The UK’s first week outside the EU was not sterling’s best week ever. The pound was the poorest performer among the major currencies, falling an average of almost 1%. It lost one euro cent and one and a half US cents. At the root of its trouble was Downing Street’s strident approach to negotiation with the EU. Having scored highly at the end of last week, following the Bank of England’s decision to keep Bank Rate unchanged, the pound came to grief after a series of combative ministerial comments relating to Britain’s future relationship with the EU. The Prime Minister’s altercation with the EU’s chief negotiator cast doubt on the viability of Michel Barnier’s “highly ambitious” trade offer and led investors to fear that the government is pursuing a no-trade-deal outcome, or an “Australian-style” agreement as it is known.
Frustratingly for supporters of the pound, the UK economic data were not bad at all. Mortgage approvals picked up in December and the purchasing managers’ index reading for manufacturing, construction and services all beat analysts’ forecasts.
Once again the euro flew resolutely below the radar to clock up another average performance. On average, it was unchanged against the other major currencies and it was flat against the Swiss franc. The euro strengthened by a cent against sterling, leaving it a fifth of a cent below its level a month ago. Politics added nothing to the equation and the European Central Bank was mostly quiet. When ECB President Christine Lagarde visited the European Parliament, she made what many will regard as the obvious observation that a decade of monetary relaxation has left central banks’ armouries worryingly empty. With that in mind, Ms Lagarde anticipates that the ECB will before long be buying Greek government bonds as part of its monetary stimulus programme.
With the exception of Germany, economic data from the euro zone were mostly solid enough, though the 0.1% expansion of gross domestic product in the fourth quarter of 2019 was a little disappointing. German retail sales, factory orders and industrial production all looked awful. The euro zone PMIs all either matched or beat expectations, with the composite index half a point higher on the month at 51.3.
Jointly with the Australian dollar and Swedish krona, the US dollar was the week’s top performer. It strengthened by a cent and a half against sterling and took a third of a cent off the euro. The dollar’s main achievement was to do nothing wrong, though the week was not without incident from a political point of view. The process of selecting a Democratic challenger to the President got off to a shaky start in Iowa, allowing all the candidates to claim victory. Trump was acquitted by the Republican Senate of charges levelled against him by the Democratic House of Representatives. The leader of the House showed her disapproval by ceremoniously tearing up her copy of the President’s State of the Union address.
Despite all that, the data from the States continued to portray a reasonably dynamic economy, at least in comparison with the other majors. Consumer confidence “remained at very positive levels”. The two manufacturing PMIs were positive at 51.9 and 50.9 and the services readings even more so at 53.4 and 55.5.
Had it not been for a downward lurch on Monday, the Loonie might well have kept pace with the US dollar. As it was, the CAD came away with a half-cent loss on the week. It strengthened by a proportionally-similar half a cent against sterling. Since the beginning of the year the Canadian dollar has lost a third of a cent to the pound. Its progress was driven more by investors’ appetite – or lack thereof – for risk than by anything directly related to the Canadian economy, though there was a correlation of sorts with changing oil prices. And both risk-appetite and oil were shaped by investors’ changing perceptions of the Wuhan coronavirus and its possible economic impact.
There was little illumination from the Canadian economic data. Raw material and industrial product prices last Friday showed a sharp increase in material costs that mainly related to energy. Gross domestic product expanded by 0.1% in November and the manufacturing PMI was only a touch higher in January, demonstrating that “subdued manufacturing conditions persist”.
It was a busy old week for the Australian dollar with several significant ecostats and a central bank rate decision, all against the backdrop of the Wuhan coronavirus outbreak that has direct economic implications for Australia. Taken together it amounted to a good week for the Aussie, which shared first place with the US dollar and the Swedish krona. It strengthened by two and a third cents against sterling.
The manufacturing PMIs from AiG and Markit described “stumbles” and “contraction” at the start of 2020. Building permits went up by an annual 2.7% in 2019 despite falling 0.2% in December. New home sales rose 1.5% in December. The two services sector PMIs came in at 50.6 and 47.4 and retail sales fell 0.5% in December. The undoubted highlight of the week for the Aussie was the Reserve Bank of Australia’s decision to keep its Cash Rate benchmark unchanged at 0.75%. Although that had been the consensus, investors still had half an eye on the possibility of a cut, so the Aussie strengthened afterwards.
The NZ dollar put in a slightly below-average performance, falling by 0.2% against the other major currencies. It lost a third of a US cent and went up by a cent and two fifths against the pound. As much as anything, the Kiwi’s movement was a function of the wax and wane of pessimism about the Wuhan coronavirus. NZ economic data did not really add much to the debate.
There were not so many of them anyway. Total filled jobs numbered 2,210 in December and building permits were up by a monthly 9.9%. Dairy prices fell 4.7% in the two weeks to 4 February. Although they did not create much of a ripple the most important data were Wednesday’s jobs numbers. They showed employment remaining static in the fourth quarter of 2019, with the rate of unemployment a touch lower at 4.0%.