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Risk-appetite up, safe-havens down


The pound lost out to the antipodean dollars and Northern Scandinavian crowns and made headway against the safe-havens, especially the US dollar (0.7%) and Japanese yen (0.9%). On average, it was a millimetre higher against the major currencies. The UK economic data were better – or at least better than expected – on average too. Public sector borrowing, though massive by historical standards, was less than expected in October and retail sales went up by more than forecast. The provisional purchasing managers’ indices showed weakness in services while manufacturing got a boost from pre-Brexit stock-building.

The chancellor’s Spending Review delivered almost exactly what investors had been led to expect. It contained no surprises and sterling moved higher after the speech. Investors took it as given that it would be at least two years before the UK economy recovers to pre-Covid levels of output. With five weeks until the end of the Brexit transition period, investors are still none the wiser about what will happen on 1 January with regard to European trade. They nevertheless remain optimistic that a deal - however flimsy - will be struck to facilitate the continued cross-Channel movement of people and goods.



Hard economic data from the Eurozone were quite thin on the ground. The only really heavyweight statistic came from Germany and it was almost two months out of date. Gross domestic product was revised to show growth of 8.5% in the third quarter, a little more than the 8.2% expansion estimated previously. The more up-to-date provisional purchasing managers’ indices were less upbeat, with the composite pan-Eurozone reading five points lower on the month at 45.1. Markit’s chief economist commented that “the Eurozone economy has plunged back into a severe decline in November amid renewed efforts to quash the rising tide of COVID-19 infections. The data add to the likelihood that the euro area will see GDP contract again in the fourth quarter.”

That pessimism prevailed among consumers and businesses too. The EC’s index of consumer confidence fell two points to -17.6, a six-month low. German business sentiment deteriorated by two points to 90.7, a four-month low. Even the euro felt a bit sorry for itself, losing an average of 0.2% to the other major currencies, though it did pick up two fifths of a cent from the even sorrier US dollar.



The USD gained a seventh of a yen from the Japanese currency but lost ground everywhere else. It fell by an average of 0.6%, giving up a cent to sterling. Paradoxically, part of the dollar’s problem was the improving political situation in the United States, which increased investor appetite for risk and lessened their appetite for safe-havens. Last weekend, the President sacked Sydney Powell, one of the lawyers who had been boosting his claim that foreign intervention had redirected millions of his votes to Joe Biden. On Monday, he took the further step of allowing the General Services Agency to proceed with facilitating the transition to a Biden administration.

The USD was helped by one set of data and hindered by most of the others. The flash PMIs were not huge, with manufacturing at 56.7 and services at 57.7. They were, however, the highest readings in more than five years and the composite was more than ten points ahead of the UK and the Eurozone. The numbers took investors by surprise and they hurried to cover short positions. Within 24 hours, they had forgotten all about it and the dollar was back on the defensive.



The Loonie had a mediocre week, remaining almost unchanged on average against the other major currencies. It lost two fifths of a cent to sterling and added a third of a US cent. A 7% rise in oil prices, which helped the NOK into first position for the week, did almost nothing for the CAD. Similarly, the improvement in investors’ risk-appetite that allowed the antipodean dollars to put in above-average performances was rather lost on the Loonie.

The week’s Canadian economic data all came out together last Friday. Retail sales went up by 1.1% for a second consecutive month in October. It was the fifth monthly increase in succession after the record 24.8% decline in April. Canada’s index of new house prices showed them continuing to increase in the majority of areas. Nationally, prices rose by 0.8% in October after going up by 1.2% in September. The index was 3.9% higher on the year.



The improvement in investors’ risk-appetite did more for the Kiwi than it did for the Aussie. Even so, the AUD strengthened by an average of 0.5%. It added four fifths of a US cent and went up by four fifths of a cent against sterling. The AUD appeared to get a lift from a speech by Reserve Bank of Australia Deputy Governor Guy Debelle. Although he does not expect a rate hike for three years or more, neither is he convinced that negative rates would help. If he did not exactly take negative rates off the table, he at least made the possibility look less likely.

The important Australian economic data were positive for the currency. Retail sales went up by 1.6% in October after stumbling in August and September. Provisional purchasing managers’ index readings showed private sector growth accelerating in November, led by services. All of those numbers were monthly improvements and ahead of forecast. The goods trade figures for October were less impressive, showing a narrowing surplus of $4.8 billion.



The trade figures for New Zealand are heavily affected by the season, with the biggest surpluses in autumn and winter and the widest deficits in spring and summer. After deficits of $282 million and $1025 million in August and September, the shortfall for October was $501 million. It still left the surplus for the 12 months to October at a 28-year high of $2.2 billion. Retail sales increased by 28% in the third quarter after tumbling 14.8% in Q2. Consumer confidence eased by two points to 106.9 in November and remains under par; its historical average is around 120.

There was a flurry of buying for the Kiwi after it emerged that Finance Minister Grant Robertson had written to Reserve Bank of New Zealand Governor Adrian Orr, asking him to consider adding house prices to the bank’s monetary policy criteria. Mr Orr wrote back to say he would think about it. The following day, the penny dropped: rather than raising interest rates, the RBNZ will reimpose loan-to-value restrictions and seek government approval to impose debt-to-income limits. The NZD is a cent and a quarter higher against the pound and an average of 0.7% firmer against the major currencies.

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