The Bank of England’s monetary policy statement on Thursday was not the only event in sterling’s week but it carried by far the most weight. Ahead of the announcement there had been a good deal of conjecture about negative interest rates: would the bank impose them, threaten them or steer away from the subject? It did none of those. Governor Andrew Bailey simply said what he had said before: negative rates are in the bank’s toolbox but it currently has no intention to use them. Mr Bailey’s comments were taken as hawkish, especially as he offered the prospect of Covid vaccinations leading to a rapid recovery for the UK economy later this year.
Sterling was Thursday’s top performer by a mile, adding an average of almost 1%. Over the week as a whole it was less assured, bringing up the rear on Wednesday. Even so, it managed an average gain of 0.4% with few losses. The UK economic data were not a great deal of help. Mortgage approvals were once again strong in December and the services sector continues to struggle as a result of Covid restrictions.
The euro got off to a rocky start as the European Commission escalated its dispute with Covid vaccine manufacturer Astrazeneca. It accused the company of diverting product from Belgium and the Netherlands to the UK and briefly threatened to close the internal Irish border. There was better political news in midweek when there was confirmation that Italian President Sergio Mattarella had asked Mario Draghi to form a government. His nomination received the fulsome support of ex-Prime Minister Matteo Renzi and of investors who recall the success of Sig. Draghi as President of the European Central Bank.
Mario Draghi’s appearance on the scene was not enough to save the euro, but he probably did help to prevent it suffering further damage. Over the week the euro lost an average of 0.6%, faring slightly better than the Swiss franc. It lost more than a cent to sterling and lost one and a third US cents.
Another good week for the dollar was helped by the continuing perception that the US is doing pretty well, politically and economically. Investors are also reassured by the prospect of monetary policy remaining unchanged for the foreseeable future. This week the St Louis Federal Reserve President James Ballard said “we’re in a good place with monetary policy” and his colleague in Cleveland, Loretta Mester, said much the same thing. The economic data reinforced the impression of economic recovery. ISM’s purchasing managers’ indices for manufacturing and services showed the “fastest private sector output expansion since March 2015”.
There is also optimism on the political front. US Covid vaccinations now outnumber the total number of cases. President Biden has announced an end to America’s involvement in Saudi Arabia’s war with Yemen and warned Moscow that his country will no longer be “rolling over” to Vladimir Putin. “America is back” and “diplomacy is back at the centre of our foreign policy”. Although the USD had to take second place – together with the NZD - to the CAD, it nevertheless strengthened by an average of 0.6%.
A good showing by the Loonie owed much to the strong performance of oil prices, even though the correlation between the two was far from obvious. The price of WTI crude, the mostly onshore output of North America, went up by nearly 9%. It traded above $55 for the first time since January last year, marking a complete recovery from its pandemic-induced collapse. The trajectory of the Canadian dollar was less composed, with USD/CAD swinging across a range of C$1.25. It got there in the end though, with the CAD adding a third of a US cent. Against the pound the Loonie was up by one cent, 0.6%.
Yet again the Canadian ecostats did not have much of an impact on the currency. Industrial product and raw material (producer) prices increased by 1.5% and 3.5% respectively in December, driven mainly by energy. Gross domestic product grew 0.7% in November and the manufacturing PMI at 54.4 showed softer, but still solid, growth in January.
On average the Aussie was unchanged against the major currencies. It lost two fifths of a US cent and fell by two thirds of a cent against sterling. Overall it was quite a busy week for the AUD, with politics, monetary policy and economic data playing a part. The political highlight was a couple of hawkish comments from the prime minister and the treasurer. Treasurer Josh Frydenberg insisted that the JobKeeper (furlough) scheme will not continue beyond the end of March, and Prime Minister Scott Morrison said “You can’t run the Australian economy on taxpayers’ money forever”, and “we are not running a blank cheque budget”.
The Reserve Bank of Australia surprised the market by announcing a further $100 billion of asset purchases, which will shrink the bond market by $1.5 billion a week. The move was described by analysts as “aggressive”. Among the economic data the most impressive was the trade surplus. It widened in December as exports increased by 3% and imports fell 2%.
Among the major currencies the NZD shared second place with the USD behind the CAD. It strengthened by an average of 0.6% and added a third of a cent against the pound. Again, the Kiwi got the benefit of the doubt as a result of the country’s success in controlling the pandemic. It was also helped by some positive economic ecostats.
The most noticeable data were the jobs numbers for Q4. They were considerably ahead of forecast, with employment increasing by 0.6% and unemployment falling from 5.3% to 4.9%. The strength of the data, on top of the latest inflation figures, were enough to cast doubt on the previously glib assumption that NZ interests could do no other than fall further. Building consents went up by a respectable 4.9% in December. ANZ’s Business Outlook was guardedly optimistic, with “a further lift in activity indicators but a sharp increase in costs, dampening profitability”.