A mountain of worries discouraged investors from buying the pound. Despite comprehensive leaks, they were apparently taken aback when the government announced a new four-week anti-Covid lockdown starting on Thursday. Investors were unhappy to hear of “serious divergences” in the Brexit negotiations and to learn that the talks would break off on Wednesday for the rest of the week. They were alarmed by a report from the Institute for Government which concluded that the country is unprepared for the changes coming at the end of December and that, with Brexit on top of Covid-19, “local authorities and businesses may well be overwhelmed”.
With all of that going on it was a pleasant surprise to see the pound losing only 0.2% on average, despite taking the wooden spoon on Wednesday. The Bank of England was of some assistance. Although it increased its asset purchase programme by more than expected, the committee stayed away from the idea of negative rates. In a subsequent interview the governor conceded that some banks’ IT systems might be unable to cope with sub-zero rates.
The euro’s performance could most politely be described as undistinguished. It lost 0.5% to sterling but the so did the Swiss franc, and the Japanese yen lost twice as much. As with Britain and the pound, a significant contra-indicator for potential buyers of the euro was the renewed increase in Covid infections, which has prompted several countries to re-impose curfews and lockdowns. Unlike Britain, however, the European measurers were either already in place or had been clearly notified in advance.
At a political level the European Parliament came to an important and long-awaited agreement on Thursday. In essence, member countries will be denied access to EU funds if they fail to uphold what the EU calls “the rule of law” by, for example, politicising the courts. The decision should make it easier to unblock the distribution of the €750 billion Covid recovery fund and the bloc’s €1.1 trillion budget.
A national vote was held on Tuesday to elect a new president, the whole of the House of Representatives and a third of the Senate. It did not go entirely to plan, and the opinion polls were almost as poor at predicting the outcome as they had been four years ago. At the time of writing it remains unclear who will form the next administration. It looks likely that Democrat Joe Biden will be the winner, that the Senate will remain in Republican hands and that the Democrats will have a reduced majority in the House.
Investors seem content with the result, and the general mood is risk-on. Equities are in demand, as are emerging market and commodity-related currencies. The perception is that Mr Biden will work to normalise American trade and foreign policy strategy after four years of isolation and trade barriers. They are less optimistic about the US dollar, for which there will be reduced demand as the political noise is dialled down. It was the week’s feeblest performer, falling by an average of 1.9% and losing two cents to sterling.
The Loonie was on average unchanged against the other major currencies. It fared less well than its Australian and NZ cousins, perhaps on account of its close relationship with the USD. The CAD took a third of a cent off the GBP and strengthened by one and a third US cents. Oil prices had little bearing on the Loonie: WTI crude ended the week close to the middle of the $34 - $44 range that has contained it since early June.
There was nothing among the Canadian ecostats to energise the currency. Manufacturers’ costs and factory gate prices were both lower in September: the raw material price index slumped 2.2% while industrial product prices were just 0.1% lower on the month. Canadian gross domestic product grew 1.2% in August, beating the 0.9% forecast. The manufacturing sector purchasing managers’ index was half a point lower at 55.5 but still within a couple of points of its summer 2018 highs. Canada’s trade deficit widened almost imperceptibly in September as imports and exports both increased.
Although it was beaten by the volatile Norwegian krone, the Australian dollar nevertheless had a profitable week, strengthening by an average of 1.4%. It went up by three cents against the British pound and took a proportionally greater two and a third cents off the US dollar. The Aussie was the top performer on Tuesday and Thursday. Its success owed a lot to the US narrative: initially the anticipation of a Biden presidency, as forecast by the opinion polls, which would facilitate international trade, and latterly by the likelihood that Mr Biden would indeed make it to the White House despite the misleading polls.
The Aussie also received help not only from the domestic economic statistics and was not hurt by the Reserve Bank of Australia’ rate cut on Tuesday. The purchasing managers’ indices for manufacturing and services were both in line with forecast, with services gaining pace in October while manufacturing lost it. As anticipated for months, the RBA cut its benchmark interest rates from 0.25% to 0.1% and said it would buy $100 billion of government bonds, causing only short-term distress to the AUD.
The trajectory of the NZD was similar to that of the AUD but went only half as far. Where the Aussie strengthened by 1.6% against sterling, the Kiwi managed only 0.8%. The NZD nevertheless managed to pick up one and two thirds of a US cent and to gain an average of 0.6% against the other majors. As with the Aussie, the prospect of a Biden presidency in the United States cheered the Kiwi because of its positive implications for international trade and political calm.
Some of the NZ economic data worked in favour of the NZD. Building permits jumped 3.6% in September, blitzing the previous month’s 0.2% rise. Employment was down by 0.8% in the third quarter but the participation rate increased to 70.1% and unemployment at 5.3% was lower than forecast. On the downside, ANZ’s Business Outlook put business confidence and activity little changed on the month in the “could be worse” category.