Weekly Brief

Sterling: hero to zero


After a successful first quarter the pound turned on its heel and fled as Q2 began. There are only four days in this shortened post-Easter week, and for the first three of them sterling was the weakest among the major currencies. It remains to see how the fourth will pan out but it did not begin auspiciously. Since the previous weekly report last Thursday sterling has fallen by an average of 1.5%, with losses ranging from 0.2% to the USD and 2.4% to the CHF.

There was absolutely nothing among the UK economic data to justify sterling’s collapse. The purchasing managers’ indices for manufacturing and services were both higher on the month and comfortably positive at 58.9 and 56.3 respectively. The construction PMI at 61.7 was the highest in six and a half years. One news outlet suggested that snags in the vaccination programme are to blame, another believes “traders are starting to question the destination” of the prime minister’s post-lockdown road map.



While sterling blundered into the mire the euro could do almost nothing wrong. It strengthened by an average of 0.3% over the eight days, adding almost two US cents and taking more than two cents off sterling.

Economic data from the Eurozone, such as they were, tended to be helpful to the EUR. The manufacturing PMIs last Thursday all came in comfortably above the breakeven line at 50. Results ranged from Greece’s 51.8 to Germany’s 66.6; a record high. The services PMIs on Wednesday averaged out at 49.6, narrowly missing breakeven, while the composite reading for all countries and sectors came in at 53.2, the highest since last July. The only other ecostats for the Eurozone as a whole were for producer (factory gate) prices. They went up by 0.5% in February and were 1.5% higher on the year. The account (the expurgated minutes) of last month’s ECB policy meeting brought nothing really new to the table, though the EUR did move higher following its publication.



The USA does not officially commemorate Easter. So last Friday and Monday brought a host of important economic statistics to add to those that had already appeared on Thursday. They were mostly better than expected, yet were of little help to the dollar. The USD was only a third of a cent ahead of the last-placed GBP over the eight days, losing an average of 1.3%.

Manufacturing PMIs of 59.1 and 64.7 from Markit and ISM were followed by readings of 60.4 and 63.7 for services. Friday’s employment report showed nonfarm payroll employment rising by 916k in March and unemployment falling to 6%. The payrolls number smashed expectations. The administration and the Federal Reserve were united in emphasising their commitment to supporting the US economy: President Biden expanded upon his American Jobs Plan and the Federal Open Market Committee released the dovish minutes of last month’s meeting. There were no surprises in either. The president’s push for another $2 trillion infrastructure spend came alongside proposals for a higher rate of corporation tax and an international floor for such taxes, to avoid a race to the bottom. The FOMC minutes trod the familiar path of committing to ultra-easy monetary policy until inflation returns sustainably to 2% and full employment is achieved.



The Loonie came in second from last, up by a seventh of a US cent and three quarters of a cent ahead of sterling. It lost an average of 1.1% over the eight day week. It behaved more like the US dollar than the Australian and NZ dollars, with which it is usually compared. There were no problems at all from the Canadian economic data, so other factors must have been in play. One of them could well have been investors’ negative perception of Ottawa’s Covid vaccination programme. With no domestic production facilities, Canada must import all the vaccine it uses, and the process is not working well. 

The Canadian ecostats themselves were really rather good. Building permits for February broke the $10 billion mark for the first time, with a 2.1% monthly increase. Markit’s manufacturing PMI rose four points to a record high of 58.5. The trade surplus narrowed very slightly in February. The broad-brush Ivey PMI jumped 13 points to a seasonally-adjusted 10-year high of 72.9. No bad numbers there, at all.



Not a lot of daylight separated the AUD from the NZD. On average both were just about unchanged on the week, with the Kiwi an inch ahead of the Aussie. The Australian dollar strengthened by two and a half cents against the British pound. It was not helped by Australia’s own version of Europe’s AstraZeneca flip-flops. Mixed messaging is confusing people, to the extent that each vaccination is taking longer than it should because clinicians have to convince patients on the benefits of the vaccine.

There was minimal confusion about the Australian ecostats, all of which were to some extent subjective. Job-vacant adverts rose 7.4% in March following an upwardly-revised 8.8% increase in February. ANZ’s index of consumer confidence suffered the largest fall since March last year. AiG’s performance of construction index rose 4.4 points to 61.8, a record high, and Markit’s services sector PMI was up by two points at 55.5. As expected, the Reserve Bank of Australia left monetary policy unchanged. In its statement the central bank reiterated the pledge that it “will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range”.



Looking back at the agenda, the highlights of the NZ dollar’s week appear to have been the bank holidays last Friday and Monday and the end of daylight saving time at the weekend. That said, it will have lifted some hearts when the government announced a quarantine-free travel bubble that will join NZ and Australia. It certainly did the NZD no harm: the Kiwi is on average almost unchanged on the week against the majors and three cents higher against sterling.

The only relevant NZ economic data came in ANZ’s Business Outlook. It showed a four-point fall in business confidence, to -8%, and unchanged own-activity expectations. The report revealed considerable concern about inflation, with a net 75% or respondents expecting higher costs. A net 53% of respondents intend to raise their own prices, up 6 points at a record high, in data that go back to 1992.


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