The pound made gains all week due to rumours than an agreement between the UK and the EU on fishing rights was imminent. Analysts seem to be conveniently ignoring the Prime Minister’s reiterated ultimatum to the German Chancellor that he is prepared to press ahead with a no-deal Brexit, for now anyway. Many believe that the progress of the UK/EU negotiations will be the main driver of the pound’s value in the coming weeks.
Chancellor Rishi Sunak set out his mini-Budget, pledging another £30bn for an emergency spending programme now totalling £190bn to offset the economic damage done by Covid-19. At first sterling took a while to respond to Sunak’s measures designed to support employment and stimulate the economy. It is debateable whether his £1,000 subsidy to bring back furloughed workers is big enough to influence firms, but only the most egregious yes-but-what-about critic could not see Sunak’s mini-budget as being of at least some help to the economy. Although it will further inflate the country’s national debt, it will not do so in a disproportionately bigger way than is happening elsewhere. Normality is edging closer for the economy, with leisure facilities and beauty services given the green light to open again.
The charm offensive of the ECB on Germany worked a treat last week. This week, it was German Chancellor Angela Merkel as the charmer, presenting her agenda for Germany’s presidency of the Council of the European Union. Merkel has the tricky job of persuading the ‘frugal four’ – the Netherlands, Austria, Denmark and Sweden – to approve the €750 billion coronavirus recovery package. Those four argue that any assistance should take the form of loans, not grants. The euro was rather average in its performance.
Despite its economic woes, the euro could see some newbies very soon. Croatia and Bulgaria are set to be approved to adopt the euro, the first steps in expanding the currency since 2015. Announcements and data releases in Euroland were a mix of ugly and pessimistic, starting with the ECB’s Christine Lagarde’s weekend words that the pandemic would have a long-term impact on the European economy. The European Commission’s Economic Forecast opened up with the cheerful heading, “A deeper recession with wider divergences”. It predicted an 8.75% contraction in the euro zone economy this year, followed by a 6% expansion in 2021.
The US started the week looking past the pandemic, focusing on the latest US employment report. US President Trump enjoyed basking in the news of a 4.8 million jump in nonfarm payrolls, even though a net 14.6 million jobs still remain missing from the pre-pandemic tally. The employment data boosted the US dollar early on. A different rhetoric came from not one, not two, but three US Federal Reserve head honchos. Cleveland President Loretta Mester spoke of slowing activity and a need for more policy help, Atlanta’s Raphael Bostic said businesses and customers were “getting worried” and might need additional support, and Vice Chairman Richard Clarida repeated his mantra that “there’s more that we can do; there’s more that we will do”.
America’s NASDAQ 100 index hit a record high on Monday. However, this belies the growing concern about the US economy as coronavirus cases across the continent continue to grow. The two US services sector purchasing managers’ indices from Markit and ISM were quite widely separated at 47.9 and 57.1 but both showed a growth in activity. There wasn’t much in the data to assuage those concerns; MBA mortgage applications in the United States were up by 2.2% on the week and consumer credit decreased by $18.3 billion in May. However, if the virus continues to spread, forcing further lockdowns while countries elsewhere are easing restrictions and growing their economy, it could threaten the greenback’s extensive rally in recent years.
The Canadian dollar has been struggling, starting the week as the weakest major currency and the Bank of Canada’s Business Outlook Survey did little to help the Loonie by pointing to “weak demand.” The BoC’s report stated that “business sentiment is strongly negative,” but did offer a sliver of hope in that “roughly half of firms anticipate that their sales will recover to pre-pandemic levels within the next year.”
At the moment, even good news can’t seem to move the struggling currency; stronger than expected figures from the Ivey PMI had little effect. The market will be closely watching the Canadian jobs report due out at lunchtime today – the expectation is for a growth in employment and a subsequent fall in unemployment, which may help to disperse the cloud hanging over the Loonie.
As the Melbourne lockdown began and New South Wales closed its border with Victoria, the Australian dollar trended to the downside. AiG’s Performance of Services Index came in at a disappointing 31.5, only four and a half points off the low two months ago and Australian mortgage lending fell “sharply” in May, its 15.6% decline was the “largest fall in the history of the series.” Against this backdrop, the Reserve Bank of Australia board “decided to maintain the current policy settings, including the targets for the cash rate and the yield on 3-year Australian Government bonds of 25 basis points”. Nothing appeared to move the Aussie or help it regain some of its strength.
The current weakness appears due not only to effect of the pandemic but also suggestions that tensions between the US and China are escalating once more, with reports that the US Government is planning a raft of regulations against top Chinese tech companies in the name of national security. A sharp fall in global equity markets is also piling on the pressure; the commodity based currency mirrored the sharp fall in the US S&P 500.
On the world stage, New Zealand has been praised for its actions to put a halt to the spread of Covid-19, but it appears that many are starting to consider the cost of those actions. The Kiwi did rise after the NZIER’s Quarterly Survey of Business Opinion rose seven points from its lowest to -63.
Like the Australian dollar, the New Zealand dollar has stalled in light of the performance of the global equity market and concern is growing that the economy may not gain real traction until the borders are reopened. Since March, the New Zealand dollar had been making gains against its G10 peers but faltered around mid-June after the S&P 500 stalled and questions began to be raised about the roadmap for reopening the country’s borders. However, with cases rising in the US and the prospect of further State-wide lockdowns, the New Zealand’s achievements in eradicating the virus may still pay dividends for the currency in the long term.