Limping into last place against other majors, it’s been a real contrast from last week for the pound. Why? Post-Brexit trade concerns, disappointing GDP data, and unemployment figures all took a swipe at sterling. The number of workers on UK payrolls fell by 649,000 between March and June, bringing the total number of people claiming work related benefits to 2.6m. While the full extent of unemployment caused by the coronavirus economic downturn won’t be fully revealed until the furlough scheme fully unwinds in October, the total number of weekly hours worked fell by 16.7%, amounting to a record drop of 175.3m hours, giving an idea of just how bad the figures may be in the coming months.
Hopes of an often touted V-shaped recovery are receding as poor GDP figures revealed 1.8% growth in May, against a forecast of 5% and following a record 20.3% contraction in April. There is speculation that the Bank of England may need to take more action to steady the ship – printing more money or introducing of negative interests rates are both circulating the rumour mill. UK two-year gilt yields dropped to such an extent that for the first time, they were below the equivalent JGBs in Japan. All hopes of a pound pickup appear to be pinned on trade talks with the EU, and while negotiations haven’t merited any major headlines so far this week, there is still time to squeeze in an announcement on Friday.
Trade talks between the EU and the UK only resumed mid-week, and while those meetings are critical to sterling, the important driver for the euro is the EU leaders meeting taking place Friday-Saturday. The main discussion point will be the Covid-19 economic rescue fund, and a new long-term EU budget. While the bloc’s generous €750bn recovery package has helped the euro against other major currencies, opposition to it from the Netherlands and other more ‘frugal’ nations may prove a sticking point. It is unlikely, according to analysts, to sail through the approval process without some amendments, so all eyes will be on how the euro reacts to a potentially paired down rescue fund.
Midweek the euro touched a four-month high against the US dollar, a one-month high against the Japanese yen, and a two-week high against sterling. The early lockdown across Europe appears to suggest an earlier economic recovery, because while Europe may have seen a sharper fall in activity during lockdown, due to the severity of restrictions, it is now recording a more significant recovery, especially in comparison to the US. A 92% recovery of pre-crisis activity for Europe, in contrast to the US, with a 67% recovery.
While investors are looking at the euro with increasing optimism, it appears confidence in the US is waning. The slower economic recovery trajectory, coupled with cases of coronavirus continuing to rise, is giving President Trump difficulties, especially with his re-election campaign. He currently trails his Democratic rival Joe Biden by 20 points, largely because of his administration’s handling of the pandemic. While US stock markets are still holding out hopes for a V-shaped recovery, as more states reintroduce lockdown measures, most economists are now predicting a longer trough before the US sees recovery.
A rise in US inflation and a fall in demand due to a rise in coronavirus cases also piled on the pressure this week. Escalating tensions between the US and China have not been positive for the dollar either, with Victor Gao from the China National Association of International Studies stating that the US needs to come to terms with the reality that China will become larger than the US, and its growth cannot be stopped. En route to Florida, Trump has said he isn’t even focused on phase two of the trade deal, adding that the US-China relationship is ‘severely damaged’ by the coronavirus pandemic. Reporters travelling with the president claim he is still blaming China for the outbreak. Data emerging from the states remains relatively strong, but investors feel the numbers have yet to catch up with reality, so the US dollar is showing signs that it is no longer impervious to its many, many challenges.
A mixed bag of news for the Canadian dollar this week, breaking even after the Bank of Canada (BoC) struck a downbeat note in its latest statement and put a dampener on things. A rise in global equities gave assistance to the Loonie just beforehand, and there are suggestions of a possible sharp recovery in the second half of the year, following Q2 trends. This news did boost the Canadian dollar briefly, but overall it didn’t help the currency much, as the overall message is of a long, slow recovery.
As well as keeping the interest rate steady, as expected, BoC Governor Tiff Macklem suggested economic activity was unlikely to return to pre-pandemic levels until 2022, and that an extended period of low interest rates was on the cards. Also not great for the Loonie was the 2% drop in WTI prices due to a fall in demand, and fears that demand for oil may not return to previous levels, particularly with an easing of talks regarding OPEC+ output cuts.
Another country and another host of mixed bag results, this time for the Australian dollar. It struggled to hold onto its brief rally, and as a commodity-based currency, it found itself once again near the bottom of the pack of other majors. Figures from China and domestic numbers on jobs and unemployment in Australia blurred the picture.
The NAB Business Confidence Index rose sharply in June, moving from -20 in May to 1 this month. While such results are very encouraging, and caused the Aussie to ride high off the back of this news, investors are sensing that the recovery is still in its early stages, and it is too close to call. Weekly payroll numbers suggest 35% of lost jobs have now returned, but these numbers, and the positive sentiment data, were gathered prior to the second lockdown of Victoria and New South Wales.
The Kiwi followed its down under cousin, struggling to keep a grip on its highs, and feeling the pinch after disappointing inflation for the second-quarter. Outlook is subdued, with consumer prices falling by the most in four years last quarter. The collapse in oil prices isn’t just hampering the Canadian dollar, it is dragging petrol costs down sharply in New Zealand too.
However, the consumer price index was bang in line with what market experts had predicted. Still, a rise in Covid-19 cases in Japan is bad news for trade-reliant New Zealand, and in turn its currency, so the Kiwi is facing a number of stumbling blocks as we end the week.