Weekly Brief

Ignoring the bad bits


Britain’s piecemeal approach to Covid-19 stumbled a couple of steps forward with some schools accepting some pupils back into some classrooms, some MPs returning to Parliament, some shops reopening to sell some types of good and some non-medical face masks becoming mandatory on some forms of transport at some time in the future. Sterling took these and other distractions in its stride and, on average, was roughly unchanged against the other major currencies.

One fairly large distraction that failed to make a difference was the failure of another round of UK-EU negotiations. Although a no-deal Brexit looms large, investors seem not to be unduly worried, either because they believe something can still be pulled from the fire or because the Covid recession will disguise its impact. The week’s UK economic data could have been better but were not a surprise. Bank of England data showed a major retrenchment in household finances as borrowers repaid a record £7.4 billion in April. Optimists and pessimists put their own spin on the situation. One group saw record savings as “fuelling hopes that consumer spending will rebound”. The other believed “economic fears could reduce spending”.



Although they did not travel together, the euro and the pound ended the week in the same place, unchanged against one another. Both were 2.2% higher against the US dollar which, for the euro, meant a gain of two and a half US cents. A good chunk of that came on Thursday after the European Central Bank announced an extension to its Pandemic Emergency Purchase Programme (PEPP) of monetary stimulus. The bank will buy an extra €600 billion of bonds, a larger amount than investors had expected. It was not the week’s first European stimulus package either. On Wednesday Angela Merkel unveiled €130 billion of measures to reboot the German economy, including a cut in VAT from 19% to 16%.

The euro zone ecostats were predictably awful. Inflation fell to a provisional 0.1% and the ECB sees it remaining below target for some time, inching up to 1.3% in 2022. The composite purchasing managers’ index scored a 154% improvement, rising from 12 in April to a still-recessionary 30.5 in May. Retail sales fell 11.7% in April, with only Finland reporting an increase (0.3%).



The dollar just missed out at finishing in last place to the Japanese yen. Alongside this the US currency lost two and three quarter cents to sterling. Part of the dollar’s problem was the same economic optimism that so hurt the yen, which was at the back five days on the trot and an average of 4.2% lower. With lockdown being phased out around the world investors piled into equities and ignored the supposed safety of the dollar. Another negative was the civil unrest following the tragic death of George Floyd and the reaction of the president.

Nobody paid much attention to the US economic data. Some of them were better than forecast but none could have been described as good. Consumer sentiment improved fractionally but remains close to its lowest level in eight years. The composite purchasing managers’ index improved by 37% to 37, still a far cry from breakeven at 50. Initial jobless claims were fewer than the previous week at 1.9 million, which could put unemployment on the wrong side of 20% this Friday.



The Canadian dollar managed to avoid being dragged lower by the Greenback, assisted by the continued upward progress of oil prices. As the world gets back to work, and people remember what to do with the expensive lump of metal at the side of the house, the demand for energy goes up and, with it, the price. WTI crude rose another 16% to its highest level since the pandemic exploded in early March.

Unfortunately the Canadian economic statistics did not match the upbeat mood of energy prices, in part because of the time lag between the collection and reporting of data. The industrial product and raw materials price indices, for example, both fell in April mainly because of lower prices for crude and refined oil. Gross domestic product dropped 7.2% in March and contracted by 2.1% compared to Q419. Canada’s merchandise trade deficit widened in April as exports fell by more than imports. The sickly numbers had no effect on the Loonie because they were not unique to Canada. Against sterling the Canadian dollar was a quarter of a cent lower and it added one and a half US cents.



Although it did not exactly have a clear run the Australian dollar came out of the week on top, with the NZ dollar and the oil-powered Norwegian krone not far behind. The Aussie added three and a quarter US cents, almost matching its turn-of-the-year high, and strengthened by four and three quarter cents against sterling for a nine-month high. After ending the previous week on the defensive, because of supposedly reduced Chinese demand for Australian coal, the Aussie picked up after the weekend on reports of increased demand for iron ore, a principal export for Australia

On the domestic economic front, even some of the bad news was good for the Aussie. A case in point was Tuesday’s gross domestic product numbers for the first quarter. GDP contracted by 0.3% in Q1, the first negative quarterly reading in 29 years, and it is certain that the figure for Q2 will be much worse. However, many countries would give substantial parts of their anatomy for a 0.3% shrinkage (Italy -5.3%, Euroland -3.8%, Switzerland -2.6%, etc.).



The Kiwi’s absence from the headlines meant that it had no real life of its own. It drifted higher against the foundering US dollar, picking up two and three quarter US cents to reach a four-month high, and achieved a 2020 high against sterling having strengthened by four and a third cents. The NZ dollar gave up 0.4% to the Aussie after rebounding from a 20-month low. As was the case last week, the broad economic optimism that surrounds the phasing-out of lockdown was not appreciably dented by civic unrest in the United States or Chinese sabre-rattling.

On balance the domestic economic data was unhelpful to the Kiwi. The terms of trade index deteriorated from 2.8% to -0.7% in the first quarter. Building permits fell 6.5% in April after tumbling 21.7% in March. Milk prices rose 0.1% in the two weeks to 2 June. Commodity prices were down by 0.1% in May, a smaller than expected decline.

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