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Rattled by the Fed

GBP

Other than a difficult day last Friday the pound had a reasonably easy ride. It was very slightly lower on average against the other major currencies and flat against the euro and the antipodean dollars. Sterling does face technical challenges against the US dollar and the euro but investors failed to exploit the potential fault lines when they had the opportunity on Tuesday.

After the slew of disappointing UK trade and output figures last Friday morning, sterling had a clear run as far as ecostats were concerned. Rightmove’s index of estate agents’ listings showed house prices rising 2.7% in the year to March. Gfk reported that “consumer confidence shows green shoots of recovery” with the index improving by seven points to -16, its highest level in a year. On Thursday, the Bank of England did as expected, leaving interest rates unchanged. Monetary policy will remain relaxed “at least until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2% inflation target sustainably”. Next Wednesday’s inflation data are unlikely to bring that date any closer, though a spike up to that level is possible later this year.

 

EUR

The Eurozone struggled this week after concerns surrounding the AstraZeneca jab, which the EU regulator has now deemed as safe. Countries are resuming the rollout, with supply issues once again at the forefront of the euro's lackluster performance. In another display of division, the EU has yet to implement the €750 billion recovery plan agreed by the European Council eight months ago. Not a cent has been spent, and ECB board member, Isabel Schnabel, suggested this week that, even when the disbursement begins, the plan may be inadequate.

There was little relief for the euro from the few economic data. Industrial production went up by a monthly 0.8% in January. Inflation was steady at 0.9% in February, with national rates ranging from Greece’s -1.9% to the Netherlands’ 1.9%. The best news came from ZEW. Investor sentiment in Germany improved by more than five points to 76.6, within a point of last September’s high, and in the euro area it was up by more than four points at 74, fractionally ahead of the September peak.

 

USD

The US dollar shared second place for the week with the safe-haven Swiss franc and Japanese yen, strengthening by an average of 0.3%. Its trajectory was anything but smooth, covering a two-cent range against sterling with half a dozen clear changes of direction. The most significant influence, both before and after the event, was the Federal Open Market Committee’s policy announcement on Wednesday. Ahead of the announcement, with long-term borrowing costs on the rise, investors fancied that the Fed might tighten policy in order to flatten the yield curve.

It did no such thing. Instead, and despite a much more upbeat economic outlook, the Fed doubled down on the dovishness with a repeat of its pledge to keep the federal funds rate at 0%-0.25% “until labor market conditions have reached… maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time”.

 

CAD

Almost unnoticed, the Canadian dollar slipped into a leading position for the week, with an average gain of 0.7%. It added a third of a US cent, touching a three-year high along the way, and went up by a cent and a half against sterling. Although the Loonie received some help from US Federal Reserve’s commitment to near-zero interest rates it was only short-lived; 36 hours after the Fed’s announcement investors were still struggling to work out what it would mean for commodity and energy prices.

Some of the Canadian economic data had a longer-term beneficial effect. The Labour Force Survey showed the number of people in work increasing by 259k in February, taking the rate of unemployment down from 9.4% to 8.2%, its lowest level since March last year. After disappointing jobs numbers in December and January, the labour market “roared back to life” as lockdowns began to be lifted. The only real disappointment was inflation, which went up by less than expected from 1% to 1.1%.

 

AUD

The biggest, though not the longest-lasting, influence on the AUD was the US Federal Reserve’s monetary policy announcement on Wednesday. It was immediately positive for all the commodity- and energy-related currencies, including the Aussie, on the basis that an extended period of almost-free money would boost global activity and therefore support demand for raw materials. The AUD went up by a cent against the USD almost immediately. However, the following day the euphoria evaporated almost as quickly as it had arisen, on fears that inflation might stymie the recovery. In the end the AUD lost a third of a US cent and held steady against the GBP.

Most of the Australian ecostats were constructive for the currency. New home sales jumped 22.9% in a rush to get in before the end of the government’s HomeBuilder subsidy. House prices rose by 3% in the fourth quarter and by 3.6% in 2020. Australian unemployment fell to 5.8%, an 11-month low, as 89k mostly full-time jobs were added in February.

 

NZD

To all intents and purposes the NZ dollar was unchanged against the Australian dollar, the British pound and the euro. It lost two fifths of US cent and was fractionally lower on average against the major currencies. The Kiwi did its usual efficient job of staying below the radar and most of its movements were dictated by the gravitational pull of the Aussie. Like its neighbour, the NZD popped higher after the US Federal Reserve underlined its low-rates-forever philosophy and, also like the Aussie, the Kiwi quickly fell back as investors scratched their heads about the longer term implications for inflation.

There was not much help from the domestic economic data. Business NZ’s performance of services index at 49.1 was well below the long-term average of 53.8 and showed business continuing to “struggle”. Visitor arrivals remained almost non-existent, at 5,400 in January as a result of the closed border. Credit card spending fell 10.6% in the year to January. The real disappointment, though it went almost unnoticed by the NZD, was the unexpected 1% contraction of GDP during the fourth quarter.

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