Football aside, the hot topic in Britain was the prime minister’s confirmation that Covid restrictions will be lifted on 19 July. Whilst there is a lack of symmetry to the relaxation of the rules – two British vaccinations will allow people to avoid quarantine while two French jabs will not – the sense is that many brakes on the economy will be released in ten days’ time. For that, sterling was moderately grateful; it strengthened by an average of 0.2%, holding steady against the euro and US dollar.
Although they did not all measure up to analysts’ ambitious forecasts, the UK purchasing managers’ indices were all strong, with manufacturing at 63.9, service at 62.4 and construction at a 24-year high of 66.3. The residential property remained vibrant, despite a slight setback for house prices in June. RICS house price balance hit a 33-year high at 83% as demand continued to outpace supply and one estate agent in York spoke of “the busiest sales month on record”.
Like Britain and, to be fair, just about everybody, the Eurozone delivered a punchy set of post-lockdown PMIs. Manufacturing came in at a collective 63.4 with Austria, Spain and Greece at multi-year highs. A 58.3 for services comprised a two-month low of 63.4 from Ireland which was at the same time the highest national reading. Although ZEW’s survey of economic sentiment was 20 points lower on the month it was still in the upper reaches of its long-term range. Retail sales went up by an annual 9% in May, beating expectations of an 8.2% increase.
The euro’s big event was the announcement of its new monetary policy strategy. After a year and a half of deliberation, the Governing Council has adopted a “symmetric 2% inflation target”. The change from “close to but just below 2%” was made to avoid giving the impression that 2% was a cap. President Christine Lagarde made a big point of spelling out that the ECB will not be following the US Federal Reserve’s average rate targeting.
The Independence Day holiday on Monday left the dollar with only four days to get its work done but it pressed ahead. In last Friday’s employment report the addition of 850k people to nonfarm payrolls in June was, on the face of it, a strong result. It was certainly better than the forecast 700k increase and it was the biggest rise since August last year. However, there were a couple of flies in the ointment. Payrolls are still more than 2 million short of their level in February 2020 and the persistently low 61.4% participation rate suggests that a considerable number of people are choosing not to work. There was more theoretical disappointment from the services PMIs from Markit and ISM. At 64.6 and 60.1 they were lower on the month and below forecast, therefore unacceptable. Ironically, they hurt the commodity currencies, not the US dollar.
The minutes of the June Federal Open Market Committee did not give much away. They contained no details of when the tightening of monetary policy will begin. However, there was a hint that it might happen sooner than the market expects. Buried within the text was the acknowledgement that “Various participants mentioned that they expected the conditions for beginning to reduce the pace of asset purchases to be met somewhat earlier than they had anticipated at previous meetings in light of incoming data.” With that in mind, there was general agreement that the FOMC should prepare itself to adjust the asset purchase programme at short notice if circumstances change.
Energy prices had a dampening effect on the currencies of the countries that produce them. After touching a seven-year high on Tuesday, oil suffered an 8% correction and it is still 3% lower on the week. The Loonie, in turn, is down by an average of 0.7% from last Friday’s opening, having lost a cent and a half to sterling and two thirds of a US cent. (The Norwegian krone was much harder-hit, falling 1.9% against the majors).
The Canadian economic data were decent enough. Trade fell into a small deficit in May as imports and exports moved in opposite directions. Markit’s manufacturing PMI softened to a four-month low of 56.5 while the broader Ivey PMI at 71.9 was only a point short of its March high. The Bank of Canada’s Business Outlook Survey pointed to continued improvement in business sentiment. “Firms tied to high-contact services still face challenges but are becoming more confident that sales will pick up as vaccination rates rise. This suggests an important broadening in the recovery ahead".
Together with the other commodity-related currencies, the Australian dollar was in the back half of the field. It lost an average of 0.5% to the majors, giving up half a US cent and falling a cent and a quarter against sterling. The Aussie’s highlight was Tuesday’s monetary policy statement from the Reserve Bank of Australia and the follow-up speech by Governor Philip Lowe. The bank left interest rates unchanged, as expected, and announced a new round of asset purchases to follow the current one, which ends in September. The next round will be smaller in size and more short-lived.
The week’s Australian economic data consisted almost entirely of purchasing managers’ index readings. AiG’s performance of construction index was two and a half points lower on the month at 55.5. Markit’s services PMI was more than a point lower at 56.8 and the composite index fell from 58 to 56.7. They were all good numbers but investors were unimpressed. A 7.1% decline in building consents and a 0.4% increase in retail sales attracted little attention.
The NZ dollar performed better than its commodity peers because it stayed mostly below the parapet and only appeared when there was something to crow about. There were vanishingly few NZ economic statistics and just one with any implications for the currency. That was NZIER’s Quarterly Survey of Business Opinion and it was positive for the Kiwi. The “strong pick-up in demand and confidence” that emerged from the survey was seen as an encouragement to the Reserve Bank of New Zealand to tighten monetary policy. Confidence improved by 20 points to 7, the highest reading in four years.
The NZ dollar lost an average of 0.2% to the major currencies. It lost quarter of a US cent and gave up seven eighths of a cent to sterling.