Weekly Brief

Fed rattling the cages

7 minute read


Sterling breezed into the end of 2021 and came out of the holiday period with no sign of a hangover. In the first seven days of the year, it strengthened across the board, adding one and a quarter Swiss cents and picking up two fifths of a cent each from the USD and EUR. Compared with a month ago, the GBP is an average of 1.9% firmer, with no losses. From the beginning of 2021, it is an average of 5% higher with its only losses being of 1% each to the USD and CAD.

Investors have proved surprisingly resilient to the litany of woe that Downing Street seems incapable of bringing to an end. It could be that they are giving the GBP the benefit of the doubt because of the Bank of England’s apparent readiness to respond to rising prices, as shown by its (extremely modest) rate increase last month. The week’s UK economic data were not spectacular but were at least mostly better than forecast. The Old Lady’s money and credit report for November showed mortgage approvals holding up and a switch by households from saving money to borrowing and spending it. Markit’s purchasing managers’ index readings showed slower but still comfortably positive growth.



The euro (EUR) was affected more by the commentary from the United States than it was by anything going on in Europe. It came out of the week net unchanged against the USD, though it did explore much of a one-cent range along the way. The EUR is also practically unchanged from a month ago against the USD. Look back a year, though, and the performance of the EUR in 2021 is less impressive. It is down by an average of 2.3%—7.3% lower against the GBP and 7.8% weaker against the USD.

There was little for investors to see among the economic data. German inflation came off its 30-year peak, falling from 6% to a still-heady 5.7%. However, there were no implications for European Central Bank monetary policy, which investors still believe to be frozen for the foreseeable future. The 3.7% monthly bump in German factory orders left them just 1.3% higher on the year. Markit’s purchasing managers’ index readings put private sector growth at a “nine-month low as pandemic flares up”.



Over the week, the USD held steady against the EUR and gave up two fifths of a cent to the GBP. From a month ago, it is all but unchanged against the euro and on average down by two and a half cents against sterling. Since the beginning of 2021, the USD has been the joint top performer, sharing first place with the CAD for an average gain of 6%. It is 1% firmer – a cent and a third – against the pound (GBP).

As 2021 drew to a close, the Federal Reserve devoted considerable effort to managing monetary policy expectations. Inflation was no longer “transitory” and the mutterings from Federal Open Market Committee members showed growing numbers of them leaning towards tighter policy. As this year began, that trend continued. Neel Kashkari, the most dovish of Fed doves, said he expects two rate increases this year. The minutes of the December FOMC meeting were more hawkish than they have been in a decade, saying it “may become warranted” to increase rates at a faster pace than previously expected. On Thursday, St Louis Fed President James Bullard, a traditional policy hawk, upped the ante with a suggestion that the funds rate will go up in March and that quantitative tightening – selling off the Fed’s stock of financial assets – could begin soon afterwards. Today’s employment report will be important to the credibility of that idea.



After a good run against the USD in 2020, the CAD came to a halt last year, to the extent that CAD/USD is exactly unchanged over the last 12 months. Coincidentally, they are also unchanged against one another over the last week and month. Against the GBP, the Loonie is flat on the week and 1.8% - three cents – lower than a year ago. Over the last week, the CAD played second fiddle to the USD, which dominated the newswires with all the talk of Federal Reserve tightening. The background assumption is that, once the Fed has begun to move, the Bank of Canada will give serious consideration to following suit.

Today’s Canadian jobs data will have a bearing on that debate, given that unemployment is now back down to the pre-pandemic levels and not a mile above the 40-year lows seen in 2019-20. Otherwise, this week’s ecostats did not provide much of a lead. Canada’s manufacturing PMI put growth at a 10-month low as “Firms remain optimistic, but concerns around the Omicron variant emerge”. Building permits saw monthly and annual increases of 6.8% and 15.5%, while new house prices were up by 11.7% on the year.



The antipodean dollars were at the back of the field this week, almost entirely as a result of the talk about higher interest rates in the United States. The Aussie was hardest-hit, with losses of 1.4% to the USD and 1.7% to the GBP. On the month, the AUD is four fifths of a US cent worse off and a cent and a half lower against the GBP. From a year ago, the damage is 7% against the USD and 6.5% - 11.5 cents – against sterling, with an average loss of 1.5%.

Australia’s statisticians took the first week of the year at a fairly relaxed pace. Markit’s PMIs for manufacturing and services were both comfortably positive at 57.7 and 55.1, though both showed slower growth. “Supply constraints” continued to be a problem for manufacturers and higher prices were an issue across the board. ANZ’s count of job advertisements showed 5.5% fewer of them in December after a 17.2% upward lurch in November after the easing of lockdowns. The Australian Bureau of Statistics had nothing useful to contribute.



If the Australian statisticians were taking things easy, their colleagues in New Zealand seemed to be taking the week off. The sole, and not terribly important, ecostat was the GDT dairy price index. At the auction on 4 January, prices were up by 0.3% from a fortnight earlier. Investors were unmoved by the news, as was the NZD.

Developments in Washington DC were of far greater importance to the Kiwi. The US Federal Reserve came out of the holiday period apparently spoiling for a fight. It had spent the last couple of months of last year reshaping interest rate expectations and that process continued this week. Minneapolis Fed President Neel Kashkari, normally one of the most dovish of policy doves, said he expects the Fed to raise rates twice this year. His colleague in St Louis, the rather more hawkish James Bullard, said the first rise could well come in March. More officially, the minutes of the Fed’s December policy meeting indicated that rates could rise sooner and more quickly than previously indicated. Taken together, those pointers made life more difficult for commodity-oriented and “risky” currencies. The NZD suffered a little less than the AUD, but it still lost 1.1% to the USD and 1.4% to the GBP. From a year ago, it is down by 5.25% against the GBP and 0.5% on average.


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