It was an unusually – and surprisingly – successful week for sterling. On three days the pound was in either first or equal first place among the major currencies. Overall it strengthened by an average of 1.3%, with its closest competitor, the US dollar, 0.6% behind. At the beginning of the week, the outlook was not at all promising. Neither the red tape friction obstructing Britain’s trade with Europe, nor MPC member Silvana Tenreyro’s call for negative interest rates, was helpful to the pound.
Whilst there was no quick fix to the red tape, Bank of England Governor Andrew Bailey came to sterling’s rescue on rates. He argued that “there are lots of issues” that make them undesirable. The pound also received support from Britain’s Covid vaccine programme, which in terms of jabs per capita is ahead of Europe and the United States. The important UK economic data appeared this Friday morning in a rush. Disappointing falls in manufacturing and industrial production were offset by November’s smaller-than-expected 2.6% decline in GDP.
Although it avoided last place among the majors (the Swedish krona was down by 1.3%), the euro shared the penultimate slot with the NZ dollar. The pair lost an average of 0.5%, with the euro giving up one and a half US cents and falling by two cents against sterling. Like sterling, the euro was not afforded much in the way of economic data to motivate potential buyers. Investor confidence improved from -2.7 to 1.3, its highest level since February. German GDP shrank by 5% in calendar 2020.
On monetary policy, the word from the European Central Bank was steady ahead. The account of the ECB Governing Council’s policy meeting in early December reiterated “the need for an ambitious and coordinated fiscal stance” from EU governments. The ECB “continued to stand ready to adjust all of its instruments, as appropriate”. President Christine Lagarde said separately that “any kind of tightening at the moment would be very unwarranted… and could lead to very serious risks”.
Most of the members of the Federal Open Market Committee agree with Ms Lagarde. After a surprising report that the central bank is now thinking about slowing down its quantitative easing asset purchases, Fed chiefs almost fell over themselves to tell the media that they were doing no such thing. James Bullard, Eric Rosengren and Lael Brainard all used almost exactly the same vocabulary to insist that the economy will need monetary support “for quite some time”. Federal Reserve Chairman Jerome Powell underlined that sentiment on Thursday.
The even bigger story (even though it was trailed last weekend, thereby muting its shock effect) was President-elect Joe Biden’s formal announcement of his fiscal stimulus plan. At $1.9 trillion it represents $5,800 for every US resident, and will involve handing out a further $1,400 to every adult on top of the $600 already provided for. The plan was of modest help to the USD, which is an average of 0.7% higher on the week. It lost four fifths of a cent to the GBP.
The Loonie first lost ground to the Greenback, then recovered, such that the two were eventually just about unchanged against one another. It lost a net cent and a fifth to the pound. There was more than a hint of randomness in the CAD’s movements. On Wednesday, for example, it came first among the major currencies and, even with the benefit of hindsight, it was unclear why. Rising oil prices were positive for the CAD during the early part of the week before running out of steam on Tuesday night.
Statistically, the only contribution from Canada was last Friday’s employment data for December. They were less than sparkling, largely as a result of continuing or renewed Covid restrictions. Unemployment edged up to 8.6% with the loss of almost 63k jobs. The Bank of Canada’s Business Outlook Survey was guardedly upbeat, with the indicator continuing to recover from near-record lows and turning slightly positive.
An above-average performance put the Aussie between the safe-haven Swiss franc and Japanese yen. It strengthened by an average of 0.3% against the majors, losing a third of a US cent and giving up a cent and three quarters to sterling. As much as anything, the AUD was driven by the irresolute, almost capricious, appetite for risk among investors. That, in turn, was fed by changing expectations and attitudes to the outlook for US bond yields as a result of the incoming administration’s anticipated stimulus measures.
Monday’s Australian retail sales figures showed sales increasing by a chunky 7.1% in November, as expected. The mortgage lending data for the same month were unexpectedly strong, with new loan commitments for housing and the value of owner occupier home loan commitments both reaching record highs. Mortgage approvals rose 5.6% on the month and were 23.7% up from November last year.
Investors know better than to expect excitement from the New Zealand economic data. They will therefore not have been disappointed with the paucity of ecostats from Statistics New Zealand during the week. There were two sets of data, for building permits and food prices. Building permits rose 1.2% in November to 38,624, 4.2% more than the same month last year. Food prices rose 0.1% in December and were 2.9% higher on the year. ANZ’s world commodity price index went up by 1.8% in December, leaving it 0.4% lower on the year. The report noted a sharp lift in global shipping costs as a result of congested ports.
None of these numbers had much impact on the NZD, which continued to react to investors’ risk appetite. On balance they were no more enthusiastic about the Kiwi than they were about the euro, both of which fell by an average of 0.5% against the other major currencies. The NZD lost three and a quarter cents to the GBP.