Sterling had a better week than the US dollar but that was as good as it got. The two thirds of a US cent that the pound picked up was more than outweighed by losses of nearly two euro cents, two and a quarter Swiss cents and three and a quarter Japanese yen. The yen’s position at the front of the field reflected investors continuing – even growing – unease about the economic impact of the tragic Covid-19 outbreak. Sterling’s particular disadvantage yet again was Brexit, and the fractious start to trade negotiations with the EU. The more Britain tries to prove its independence by refusing to comply with EU standards, the greater the risk investors see of a no-deal Brexit.
The economic data were more adequate than stunning but did no harm to the pound. Consumer confidence improved by two points to -7. The manufacturing and services purchasing managers’ indices were positive at 51.7 and 53.2 even though they both fell slightly short of forecast.
On Tuesday, the leaders of Germany, France and Italy were among those who took part in a G7 conference call to discuss a collective approach to Covid-19. The subsequent statement gave no indication that the EU, collectively or individually, was eager to take part. Rate cuts in Australia, the States and Canada were not matched by any action on the part of the European Central Bank and for this, investors rewarded the euro with a better than average week. It added two and a third US cents, 2.1%, and strengthened by nearly two cents against sterling.
Economic data from the euro zone were mixed but, in the circumstances, all but irrelevant. The manufacturing sector PMIS from Germany and Euroland were a little closer to breakeven at 48 and 49.2. Pan-Euroland inflation was a touch lower at a provisional 1.2%. German and Eurozone retail sales increased by 0.9% and 0.6% in January. German factory orders fell 1.4% on the month, a much smaller than expected decline.
The Federal Reserve was one of three major central banks to lower its benchmark interest rate. Acting outside its normal schedule of policy decisions, it announced a 50-basis-point cut to the funds rate, the first such “emergency” move since March 2008 when the global financial crisis was in full swing. Investors did not know quite what to make of it, so they quickly came to the conclusion that if the Fed was that worried, they should be too. The biggest beneficiary, once again, was the 10-year US Treasury note, whose yield fell as low as 0.9% as investors fled to safety.
As for the dollar itself, the rate cut – and the prospect of further reductions in the foreseeable future – made it the weakest performer among the major currencies. It lost three yen and gave up two thirds of a cent to sterling. The US ecostats were not especially helpful either. Markit’s PMIs revealed the “fastest contraction in business activity since October 2013”. This Friday’s employment report might also lose some of its usual impact, given the uncertainty that lies ahead.
After cuts by Australia and the United States on Tuesday, investors were conscious that the Bank of Canada might well lower its benchmark interest rate at the scheduled meeting on Wednesday. It did so, cutting from 1.75% to 1.25% and, in doing so, sunk the Loonie. Normally, the “sell the mystery buy the history” theory would have minimised the impact of the BoC’s move. Investors anticipating a rate cut would short the currency ahead of the event and take profit by buying it back after the announcement. In this case, they evidently misjudged the scale of the central bank’s determination, discounting only a 25 basis point reduction when the BoC actually delivered a half-percentage-point cut and hinted at the possibility of even lower rates in the future.
As elsewhere, the historic domestic economic data were of less consequence than investors’ fears for the future. Gross domestic product expanded by an annualised 0.3% in the fourth quarter, putting growth for calendar 2019 at 1.9%. Markit reported that there was a “modest rebound in manufacturing activity during February”. The Loonie added a fifth of a US cent and weakened by two fifths of a cent against sterling.
To nobody’s great surprise, the Reserve Bank of Australia was the one that got the rate-cut ball rolling on Tuesday morning, when it lowered its Cash Rate from 0.75% to 0.5%. There were two unusual reactions from investors: the Aussie dollar went up and Australian share prices fell. Both were apparently the result of buy-the-rumour-sell-the-fact syndrome. Although the Aussie put in a below-average performance for the week it still added three quarters of a US cent and strengthened by a cent and a fifth against sterling.
Nothing else on the Aussie’s agenda could compete for attention with the RBA’s move. The PMIs were mixed with AiG putting manufacturing at 44.3 while Markit reported it at 50.2. With services, both bodies reported contraction, AIG at 47 and Markit at 49. The Aussie found some support from data for fourth quarter gross domestic product. GDP grew by 0.5% in Q4 and by 2.2% for calendar 2019. Both numbers were better than expected.
The Kiwi had to stand idly by and watch as the important events unfolded elsewhere. It did what it often does in such circumstances, following its Australian cousin for lack of further inspiration. The AUD and NZD were just about unchanged on the week, with the Kiwi a cent and a half higher against sterling and three quarters of a US cent to the good.
Only the most dedicated stat-watcher could have found entertainment in the few and turgid NZ economic data. The terms of trade index improved to 2.6%. Global Dairy Trade’s GDT index showed milk prices falling 1.2% in the two weeks to 3 March. Building permits fell 2% in January. The next truly consequential event in the Kiwi’s diary is three weeks away on 25 March, when the Reserve Bank of New Zealand makes its decision on monetary policy. With its Official Cash Rate currently at 1%, the RBNZ has theoretical scope to cut, if such things are still fashionable by then.