Weekly Brief

Risk-aversion bites


Last Friday sterling was the strongest of the major currency bunch. It lost its shine over the weekend though, and as the week progressed it looked ever sorrier for itself. The British Retail Consortium reported “another month of struggle for retailers” in May. Total sales were down by 5.9%, a “less drastic” decline than April’s fall of 19.1%. The RICS house price balance fell to a ten-year low of -32%. This Friday’s line-up of growth and output figures looked at least as awful as analysts had predicted, with monthly falls of 24.4% and 20.3% for manufacturing and industrial production. Gross domestic product shrank by 10.4% in the three months to April and by 20.4% in April alone. The OECD’s Economic Outlook underlined Britain’s economic vulnerability with an estimate that GDP could contract between 11.4% and 14% this year.

Taking all that into account, the average weekly gain of 0.4% achieved by sterling must be seen as a bit of a result. It lost ground to the safe-haven Swiss franc and Japanese yen but so did all the others.



Awful though the UK production data were, Europe came out with similar or even worse results. In Italy industrial production in April was down by 42.5% from the same month last year and German output was down by an annual 25.3%. The Sentix measure of investor confidence for June was 17 points higher on the month at -24.8, though a couple of points short of forecast. Euro zone GDP was a touch better than expected, with a 3.6% quarterly contraction in Q1. The OECD expects the Euroland economy to shrink by 9.1% this year if Covid-19 remains under control or by 11.5% if it flares up again. Conveniently, the pound and the euro were unchanged on the week against one another.

When European Central Bank president Christine Lagarde addressed the European Parliament she volunteered her services to help defuse the legal tussle between Germany’s constitutional court and ECB monetary policy. Her offer was to help, if requested, “without ever compromising on our independence, compliance with EU law, and validity of the European Court of Justice decision”. Ms Lagarde also encouraged politicians to press ahead with their approval of €750 billion of support measures proposed by the European Commission: “It will be important to adopt this package quickly”.



The dollar eventually found itself two fifths of a cent higher on the week against sterling and half a cent better against the euro. Its gains came late in the day, principally as a result of a shift towards risk-aversion on Thursday that sent the dollar to the front of the field alongside the yen and franc. A spectacular US employment report last Friday had little impact on the currency than might have been expected. A forecast loss of 8 million from nonfarm payrolls materialised as a net increase (including revisions) of just under 10 million jobs, yet the dollar lost ground to sterling and picked up no more than half a cent against the euro. Investors took the news with a pinch of salt, a position apparently justified by news of 1.5 million new jobless claims on Thursday.

The previous day the Federal Reserve chairman had reinforced expectations that he would not be taking interest rates higher in the foreseeable future. He is “not even thinking about thinking about raising rates”. The Funds Rate is going to remain close to zero through 2022.



The Canadian employment data were less spectacular than the numbers from the United States but they leant in the same direction. Analysts had prepared investors to expect a loss of 500k jobs and a rise in the rate of unemployment from 13% to 13.7%. What they got was an increase of 290k jobs and an uptick in unemployment to 13.7%. The gap between forecast and was not so wide as in the States but was nevertheless somewhat reassuring. If just the US or only Canada had delivered such an unexpected result it would probably have been dismissed as an aberration: the two together must mean something about the North American economy.

Unfortunately there were no other Canadian data to corroborate the jobs data. The Ivey purchasing managers’ index was less negative at 39.1 but still well below breakeven. Housing starts fell 20.4% in May but the data were incomplete, with no numbers from Quebec. The OECD’s forecasts for Canadian GDP growth this year are either -8% with Covid-19 under control or -9.4% in the double-hit scenario. The Loonie added two thirds of a US cent and lost a cent to sterling.



Among the most actively-traded currencies the Aussie had a worse week than all but the Norwegian krone. It lost one and a third US cents and fell three cents against sterling for an average loss of 1.2%. There were two aspects to Australian dollar’s problems, neither of them domestically driven. The first was the “technical” picture for AUD/USD. For more than a year the Aussie has repeatedly struggled and failed to make a convincing break above US$0.7. After its rebound in March from US$0.55 it appeared ready to have another go at the resistance but once again it was knocked back. The second handicap this last week was a swerve towards risk-aversion among investors, driven by a host of factors ranging from Covid-19 to civil unrest on the States. Another symptom of that risk aversion was a sudden dip in equity prices on Thursday.

There were no hard-core Australian economic data to change the mood. The summary of NAB’s Monthly Business Survey was that “conditions and confidence improve but remain weak”. Westpac’s consumer confidence survey was more constructive, with “Consumer sentiment back near pre-Crisis levels”.



The NZ dollar’s cloak of invisibility excelled at its task once again. There were precisely two sets of economic data from Statistics New Zealand and one assessment from the private sector. The first offering from Stats NZ related to manufacturing sales in the first quarter of 2020. They were down by 1.7%, led by petroleum and coal products which were down by 3.3%. Unsold stocks of those products rose 27%, the largest quarterly increase in 11 years. The second set of official data covered electronic card retail sales. Retail card spending “bounced back by $2.3 billion [78.9%] in May from extremely low levels in April” as businesses reopened after the lockdown. The private sector contribution was Business NZ’s Performance of Manufacturing Index. Almost 14 points higher on the month at 39.7 it “showed some signs of recovery, albeit off a very low base”.

Although the risk-off mood did hurt the Kiwi as much as it did the Australian dollar, the NZ currency could not avoid entirely the downward pull of the Aussie. It lost two thirds of a US cent and fell a cent and a third against sterling.

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