Weekly Brief

Race to the bottom

GBP

As Covid-19 broadened its reach across the world, investors had another rethink about which currencies constitute a safe-haven. After snubbing it a week earlier, they decided that the yen was, after all, one of them. As investors trashed the price of risky equities – the FTSE100 moved 12% lower on the week – they piled into the yen, taking it 2.8% higher against the pound.

It was a week of mixed fortunes for sterling. Last Friday and again on Tuesday it was the top performer among the majors while on Wednesday it shared last place with the AUD. There was no rhyme or reason to any of those outcomes: Wednesday’s failure was no more justified than Tuesday’s success. There were positive and negative developments for the pound but they did not coincide with its gains and losses. Everything hinged on sentiment, as indeed it did for all currencies. The pound came out of it with an average loss of 0.3%, down by two and a quarter euro cents and unchanged against the US dollar.

 

EUR

The euro staked its claim as a safe-haven currency, taking second place for the week (well) behind the Japanese yen and a third of a cent ahead of the Swiss franc. It added two US cents and strengthened by two and a quarter cents against sterling. In effect, the euro usurped the US dollar’s place in the safe-haven pecking order. As with sterling, it was all to do with sentiment and the economic data were only of secondary importance.

As it happened, the data were not bad. Last Friday’s provisional purchasing managers’ index readings were mostly better than expected. Although Germany’s manufacturing PMI was still well into the red at 47.8 it was more than two points higher on the month. Markit’s optimistic description was “Eurozone business bucks virus impact as growth hits six-month high”. Inflation was confirmed at 1.4%, a long way short of its 2% target. The European Commission’s surveys of sentiment found improvements in every measure. In Germany, business confidence also improved despite confirmation that the country’s economy stagnated in the fourth quarter and could well be heading into recession.

 

USD

Nervous investors did not exactly shun the US dollar. In their anxiety, they were such keen buyers of the US 10-year treasury note that they pushed its yield to all-time lows. But they did not have quite the same appetite for the currency itself, preferring the yen, the Swiss franc and the euro as their safe havens. The dollar was unchanged on the week against sterling, down by an average of 0.3% against the other majors. Although most of the US economic statistics were decent enough, there was a problem with last Friday’s provisional services sector PMI. It was an unexpected four points lower on the month and below the breakeven line at 49.4.

The Federal Reserve and the White House were doing its best to reassure everyone that there was nothing to fear from the virus. The President promised that “the risk to the American people remains very low”. Richard Clarida, the vice chairman of the Federal Reserve, said the impact would need to be “material and persistent” if it were to warrant a change to monetary policy. Nevertheless, investors now expect two or three rate cuts from the Fed this year.

 

CAD

The week’s biggest losers were the commodity-related dollars and the Norwegian krone. For the krone and the Loonie the main issue was oil, which became cheaper as each day went by. WTI intermediate, North America’s continental benchmark, fell 15% from US$53.5 to US$45.6. Demand for oil has been crushed by the virus-driven global slump in travel and the oil-producers are hurting. The CAD took the biggest hit, giving up almost two and a half cents to the pound. It lost one and a tenth US cents.

Canadian economic data had little impact on the action; it was all about sentiment and Covid-19. That was a pity, because the couple of ecostats that did appear were better than expected. Retail sales were virtually unchanged in December and were up by a monthly 0.5% ex-autos. Wholesale sales rebounded by 0.9% in December after falling 1.1% the previous month.

 

AUD

For a second successive week, the Australian and NZ dollars were unchanged against one another at the rear of the pack. The Aussie touched an 11-year low against the US dollar and lost four fifths of a US cent. It gave up two and a fifth cents to the pound, trading at its weakest level since the Brexit referendum. The AUD’s losses were entirely the result of Covid-19 and its effect on the economy of Australia’s biggest trading partner, China. They had nothing to do with the Australian economic data.

That is not to say the Australian ecostats were good. On the contrary, two of the three sets of data were particularly disappointing. Private capital expenditure dropped 2.8% in the fourth quarter of 2019, trashing the analysts’ forecast of a 0.5% increase. Construction work done in Q4 was down by a massive 3.0% from Q3. Compared with Q418, it was down by 7.4%. On a year-on-year basis, residential construction fell 12.6%.

 

NZD

The antipodean dollars suffered together for a second week, not far from the rear of the major currency pack. The week cost the Kiwi three quarters of a US cent and it came close to an 11-year low. Against sterling, the NZD lost two and a quarter cents and reached its lowest level since the Brexit referendum.

It was of course concern about the economic implications of Covid-19, not the domestic economic data that drove the currency’s price. ANZ’s monthly survey of business confidence neatly encapsulated the situation. While “headline business confidence fell 6 points to -19 in February”,

“Survey responses received after the COVID-19 outbreak hit the headlines (about a third of all responses) were more negative”. At an individual level, there was apparently less concern. ANZ’s survey of consumer confidence found the index falling one point to 122, which it described as “a solid start to the year”, though “emerging global risks could weigh in coming months due to the worrying COVID-19 outbreak”.

GBP: Sometimes lucky, sometimes not

GBP: Sometimes lucky, sometimes not

EUR: Claims safe-haven status

EUR: Claims safe-haven status

USD: Treasuries wanted but not the dollar

USD: Treasuries wanted but not the dollar

CAD: Follows oil south

CAD: Follows oil south

AUD: Sharing China’s woes

AUD: Sharing China’s woes

NZD: Steady again against the Aussie

NZD: Steady again against the Aussie

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