approvals numbered 75,200, the fewest since July last year. Nationwide said British house prices went up 11% in the year to August, taking the national average to £248,857. Markit’s purchasing managers’ index for the manufacturing sector came in roughly as expected at a respectable 60.3. It did, however, show that more could have been made were it not for “input supply issues” – shortages of material and delivery delays.



Inflation was the hot topic in the Eurozone (EUR). Eurostat’s “flash estimate” put it at 3%, 50% above its 2% target and the highest level in almost 13 years. The figure had special significance because it ignited a debate about European Central Bank monetary policy, a week ahead of next Thursday’s Governing Council meeting. If volume was any guide, the hawks were winning the argument. The Netherlands’ central bank Governor, Klaas Knot, and his Austrian colleague, Robert Holzman, said on Tuesday that asset purchases should end early next year. A day later the Bundesbank’s Jens Weidmann pointed out that the “P” in the ECB’s Pandemic Emergency Purchase Plan (PEPP), “stands for pandemic, not permanent”.

The rest of the week’s ecostats added little to the debate. The EC’s measures of consumer and business confidence all softened in August. Markit’s manufacturing PMI was not dissimilar to Britain’s, at 61.4, and it, too, showed “clear signs of strong capacity constraints”. The euro was on average a touch firmer on the week, having strengthened by 1% against the US dollar (USD). 



In the States, as in Europe, the outlook for monetary policy is a matter of great debate. Investors had hoped that Federal Reserve Chairman Jerome Powell would shed more light on the subject in his presentation to the Jackson Hole Economic Symposium last Friday but it was not to be. In his speech, Mr Powell played the archetypical two-handed economist, setting out a scenario in which the Fed’s goals of sustained 2% inflation and maximum employment both might and might not allow the tapering of QE to begin. It left investors pretty much where they already were: asset purchases could begin to be wound down before the end of the year, and the first rate increase is unlikely to come before 2023.

The Fed’s lack of urgency in tightening policy worked against the dollar (USD). It shared last place for the week with the Japanese yen (JPY), an average of 1.2% lower against the major currencies. The US economic data, whilst not exactly hurting the dollar’s case, did little to help. Consumer confidence touched an almost 10-year low according to the University of Michigan. The equivalent measure from the Conference Board was the lowest since February. Manufacturing PMIs from Markit and ISM were strongly positive at 61.1 and 59.9 but both reports spoke of supply constraints and transport problems.



Although the week was not entirely without incident for the Canadian dollar (CAD), it came out of it just about unchanged on average against the major currencies. The Loonie added four fifths of a US cent, 1%, and strengthened by an eighth of a cent against sterling. Canada’s general election, less than three weeks away, has yet to have an impact on the Loonie. Nor has it been hurt by OPEC’s decision to increase oil output. 

The CAD was equally resilient to Statistics Canada’s surprise announcement that gross domestic product shrank by 0.3% in the second quarter of 2021. Investors had been told to expect growth, not contraction. There was a modestly positive surprise from the manufacturing PMI, which rose to its fourth-highest ever level of 57.2 in August. Even there, though, the result was marred by “delivery delays… with lead times lengthening markedly”. Other official data covered international merchandise trade, which generated a narrower surplus in July, and building permits, which decreased 3.9% in the same month.



Another good week for “risky” commodity-related currencies was largely the result of increased relaxation about US monetary policy and continued low interest rates in the States (USD). The Aussie (AUD) took second place behind the NZ dollar (NZD), strengthening by an average of 1.1% against the major currencies. It collected a cent and two thirds from the US dollar, 2.3%, and firmed by a cent and two fifths, 1.3%, against sterling (GBP). The Aussie took in its stride the ongoing Covid pandemic, which currently has around half the country in lockdown. 

Some, but by no means all, of the Australian economic statistics reflected that lockdown. Manufacturing PMIs from AiG and Markit were above 50, and therefore positive, at 51.6 and 52, but both cited Covid disruptions and lockdowns as acting as a brake on growth. Markit’s services PMI was particularly hard-hit, coming in at 42.9 for a second month of decline. “Business activity and demand remained under pressure while employment levels fell for the first time in ten months”. The gross domestic product data, which look further back, were much as expected, with quarterly and annual growth of 0.7% and 9.6%.



Yet again the NZ dollar (NZD) prospered by keeping a low profile. Helped by the prospect of continued low interest rates in the United States and higher rates at home, the Kiwi led the major currencies with an average gain of 1.3%. It strengthened by three cents to a three-month high against sterling (GBP) and went up by 2.5% against the US dollar (USD).

There was nothing to glean from the few domestic economic statistics. Building consents increased by a monthly 2.1% in July. In the 12 year to July the number of consents was 20% higher than in the previous 12 months. ANZ’s Business Outlook noted that “Initial responses [to the survey] after level 4 lockdown look encouragingly robust, but it’s early days”. Business confidence was down by 10 points at -14.2.


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