After a strong end to 2020, the pound did not have an easy ride into the New Year. A celebratory lockdown was presaged when the Prime Minister said there was “no question” that Covid restrictions would need to be tightened. On Monday, he confirmed that that people should work from home where possible, and that nonessential shops must close. Chancellor Sunak rode to the rescue on Tuesday with a £4.6 billion package of help for retail, hospitality and leisure firms that are forced to close. An additional £594 million will go to local authorities and other bodies.
Investors were not convinced that the money would be enough to offset the negative effects of the lockdown, and the pound struggled to keep its head above water. Although it was not the week’s poorest performer, the safe-haven CHF was alongside sterling and the JPY had an even tougher time – it lost an average of 0.7%, giving up a quarter of a cent each to the USD and EUR. The sensation is that investors are inclined to keep sterling at arm’s length. The Brexit deal has averted the risk of no-deal uncertainty but it, and Rishi Sunak’s package, have left investors wanting more.
The goings-on in London and Washington provided a useful distraction from the seasonal lack of activity in the Eurozone. Economic data from the mainland had had nothing to say at the end of December and the numbers in early January did not exactly electrify the market. A couple were not bad: German retail sales continued to recover in November and the 1.9% increase put sales 4.1% higher than the same month last year. German unemployment fell for a sixth straight month while factory orders were up by 4.0% from their pre-crisis level.
Germany aside, there were some less than sparkling ecostats from the Eurozone. Purchasing managers’ indices were mostly lower than forecast, with the services sector acting as the main drag on output. Consumer price inflation remained depressed in Spain (-0.6%), France (0%), Germany (-0.7%) and Italy (-0.3%). In pan-Eurozone, prices fell 0.3% in 2020. The euro did not pay too much attention to the data. It lost an average of 0.5% and was unchanged against the USD and JPY.
While the news has been dominated by this week’s unrest in the US, investors were more focussed on the two run-off elections in Georgia, with the US dollar remaining immune to the political and social ongoings.
The run-off elections returned two Democrats to the Senate. It will essentially give Joe Biden’s Democrats complete control of government, with a majority in the House and a 50-50 split in the Senate, tilted by the Vice President’s casting vote. Investors foresee a ramping up of fiscal stimulus and increased government borrowing, and they see this as a good thing for the USD. It strengthened by a quarter of a cent against sterling.
The Loonie could have followed the US dollar sideways, as it sometimes does. Instead, and perhaps partly on account of the unusual circumstances in Washington, it distanced itself from its southern neighbour and tagged along with the other “risky” commodity-oriented currencies which formed a group at the front of the field. The CAD strengthened by an average of 0.3%, adding half a US cent and going up by a cent and two thirds against the GBP. In passing, it is interesting to note that GBP/CAD passed through its current level a dozen times in the last three years, covering a range mostly between C$1.6 and C$1.8.
Rising oil prices contributed to the Loonie’s performance, driven in large part by an unexpected cut in Saudi Arabian output. Canadian ecostats were a mixed bag. Markit’s manufacturing PMI came in at 57.9, representing “the strongest overall improvement in business conditions since the survey began 2010”. The Ivey PMI on the other hand, which looks at all sectors of the economy, unexpectedly fell six points to a seven-month low of 46.7. Canada reported a slightly narrower trade surplus in November, with imports and exports both down.
The Aussie benefited from a broad upward shift in risk-appetite among investors. Three main factors were at work: the production of steadily more Covid vaccines, the continued determination of central banks to keep monetary policy relaxed and the prospect of a new, less capricious, political regime in the United States. There was not a lot to choose between the AUD, CAD and NZD; all strengthened on average by 0.3% or more. The AUD came out on top with an average gain of 0.6%, up by two and a third cents against the GBP.
Australian economic data were adequate rather than stunning. The purchasing managers’ index readings for manufacturing and services were both lower on the month and below forecast at 55.7 and 57.0, respectively. However, they were well above the breakeven line at 50, unlike in many of Australia’s peers. The trade surplus narrowed in November, as imports grew at more than three times the pace of exports, and building permits were up by 2.6% for the month.
To say that NZ economic data were scarce is to exaggerate their abundance. The first statistic was Tuesday’s GDT index of dairy prices, which was up by 3.9% from mid-December. The second, last, and most important was Core Logic’s house price index. The modest headline read: “Record summer in store for scorching hot NZ property market”. Despite the government’s efforts to enrol the Reserve Bank of New Zealand in controlling runaway house prices, the shortage of housing stock is squeezing the rental market.
The NZ dollar was less affected by domestic developments than it was by a wider appetite for risk among investors. They are heartened by optimism about Covid vaccine programmes, continued cheap money from central banks and a change of regime in Washington which, they believe, will bring an end to artificially-heightened trade tensions. The NZD was steady against the CAD and an average of 0.3 higher against the major currencies. It took two cents off the GBP.