Weekly Brief

Weekly Brief

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Central bank dovishness all round

GBP

Four weeks after the ruling Conservative party engineered the pre-resignation of Theresa May, it has whittled down to two the number of her prospective successors as prime minister. If the internal Tory selection process goes according to form, Boris Johnson will take her place in a month's time, beginning a new chapter in the dispiriting saga that is Brexit. Investors have no clearer idea than they did a month ago about how it will all pan out and they continued to take sterling lower. It lost ground over the week to all but the euro and US dollar.

With inflation on target at 2.0% and retail sales falling by a little less than expected in May the UK data did not have much impact on the proceedings. The Monetary Policy Committee voted 9-0 to leave interest rates unchanged, disappointing those who had been looking for one or two votes in favour of an increase.

EUR

The European Central Bank was one of several central banks to either adjust monetary policy or hint at changes in the pipeline. ECB president Mario Draghi said in a speech that "In the absence of improvement [to the economy], such that the sustained return of inflation to our aim is threatened, additional stimulus will be required". With Euroland inflation most recently at 1.2% his observation ought not to have come as a surprise but it apparently took investors aback and they marked down the euro. It is unchanged on the week against sterling and half a US cent higher.

Inflation aside, the euro zone ecostats were fairly anodyne bunch. The trade surplus narrowed slightly. ZW's surveys of economic sentiment identified sharp deteriorations in the euro zone and Germany. Consumer confidence softened from -6.5 to -7.2 according to the European Council's measure.

USD

There was a big build-up to Wednesday's Federal Reserve policy announcement. Where in the first quarter of the year the Fed professed to be "patient" in taking interest rates higher, the last couple of months have brought more than one signal that the trade war and other economic hurdles are making their presence felt. Investors expected the Fed to add more substance to that story and they marked down the dollar in anticipation. Sure enough, the committee voted 9-1 to keep the benchmark rate target unchanged at 2.25-2.5% for now. It also revealed, however, that almost half the participants (not just the voting members) foresee one or two rate cuts before the end of the year. 

The US dollar was consequently the weakest among the major currencies, losing half cent each to the pound and the euro. Among the US ecostats the 0.5% monthly rise in retail sales was the best result and the record collapse of the New York Fed's manufacturing index was the worst.

CAD

The Bank of Canada was another of the many central banks to affect exchange rates, not as a result of what it did or might do but because of what it might not do. The week's flagship Canadian data were the consumer price index numbers for May. All of them were higher on the month. The headline rate of inflation jumped from 2.0% to 2.4% and the Bank of Canada's favoured measure for "core" inflation went up from 1.5% to 2.1%. Prior to the news, investors had been reasonably confident that the Bank of Canada would lower its benchmark interest rate this year. With above-target inflation, however, the BoC might be inclined to hold back from a cut.

The other positive for the Loonie was oil prices, with WTI crude pushed 8.5% higher by sabre-rattling in the Straits of Hormuz. Altogether the Canadian dollar strengthened by one US cent and added a cent and two thirds, 1.0%, against sterling.

AUD

In common with most of its peers the Reserve Bank of Australia is leaning towards a relaxation of monetary policy in response to the trade war and global growth headwinds. After a cut in its Cash Rate from 1.5% to 1.25% in May, investors began the week suspecting that further reductions were on the cards. They were given two more reasons for that suspicion during the week. The minutes of the last RBA policy meeting noted that another rate cut is "more likely than not". Two days later governor Philip Lowe used a double negative to indicate another cut: "It is not unrealistic to expect a further reduction in the cash rate". 

With an imminent rate cut apparently already in the bag, investors were not worried by the scarcity of Australian economic statistics, especially as the two that did appear seemed to confirm their expectations. House prices fell 3.0% in the first quarter and were down by 7.4% on the year while Westpac's leading index pointed to "more weak growth". The Aussie added half a US cent and strengthened by two fifths of a cent against the pound.

NZD

The week started badly and ended well for the Kiwi. Its bad start was caused by the hangover from last Friday's surprisingly weak Business NZ purchasing managers' index. The strong finish resulted from better than expected gross domestic product data for the first quarter. GDP expanded by 0.6% in Q1 and by 2.5% in the year to 31 March. The report noted a divergence between primary industries - mining, agriculture, etc. - which shrank 0.7%, and good-producing industries which grew 2.0%.

Westpac's index of consumer confidence was the only other NZ ecostat. It was almost unchanged between March and June, down by 0.3 at 103.5. The commentary noted that "Consumers remain downbeat about the future of the economy, but are more upbeat about their own financial situations". The figure made no difference to the Kiwi, which added three quarters of a US cent and strengthened by a cent and a third, 0.7%, against sterling.

GBP: Brexit blight persists

GBP: Brexit blight persists

EUR: ECB speaks of "additional stimulus"

EUR: ECB speaks of "additional stimulus"

USD: Fed comes out as a dove

USD: Fed comes out as a dove

CAD: Higher inflation, higher oil prices

CAD: Higher inflation, higher oil prices

AUD: RBA rate cut in sight

AUD: RBA rate cut in sight

NZD: Q1 growth beats forecast

NZD: Q1 growth beats forecast

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