Weekly Brief

Panic over, for now


Although it will not go down as a sensational week for sterling, the last seven days were undoubtedly more kind to the pound than the week that went before. An average gain of 0.6% replaced a loss of 3%. On Tuesday and Wednesday the Great British pound was the joint top performer alongside the JPY. Over the week it picked up one and a quarter US cents, one euro cent and one Japanese yen. To a large extent the pound’s recovery was the result of fading concern about the controversial Internal Market legislation. The Prime Minister will give Parliament a veto on any breaking of the Good Friday agreement. And even with that concession it is far from certain that the bill will win approval from the House of Lords.

Sterling’s biggest wobble came on Thursday, with the minutes of the Bank of England Monetary Policy Committee meeting. Almost at the end of the document there was mention of “the Bank of England’s plans to explore how a negative Bank Rate could be implemented effectively”. It was not a promise of negative rates, nor even a threat, but it did send a shudder through the pound.



It was not a winning week for the euro but the USD, CAD and CHF were equally uncomfortable, all falling by about 1% against the GBP. They lost an average of 0.4% to the other major currencies. Economic data from the euro zone were mostly of second or third tier importance. The majority of them related to consumer prices which, in the context of a tragic global pandemic, are neither a good economic indicator nor a significant driver of monetary policy in Frankfurt or anywhere else. Standardised HICP inflation in Germany was -0.1%, in Spain -0.6%, and in Euroland as a whole -0.2%. Across the euro zone inflation ranged from -2.9% in Cyprus to 1.4% in Austria and Slovakia.

ZEW’s surveys of economic sentiment among investors in Germany and Euroland found improvement in both cases. Germany was 5.9 points higher on the month, at a 17-year high, while the euro zone was almost ten points higher.



A mediocre performance by the dollar was matched by the euro, the Swiss franc, the Canadian dollar and the Norwegian krone. All of them fell by around 1% against the British pound and lost an average of 0.4% to the other majors. There was nothing among the US economic data to encourage or alarm investors: inflation was a little higher at 1.3%; industrial production rose by an historically normal 0.4% in August after two months of charging recovery; retail sales increased by a slightly disappointing 0.6% in the same month; housing starts and building permits were fewer than forecast but not by much.

The main event for the dollar was Wednesday’s policy announcement from the Federal Open Market Committee. Its statement said everything that could reasonably have been expected. Notably, it will not take the funds rate above its current 0%-0.25% target until there is “maximum employment” and inflation is threatening to exceed 2% “for some time”. The accompanying economic projections show only one FOMC member expecting to see the funds rate rise above 0.5%-0.75% before the end of 2023. Chairman Jerome Powell does not foresee any tightening of policy until the recovery is “very far” along.



The Loonie did not have much to say for itself on the economic front. Manufacturing sales rose for the third consecutive month, up by 7.0% in July. Capacity utilisation fell by nine percentage points in the second quarter to 70.3%. Leather and allied product manufacturing (tanners and cobblers) took the biggest hit, running at just 44.7% of capacity. The consumer price index went up by a tenth of one percent in the year to August, putting headline inflation at 0.1%. Core inflation, which ignores energy and perishable food prices, ticked higher to 0.8%.

There was nothing there to motivate the CAD in either direction so it played the role of follower rather than ploughing its own furrow. An 11.5% rise in the price of WTI crude had no discernible effect on the value of the CAD, which was unchanged against the US dollar, as well as the CHF, EUR and NOK. It lost one and a half cents to sterling.



The Aussie was unchanged on average against the major currencies. It lost 0.5% - four fifths of a cent - to the pound and was down by 1.4% against the week’s champion, the NZ dollar. Early in the week the AUD got a boost from the Reserve Bank of Australia when it published the minutes of its September meeting. The central bank wistfully observed that “a lower exchange rate would provide more assistance to the Australian economy” while pragmatically acknowledging that “the Australian dollar was broadly aligned with its fundamental determinants”.

Employment data for August were mostly better than forecast. Some 75k part-time and 36k full-time jobs were added during the month, a far better outcome than the 50k job losses predicted by analysts. The rate of unemployment fell from 7.5% to 6.8%. Curiously, the numbers did nothing for the Aussie: perhaps investors were conscious that Australian employment data are particularly susceptible to subsequent revision. Other statistics covered house prices, which fell 1.8% in the second quarter, and new home sales, which rose 61.3% in the three months to August.



The Kiwi made a jerky upward trek against the USD and this Friday morning it tested the US$0.6767 high of two weeks ago. It is now in a technically-important area close to the highs of July and December 2019. Conventional wisdom has it that if the Kiwi can break above US$0.68 it will have a good shot at US$0.7. Unfortunately the technical picture for GBP/NZD is less clear-cut, safe to say that the pound would be under threat with a downward break of NZ$ 1.9, July’s low. The NZ dollar was the week’s top performer, strengthening by an average of 1.5% and adding a cent and two thirds against the pound.

That technical situation had more to do with the NZD’s success this week than the domestic economic data. Business NZ’s dismal performance of services index – down by 7.5 points at 46.9 – was of no help whatsoever. Westpac’s index of consumer confidence was equally awkward at 95.1, its lowest level since 2008. The 12.2% contraction in GDP during the second quarter was similarly unattractive but at least it did not come as a surprise and was not conspicuously worse than other developed countries.

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