Among the major currencies only the NZ dollar had a worse week than sterling. The pound fell by an average of 0.9%, losing one and a quarter euro cents and one and two thirds of a US cent. In the last month sterling has lost ground across the major currency board, dropping an average of 3%. It was not the – admittedly grim – domestic economic data that most perturbed investors, it was political concerns on two fronts: Covid-19 and Brexit. With the tragic coronavirus pandemic, investors see woolly thinking in Downing Street that has sown confusion about the ending of lockdown. With Brexit, the prime minister’s refusal to extend the transition period beyond the end of December raises concerns about international trade stalling in the new year.
That is not to say the ecostats were good, though some were indeed better than forecast. Britain’s gross domestic product shrank by “only” a provisional 2% in the first quarter. A 2.5% contraction had been on the cards. With retail sales, however, the British Retail Consortium reported overnight that sales in April were down by “a staggering 19.1%” compared with the same month last year.
A mostly low-profile week of economic data from the euro zone brought few surprises and left the currency mostly untouched. The euro lost a third of a US cent and gained a cent and a quarter from sterling. On average it was almost unchanged against the other major currencies. Pan-Euroland economic data were few. Industrial production fell 11.3% in March and the European Central Bank’s Economic Bulletin spoke of “an economic contraction of a magnitude and speed that are unprecedented in peacetime”. Neither came as a shock to investors. Nor were they taken aback by confirmation this Friday morning that the economy of Germany had contracted by 2.2% in the first quarter.”
The only real concern for the euro related to the spat between Berlin and Brussels in relation to the European Central Bank’s quantitative easing programme. Following the German Constitutional Court’s ruling about the “proportionality” of ECB asset purchases, the European Commission has become increasing resentful about the German stance. EC president Ursula von der Leyen has threatened a lawsuit, arguing that it is the German court, not the European Court of Justice, that is overstepping its powers. The power struggle does not bode well for European cohesion or the euro.
The dollar took first place among the premier league currencies, strengthening by an average of 0.5% and edging the Swiss franc into second place. Much of the dollar’s success arose from the Federal Reserve chairman’s express rejection of the US president’s call for sub-zero interest rates. In a speech at the Peterson Institute Jerome Powell hinted at more monetary stimulus, saying the steps taken so far “may not be the final chapter”. However, asked about negative interest rates, Mr Powell said “It’s an unsettled area, I would call it. I know that there are fans of the policy, but for now it’s not something that we are considering.” It confirmed his observation a few weeks ago that negative rates are “not an appropriate policy response”.
The highest-profile but lowest-impact ecostat of the week was last Friday’s monthly change in non-farm payrolls. They fell 20.5 million in April, taking the number of employed workers above 131 million, a level last seen in March 2011. Everybody had seen it coming and the dollar was only temporarily depressed.
The accelerating end to anti-pandemic lockdown measures around the world was positive for oil prices and for the oil-related Canadian dollar. WTI crude went up by $4 – 16% - to its highest level in six weeks and the Loonie was caught in the updraught. It outpaced its cousins, strengthening by more than a cent against sterling and holding steady against the Japanese yen.
Economic data from Canada were mostly unhelpful. Last Friday’s Labour Force Survey spoke of “exceptional times” and noted the loss of almost two million jobs in April. As in the States, average earnings jumped, in part because of “larger employment declines in relatively low-paying industries”. The monthly manufacturing survey reported that “sales fell 9.2% to $50.8 billion in March, the lowest level since June 2016 and the largest percentage decline since December 2008, during the previous recession”. Sales were down in 17 of the 21 industrial sectors, led by steep declines in transportation equipment and energy.
In common with almost every other major currency the Aussie strengthened last week against the British pound, picking up half a cent. It lost three quarters of a US cent and weakened by an average of 0.6% against its peers. As much as anything, its performance is being hampered by unease about the global economy as a result of the tragic Covid-19 pandemic. Britain’s prime minister and America’s Dr Rick Bright were among the prominent figures who have accepted that a vaccine might never be found.
The Australian economic data were similarly unhelpful. Two surveys from NAB showed Australian housing market activity falling sharply last month while business confidence remained “very weak”. The Business Survey found business conditions continuing to weaken to levels well below those seen during the global financial crisis. “Business confidence bounced… but remains well below the trough of the 1990s recession”. NAB does not see output recovering to pre-pandemic levels before 2022. Unemployment in Australia rose by a percentage point to 6.2% in April, an improvement on the predicted 8.3% but still representing a net loss of nearly 600k jobs. Treasurer Josh Frydenberg said the report was "heart-breaking". Business NZ’s purchasing managers’ index fell to a record low of 26.1.
Thanks to comments by the Reserve Bank of New Zealand governor, the NZ narrative focused on the cost of money. That focus was unhelpful to the NZ dollar, which was the week’s weakest performer among the major currencies, falling by an average of 1.6%. It lost a cent and a third to sterling and gave up one and a quarter US cents. The data tended to be unhelpful, with electronic card retail sales plunging 46.8% in April and visitor arrivals plummeting by an annual 53.6% in March. Business NZ’s purchasing managers’ index (26) fell to a record low of 26.1.
The real problem for the Kiwi, however, was the RBNZ governor Adrian Orr. After he announced on Wednesday morning that he would almost double the Large Scale Asset Purchase (QE) programme from $33bn to $60bn, the governor held a press conference. Mr Orr said “we would not rule out OCR cuts into negative territory next year”. His comment put the Kiwi to flight.