Weekly Brief

Flight to safety

7 minute read


In a week characterised by caution, sterling got lost in the middle. The safe-haven Swiss franc, Japanese yen and, to a slightly lesser extent, the US dollar, pushed ahead while the “commodity” dollars fell back. On average the pound was unchanged against the major currencies. At the extremes it lost two and a half Swiss cents (2%) and added two and three quarter Australian cents (1.5%).

Politically, it was a quiet week and the Bank of England was seasonally silent. The UK economic data were a very mixed bag. Two house price indices from Rightmove (5.6% higher on the year) and DCLG (up by an annual 13.2%) differed widely only because they covered different periods. Rightmove was August – August and DCLG was June – June. Wednesday’s jobs numbers were close to forecast, with unemployment a touch lower at 4.7%. Average earnings were strong, up by 8.8% on the year but, as the ONS pointed out, distorted by temporary factors. Lower than expected inflation and an unexpected fall in retail sales did no real damage.



The euro is not a classic safe-haven currency, and it was well off the pace of the week’s leaders. However, it still put in an above-par performance with an average gain of 0.8%. It is a cent higher against sterling and half a cent lower against the US dollar. As with sterling, there was near-silence from the European Central Bank and on the political front. 

Even the statisticians appeared to be taking it easy. The two main sets of data related to second quarter gross domestic product and consumer prices. Both delivered results close to analysts’ forecasts. Eurozone GDP expanded by 2% in Q2, with national results ranging from Lithuania’s 0.4% to Portugal’s 4.9%. France grew by 0.9% and Germany by 1.5%. Inflation came in at 2.2%, matching the short-term peak last seen in October 2018. National rates of inflation were bookended by Malta’s 0.3% and Estonia’s 4.9%. German consumer prices were 3.1% higher on the year while in France they were up by 1.5%.



The Swiss franc and Japanese yen both had a better week than the US dollar but it was the Greenback that hogged the headlines as the USD index touched a 10-month high. On the week the dollar was an average of 1.2% firmer. It strengthened by a cent and three quarters against the pound.

Investors blew hot and cold in their reaction to the domestic US Economic data. They aggressively marked down the dollar in response to last Friday’s provisional Michigan index of consumer sentiment when it came in well below forecast at 70.2. That was largely because “Over the past half century, the Sentiment Index has only recorded larger losses in six other surveys”. At complete odds with that was investors’ response to an unexpected 1.1% monthly fall in retail sales. That sent the dollar higher, apparently because it drew attention to risks faced by the global economy as a whole. A TV appearance by Federal Reserve Chairman Jerome Powell had no lasting impact on the dollar. One of his contributions was that “It’s not yet clear whether the Delta strain will have important effects on the economy; we’ll have to see about that”.



The flight to safety by investors was felt most painfully by the “commodity” currencies; the Australian, NZ and Canadian dollars. For the Loonie, it meant an average fall of 1.5%, including losses of two and a half cents to sterling (1.4%) and more than two US cents (2.7%). Compared with a month ago, the CAD is just about unchanged on average. 

Canada’s economic data had little to do with the currency’s performance. There were some theoretically important numbers but investors were more concerned with global matters, such as Covid-D and China’s tightening grip on the billionaires and the technology sector. The Canadian dollar was unchanged after a 2.1% rebound in manufacturing sales and a 0.8% decline in wholesale sales. Canadian inflation accelerated from 3.1% to 3.7% in July, matching the high of May 2011. The number was well ahead of the 3.4% predicted by analysts but it put no upward pressure on the Loonie.



There was not a great deal to choose between the Australian, Canadian and NZ dollars at the back of the field. However, there had to be a loser and it was the Aussie, down by an average of 1.6% against the major currencies. It gave up two US cents and lost almost two and a half cents to sterling.

As elsewhere among the commodity currencies, the domestic economic statistics were not a major factor. The Labour Force report was better than expected. Instead of losing 42k jobs in July, the Australian economy added 4,600. Admittedly, all of the gain and more was made up of part-time positions, but they were still enough to take the rate of unemployment down from 4.9% to a 12-year low of 4.6%.The minutes of August’s monetary policy meeting of the Reserve Bank of Australia contained no surprises. The board is understandably cautious about tightening policy at the same time as Covid continues to dampen economic activity.



Like its peers, the NZ dollar fell victim to a broad move from risk to safety, which favoured the Swiss franc and Japanese yen while hurting commodity-oriented currencies. The Kiwi fared better than the Canadian and Australian dollars but not by much. It softened by an average of 1.3%, losing one and three quarter US cents and giving up two and a quarter cents to sterling.

Unlike the Aussie and the Loonie, domestic developments played a major part in the Kiwi’s fortunes. Specifically, the Reserve Bank of New Zealand held back from delivering the rate hike that had been believed to be a near-certainty. Investors got the heads-up from a report that someone in Auckland had tested positive, the first such positive test in six months. When that was followed by notice of a lockdown investors offloaded the NZD. The following day, when the RBNZ did indeed leave the Official Cash Rate unchanged, the currency recovered somewhat, because the unloading had already happened. Since then it gained more ground, helped most recently by Governor Adrian Orr’s comment that an October hike is possible, even if the outbreak persists.


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