The daily pre-open (0600h) exchange rates from London show that sterling is on average unchanged today from last Friday morning. Those rates are very misleading. On three days, the pound was either the best or worst performer among the major currencies and on Thursday it only just avoided last place by courtesy of the Norwegian krone. Sterling crossed the psychologically-important $1.30 and €1.10 lines four times.
Data from the UK economy were hardly more than a backdrop to the pound’s gyrations. NIESR’s estimate that GDP rebounded by 15.2% in the third quarter was helpful, as was the 6.1% increase in retail sales reported by the BRC. The employment data were so-so, and are sure to look worse in coming months. The real driver was the Prime Minister, and the effect upon sentiment of his approaches to the pandemic and Brexit. Both were of concern to investors, especially as Johnson’s self-imposed deadline for a Brexit deal passed on Thursday. A final decision on whether to put up or shut up is expected today.
The euro is just about unchanged against sterling, but it is unchanged in a much less spectacular way than the pound. Starting at the very beginning of this week, it retreated from what had been a three-week high against the US dollar. It eventually lost three quarters of a US cent to create a new October low. Except as far as EU leaders adopted a less conciliatory attitude to Downing Street, the only real political narrative from the Eurozone related to the treatment of the resurging Covid-19 pandemic. As elsewhere, governments are struggling to balance the contrary demands of public health and public wealth. At the European Central Bank, the most interesting comment was from President Christine Lagarde. She said the bank is looking “very seriously” at the creation of a digital euro as a supplement to cash.
Eurozone economic data did not give investors much to play with. Industrial output in France and the Eurozone grew by less than expected in August, while in Italy the rebound was much stronger than forecast. Inflation remained stubbornly low in Germany (-0.2%), Spain (-0.6%) and France (0%) and is forecast to come in at -0.3% for pan-Eurozone today. ZEW’s measures of economic sentiment in Germany and the Eurozone both deteriorated sharply in October, Germany to 56.1 and Eurozone to 52.3.
With less than three weeks until the election, Democratic presidential contender Joe Biden is cementing his lead in the opinion polls. Multiple computer simulations by FiveThirtyEight show him winning the White House in 87 out of 100 times after 40,000 iterations. The Democrats are also slight favourites to secure a majority in the Senate. In addition, the US dollar is on average 0.5% firmer on the week, with gains of two thirds of a cent against sterling and three quarters of a cent against the euro. That is not to say the USD has benefitted from the anticipated election result. Some say a “blue wave” Democrat takeover of the administration and both chambers of Congress would be neutral because infrastructure spending increases would balance higher taxes. Goldman Sachs thinks otherwise, and recommends short positions against the USD.
The US ecostats were tilted slightly against the dollar, though they attracted less attention than the presidential contest. Initial jobless claims unexpectedly increased. Manufacturing indices from the Federal Reserve Banks of New York and Philadelphia pointed in opposite directions. Inflation edged up to 1.4%, a seven-month high.
The Loonie strengthened by a barely-noticeable sixth of a cent against sterling and gave up a third of a US cent. On average it was almost unchanged against the other major currencies. There was not the merest hint of any correlation with oil prices, which chopped and changed direction half a dozen times within a two-dollar range for a net loss of 50¢. Monday’s Thanksgiving holiday meant a four-day week.
Just two sets of data appeared, both relating to employment. Last Friday’s official Labour Force Survey was better than expected. Employment increased by 378k and the rate of unemployment fell from 10.2% to 9%. The news was worth a quick quarter of a US cent to the Loonie. Thursday’s ADP Employment Change number was less helpful, indicating the loss of 241k jobs between August and September and contradicting the official increase of 378k. Bank of Canada Deputy Governor Timothy Lane echoed the sentiment of the ECB president when he said that central banks “must speed up work on creating their own digital currencies”.
The Aussie struggled at the back of the field, eventually avoiding last place only because the Norwegian krone had a slightly worse run. It lost one US cent and gave up nearly two cents to the pound for an average loss of 1.0%. The AUD’s main handicap was a perception that the Reserve Bank of Australia is preparing the way to relax monetary policy further. A speech by RBA Governor Philip Lowe reinforced that idea. He set out several possible measures to support the Australian economy, all of which involved some form of monetary easing. Analysts foresee a further cut to the RBA’s record low 0.25% Cash Rate.
Among the few economic statistics, the most important were in Thursday’s Labour Force report. The rate of unemployment increased to 6.9% and participation decreased to 64.8% as total employment fell by 29.5k. There was no immediate reaction from the AUD but the numbers were not of any help to it.
A modestly successful week took the NZD an average of 0.2% higher against the majors. It lost a sixth of a US cent and added half a cent against sterling. The Kiwi strengthened by 1.25% against the Aussie. On Tuesday it was the top performer among the major currencies with an average daily gain of 0.5%. It was an off-the-wall result with no obvious justification, and went against the tone of Reserve Bank of New Zealand Assistant Governor Christian Hawkesby. He told a conference that the bank’s consideration of negative interest rates is “not a game of bluff”, and cited Sweden’s Riksbank as a good example of a central bank that had used negative rates effectively. Among the ecostats, visitor numbers were down by 96.9% from the same month last year, continuing the pattern of the last four months, and the REINZ House Price Index was up by an annual 11%.
On Saturday, prime minister Jacinda Ardern will face a general election in which the Covid-19 pandemic will be front and centre. Ms. Ardern is widely considered to have done a good job of managing the pandemic and her Labour party is well ahead of the opposition National Party in the opinion polls. It is conceivable, if not exactly likely, that Ms Ardern will be able to secure an overall majority and avoid a coalition.