Weekly Brief

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All about the Fed

GBP

Although the week was dominated by the US dollar, sterling managed to steer a relatively safe course into third place behind the Japanese yen. It strengthened by an average of 0.4%, rising more than two and a half US cents and adding nearly half a euro cent. A negative political tone, especially with regard to the cold sausage war at the G7 meeting, was outweighed by the mostly constructive economic data.

Monthly declines in manufacturing and industrial output still left annual increases of 39.7% and 27.5%, and the 2.3% expansion of gross domestic product in April was the fastest monthly growth since July 2020. A fall in unemployment to 4.7% was moderately helpful, unlike May’s 1.4% decline in retail sales (though they were still 24.6% higher on the year). What really lit the fire under sterling was Wednesday’s consumer price index numbers. They took inflation to 2.1%, higher than expected and above the Bank of England’s 2% target. Out of habit, the pound strengthened on the news, though the Bank is unlikely to react with tighter monetary policy.

 

EUR

Talk of a wind-down of the US Federal Reserve’s quantitative easing programme encouraged journalists to ask European Central Bank Chief Economist Philip Lane if he was having similar thoughts. Mr Lane made clear that he was not, and that the ECB would not be servile to any fashion set by the Fed. Anyway, the Eurozone CPI data released on Thursday put inflation almost exactly on target at 2%; not a level to worry the ECB or anyone else.

The week’s few other ecostats were as uncontroversial as the inflation data. A 0.8% rise in industrial production took it to 39.3% above the level of April 2020. A wider trade surplus resulted from exports rising by more than imports. And that was it for the pan-euro-zone economic statistics. None of them made much of a difference to the euro, which was on average unchanged. It lost two and three quarters of a US cent.

 

USD

The dollar romped away from the rest of the field, principally as the result of the Federal Reserve Chairman’s press conference on Wednesday. It strengthened by an average of 2.3%, leaving a 0.7% gap between it and the second-placed Japanese yen. Its biggest gain was of 3.7% against the Swedish krona. The US economic data came and went without having any more than a passing impact on the currency.

It was all about the Federal Open Market Committee and Chairman Jerome Powell’s admission that the FOMC is now talking about tighter monetary policy and giving consideration to when it might begin. That will not be soon. The Fed will “continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage‑backed securities by at least $40 billion per month” until further notice. So no tapering yet. However, the “dot plot” of members’ expectations for interest rates showed seven of them anticipating an increase next year and a majority looking for a higher federal funds rate in 2023.

 

CAD

The Loonie continued to receive support from buoyant oil prices. WTI crude touched $73 on Wednesday, $4 short of the October 2018 peak, which marks the highest level since 2014. It was not enough to carry the CAD higher though. On average it is unchanged against the major currencies, having lost nearly two US cents and fallen half a cent against sterling.

Investors’ interest in the domestic economic data ought to have centred on the consumer price index, which rose 3.6% in the year to April, the largest increase since May 2011. Although there was some impact from the base-effect of low prices a year earlier, the main upward pressure on prices came from housing and motor cars. However, investors did not care, and they took even less interest in an unexpected 0.4% monthly rise in Canadian wholesale sales (15) which was announced at the same time. The only other relevant economic statistics were for manufacturing sales, which fell 2.1% April, and housing starts, which trended slightly higher.

 

AUD

It was announced on Monday that the UK and Australian prime ministers had agreed a trade deal that will put more Scotch whisky in Australian glasses and Australian beef on British dining tables. Neither the AUD nor the GBP saw any benefit from the news, and the Aussie is an average of 0.5% lower on the week. It is a cent and two thirds lower against sterling. Its main stumbling block was Wednesday’s commentary from the US Federal Reserve: the prospect of less free money washing around the world is generally seen as a negative for commodity-oriented currencies.

The highest-profile Australian data were Thursday morning’s employment numbers. They were decent enough, with 115k new jobs – most of them full-time – and a fall in the rate of unemployment to 5.1%, but they brought no great joy to the Aussie dollar, perhaps because investors were still thinking about the Fed. The only other even vaguely-interesting numbers were for house prices. The government’s own index showed prices rising 5.4% in the second quarter and 7.5% in the year to June.

 

NZD

The NZ dollar was unfortunate not to have received at least a little help from the domestic economic data. There was little wrong with any of them but, like the Aussie, the Kiwi was depressed by the prospect of tighter US monetary policy and eventually higher interest rates. In the end, the NZD and AUD were unchanged against one another and an average of 0.5% lower against the major currencies. The Kiwi lost a cent and three quarters to sterling.

Although it is currently a rather meaningless number, grossly distorted by the imposition and relaxation of Covid travel restrictions, the most entertaining NZ statistic was for visitor arrivals. In April, there were 31,900 of them, a 1,755.4% increase on the same month last year. Business NZ’s performance of services index was five points lower on the month but, at 56.1, still above its long term average of 53.9. The gross domestic product data for the first quarter showed the NZ economy expanding by 1.6% over the three months, a better result than expected.

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