Weekly Brief

Covid revival dampens sentiment


Sterling began the week nervously and ended it with a spring in its step. Although it took a distant fourth place behind the US dollar and Japanese yen, the pound was only narrowly beaten by the Canadian dollar and strengthened by an average of 0.7% overall. The “official” UK economic data extended no further than retail sales, which increased by an on-forecast 0.8% in August after three months of strong gains. House prices remained strong, with Rightmove reporting a 0.2% rise in asking prices in September and a 5% annual increase.

Input from the Bank of England and the Treasury was positive on balance. Governor Andrew Bailey played down the idea of negative interest rates, saying “Yes it’s in the tool bag, but that does not imply… negative interest rates at the moment.” The chancellor revealed his widely-touted Job Support Scheme, which will replace the current furlough scheme at the end of October. There was less enthusiasm, however, for the tightened Covid containment measures which the Prime Minister announced on Tuesday. They put renewed pressure on the hospitality sector in particular.



The trend towards tighter anti-Covid restrictions was not limited to Britain. France announced new measures during the week, as did Italy and Spain. The euro is of course less sensitive than sterling to such national restrictions. It did not flinch at the news, and is unchanged on the week against sterling. The other side of that coin is that the euro is similarly less susceptible to individual national stimulus measures. At a pan-Eurozone level, there was nothing new from the European Central Bank beyond a less-than-helpful observation by the bank’s president that that “the strength of the recovery remains very uncertain”.

There was not much help for the euro from the economic data. Small improvements in German and Eurozone consumer confidence left both of them below zero. The provisional purchasing managers’ indices were less than compelling, with six of the nine readings lower on the month and below forecast. The services sector measures for France, Germany and Eurozone were below 50, indicating shrinkage. The ECB’s Economic Bulletin confirmed that Bulgaria and Croatia had taken the penultimate step towards participation in the euro by joining the exchange rate mechanism “ERM II”.



The US dollar was the week’s top performer, thanks mainly to its status as a safe-haven currency. It strengthened by an average of 0.9% and took two cents off sterling. Paradoxically, one of the main reasons for investors seeking that safety was the febrile state of American politics. The death, at the end of last week, of Supreme Court Judge Ruth Bader Ginsburg put a cat among the pigeons ahead of November’s election. The President wants to replace her immediately with his own nominee. The Democrats have cried foul, because the Republican Senate, under similar circumstances, denied Barrack Obama his own pick much further ahead of the 2016 election. Unfortunately, the acrimony that has been created makes it even less likely that the administration and the Senate will agree to the fiscal stimulus bill proposed by the House.

Meanwhile the Federal Reserve chairman continued to beaver away at persuading the two sides to come together. In three appearances on Capitol Hill this week, Jay Powell pushed on the open door of the House and worked on two Senate committees to emphasise that monetary policy can go only so far to achieve full employment and 2% inflation, especially when a pandemic is in progress.



The Loonie took third place for the week, losing one US cent and adding a quarter of a cent against sterling. It went up by an average of 0.9% against the other majors. As it had during the previous week, the CAD played a supporting, not a leading role. The US dollar did well and the Loonie rode on its coattails. In seven days the Canadian economy generated less than a handful of ecostats, most of them appearing last Friday. Teranet reported monthly and annual house price rises of 0.6% and 5.7%. Statistics Canada assessed those increases at 0.5% and 2.1%. Wholesale sales grew for a third consecutive month, up by 4.3% to a record high. Retail sales were up by a more modest, and slightly below-forecast, 0.6%.

On Wednesday, the new parliamentary session in Ottawa was heralded by the Throne Speech, read by the governor general. It is the equivalent of the Queen’s Speech in Westminster, setting out what the government intends to achieve during the session. It included pledges to create a million jobs and fight for free trade.



Broad concern about a new eruption of the tragic Covid-19 pandemic, and specific unease about the tense political atmosphere in the United States, dented investors’ optimism and confidence. The negative mood was sparked by the reinstatement of anti-Covid precautions, which will have a negative economic impact, and the vacancy on the US Supreme Court, which the President intends to fill with one of his Republican allies. The heightened nervousness led investors to mark down the price of equities and “risky” currencies, including the antipodean dollars. The Aussie fell by an average of 1.2% on the week and lost almost three and a half cents to sterling.

On Tuesday, Reserve Bank of Australia Assistant Governor Guy Debelle told the AiG that “a lower exchange rate would definitely be beneficial for the Australian economy”. The following day, he received help in that direction from Westpac analyst Bill Evans, who predicted a cut to the Cash Rate from 0.25% to 0.1% and sent the AUD nearly a cent lower. The negativity was reinforced later in the day by news that retail sales had unexpectedly fallen 4.2% in August.



Like the Australian dollar, the Kiwi was part of the collateral damage as investors fled from “risky” currencies towards the supposed safety of the Japanese yen and, paradoxically, the US dollar. It lost ground steadily throughout the week to the US dollar, eventually giving up two and a quarter US cents. Against the major currencies, it lost an average of 1.1% and it was down by three and a half cents against the GBP. The NZD was just about unchanged against the AUD.

The two salient moments for the Kiwi came on Wednesday and Thursday, with the Reserve Bank of New Zealand’s monetary policy announcement and the trade figures for August. There were no surprises from the RBNZ: it left its Official Cash Rate unchanged at 0.25% and agreed to continue with the quantitative easing programme. New Zealand reported its first real annual trade surplus since 2014. Stats NZ said it was the result of a large fall in imports in August.

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