Weekly Brief

Commodity currencies higher

7 minute read


Sterling never made it as far as the early 2018 high, but touching well above $1.42 on Wednesday, it got within a cent and a half of it. In a game of three halves the pound plodded higher on Monday and Tuesday, spiked upwards on Wednesday and gave it all back on Thursday. Overall, sterling lost an average of 0.2% and fell by exactly that much, a quarter of a cent, against the US dollar. The big moves on Wednesday and Thursday were technically-driven. Wednesday’s upward spike came as a result of short-covering purchasers in a thin early Far East market. Thursday’s plunge came after the pound broke short-term uptrend support against the US dollar.

The only significant UK economic data were Tuesday’s employment figures. There was plenty not to like, with fewer people in work and a five-year high for unemployment. Even the 4.7% annual increase in total earnings was arguably a negative, signifying a further fall in the number of lower-paid jobs. However, just about every component of the data was in line with or better than forecast. So investors ignored the numbers, focusing instead on the successful vaccination programme and the Chancellor’s imminent stimulus budget.



The euro remained mostly off the radar for a second week. Its low profile might not have been an active help but it provided investors with no excuses to take against it. As a result, the common currency strengthened by an average of 0.4%, adding three fifths of a US cent and taking three quarters of a cent off sterling.

Low-profile was certainly the way to describe the week’s Euroland ecostats. Inflation was in line with the provisional reading at 0.9%. The European Commission’s business and consumer survey results showed “economic sentiment and employment expectations picking up”. However, at -14.8, consumer confidence was still around ten points below its level during the five years prior to the pandemic. The provisional purchasing managers’ indices gave mixed results. Manufacturing at 57.7 was a three-year high, while services at 44.7 was a three-month low. Germany’s manufacturing PMI came in at a three-year high of 60.6. Business and consumer confidence in Germany both showed improvement.



The news and data from the States were not particularly ground-breaking but their influence was felt throughout global financial markets. Foremost among them was the continued erosion of bond prices, which took long-term interest rates higher and fed the suspicion that central bank benchmark rates might themselves have to go up sooner rather than later. Former US Treasury Secretary Larry Summers said last Friday that he thinks the Federal Reserve will have to raise interest rates next year.

The US economic data tended to support the reflation narrative. Both the manufacturing and services (provisional) PMIs were strong, with the composite measure at a 71-month high. Durable goods orders beat forecast with a 3.4% monthly rise. The only fly in the ointment was mortgage applications, which fell for a third successive week. The MBA noted that “Mortgage rates have increased in six of the last eight weeks” as bond yields have moved higher. The Federal Reserve Chairman appeared to disregard all of the above. He attended Congress twice to insist that US interest rates will remain close to zero until there is full employment, and inflation “has risen to 2 percent and is on track to moderately exceed 2 percent for some time”.



The reflation theme worked well for the commodity dollars. Canada shared second place with Australia behind the high-flying Kiwi, both strengthening by an average of 0.6% against the majors. For the Loonie, it meant the addition of half a US cent and a gain of a cent and a third against sterling. The three leaders received considerable help from upbeat sentiment. Investors believe the roll-out of Covid vaccinations will allow the global economy to return to normal, if not tomorrow then at least within the foreseeable future. As that recovery gains traction consumers will resume their consumption and producers will crank up production, all of which will mean increased demand for commodities. Yes, the whole thing is built around hope but it is not an unreasonable aspiration.

There was not much optimism to be found in the Canadian data though. The week’s only figures were for retail trade in December, and they were less than impressive. “Retail sales posted their largest decline since the low of April”, falling by 3.4% on the month. Bank of Canada Governor Tiff Macklem was of no great help to his currency. Joining the great choir of central bank doves, he said, “The economy will need support for quite some time, and the Bank will continue to do its part.”



The upswing in bond yields made the returns on “risky” commodity currencies look more attractive, and, with them, the currencies themselves. At the beginning of the week Australian ten-year yields “climbed the most since the height of the market dislocation in March 2020”.

In a market driven mainly by sentiment the mostly low-key Australian economic data had little impact on the currency. The wage price index rose 0.6% in the fourth quarter of 2020 and was up by 1.4% on the year. It was the slowest ever pace of wage growth. Private sector wages went up by 0.7% in Q4, more than double the 0.3% increase in public sector pay. Construction work done in Q4 was 0.9% less than in Q3. Private capital expenditure rose 3% in Q4, roughly offsetting the previous quarter’s decline. The Reserve Bank of Australia reported that private sector credit edged up by 0.2% in January for an annual rise of 1.7%.



Against the US dollar, the NZD’s trajectory over the week was similar in shape to the AUD and GBP, with a steady rise followed by a sharper fall. However, of the three, the NZ dollar was by far the most successful. It went up by an average of 1.6% against the major currencies, taking three and a half cents off sterling and touching a three-year high against the US dollar. As with the other commodity currencies, the domestic economic data did not really impinge on the value of the Kiwi. This was just as well: Retail sales unexpectedly fell 2.7% in the fourth quarter, having been expected to put in strong growth. Business confidence fell two and a half points to 7 and consumer confidence was also a point lower at 113.1. New Zealand reported $626 million balance of trade deficit in January as exports fell by twice as much as imports.

After the RBNZ kept its 0.25% Official Cash Rate unchanged, Governor Adrian Orr was slightly less dovish. He sees himself as fighting a battle with the bond market, which has recently taken yields higher for NZ and other government bonds. He hinted that he might cut the cash rate to teach the bond bears a lesson, but they were not convinced.


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