Weekly Brief

Fed says lower for ever


On Monday and Tuesday sterling continued to switch between first place and last among the major currencies, making it five in a row and an average net gain of 0.4%. For the rest of the week it behaved in a relatively normal fashion and ended up an average of 0.4% lower for the seven days. For August as a whole the pound did well, beaten only by the Canadian dollar and Norwegian krone.

The few UK economic data releases were mostly constructive for the pound. Retail sales beat forecasts with a 3.6% rise in July. Provisional purchasing managers’ index readings were also better than expected, at 56.5 for services and 59.3 for manufacturing. Both numbers were higher than the readings from Europe and the States. An auction of gilts showed that the government can borrow ten-year money at 0.323%, offering a degree of reassurance to those who worry about the cost of funding the growing deficit. There were bids of £7.4 billion for the £2.75 billion on offer.



The perception was that the currencies which did move this week did so almost by accident. The euro was not among them: it lost a little ground to the GBP, USD and CHF but the differences were tiny. The four of them were within 0.2% of one another. The USD, EUR and CHF were also quite closely grouped for the month of August, separated by just 0.3%.

Although economic data from the euro area were plentiful enough they were not particularly compelling. The provisional purchasing managers’ indices were all softer than expected and one of them, French manufacturing was in the shrinkage zone at 49.0, a three-month low. Among the national ecostats the highlight – or the lowlight – was the revised data for German gross domestic product in the second quarter. The economy shrank by 9.7% in Q2, a little less than the expected 10.1% contraction. A more upbeat tone was struck by ifo’s Business Confidence Index, which found that “sentiment among German business leaders is continuing to improve”.



Little more than a cent covered the range of the dollar against the euro, while sterling wandered slightly further afield, with a range of just over two cents. The highlight of the dollar’s week was a speech by Federal Reserve chairman Jay Powell during the Kansas City Fed’s annual symposium, conducted online this year for Covid compliance. The gist of Mr Powell’s speech – or at least the bit upon which investors focused – was his implication that the Fed would not interfere to prevent an overshoot of its 2% inflation target. That being the case, US interest rates are likely to remain ultra-low for years to come.

Among the US economic data the most intriguing juxtaposition was consumer confidence and new home sales. The traditional assumption has been that the two move together: confident consumers buy new houses and vice versa. This time, however, consumer confidence fell to a six-year low while new home sales jumped to the highest level since 2006. Apparently the new-house boom resulted from a combination of low interest rates, a pandemic-driven demand for outdoor space and a limited supply of housing on the secondary market.



On average the Loonie was just about unchanged against the major currencies. It added two fifths of a US cent and strengthened by a proportionally similar three quarters of a cent against sterling.

There was a distinct feeling of summer about the market, with major players enjoying their holiday homes and not fretting over much about the possible need to quarantine upon their return. The result was mostly relatively narrow ranges and modest movements.

Last Friday’s retail sales data for June were theoretically, if not practically, disappointing. Sales increased by “only” a monthly 23.7% when they had been expected to be up by 24.5%. Investors and the Loonie managed not to be too disheartened. New house prices maintained their upward momentum, rising 0.4% in July. The increase was in line with house prices as a whole, which were up by 0.3% - the smallest July rise in 15 years.



The antipodean dollars set the pace for the week, with the Aussie taking second place to the Kiwi. It strengthened by 1.2% - more than two cents – against sterling and went up by an average of 1.5% against the major currencies. Compared with its position at the end of July the AUD is all but unchanged against the GBP.

There was a feeling of summertime randomness about some of the currencies. Some investors were inclined to chase technical targets and others worked on sentiment. Few were driven by the fundamental economic data. In the Aussie’s case this was just as well, for hard economic data were thin on the ground. Retail sales rose by a provisional 3.3% in July, construction output went down by 0.7% in the second quarter and private capital expenditure fell 5.9% in Q2. The preliminary purchasing manager’s index readings for August were several points lower on the month and services at 48.1 was back in the contraction zone.



The NZD was the week’s clear winner, strengthening by an average of 2% against the other major currencies. It added one and a quarter US cents and went up by here and a half cents against sterling. The gains went some way to offsetting the losses incurred in previous weeks: Compared with a month ago the Kiwi is still down by an average of more than 1% and was August’s weakest performer among the majors.

The NZD’s success certainly owed nothing to the domestic economic data, all of which looked soggy in one way or another. After a third month of recovery, credit card spending in July was still 5.8% less than in the same month last year. Retail sales “fell a historic 15% in June” as lockdown hit eating out, vehicles and fuel. The trade surplus narrowed in July as imports and exports both declined. Finally, consumer confidence faded for the first time since June, falling to 100.2, around 20 points below its historical average.

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