Alongside the US dollar, sterling was the week’s joint leader among the major currencies. It strengthened by an average of 1%, adding two thirds of a euro cent. The pound is also the top performer in the year to date, up by 1.7% against the field. Its closest competitor there is the US dollar, 0.6% behind. Although there is no documentary evidence to support the theory, in the absence of any better idea it looked very much as though investors were drawn to sterling by the success of the Covid vaccination drive.
Buyers were certainly not motivated by the UK economic data. The public sector borrowing and retail sales numbers last Friday morning fell dismally short of forecast, as did the provisional purchasing manager’s indices. The manufacturing and services PMIs both hit eight-month lows, with services plunging ten points further into the contraction zone at 38.8. Jobless claims, wages and unemployment were all better than expected, though a four year high of 5% for unemployment was hardly a triumph.
Although it was not a great week for the euro, the single currency did manage to strengthen by an average of 0.4% against the other majors. It lost three quarters of a US cent and was flat against the Swiss franc. In the year to date, the EUR is down by an average of 0.5%, 2.2% lower against the GBP and 1.5% lower against the USD. Two political spats served to dent enthusiasm for the EUR. In Rome, Prime Minister Giuseppe Conte resigned, with the intention of forming a new government. It is not yet clear whether he will be able to do so. In Brussels, the EU accused Astrazeneca of failing to provide the contracted amount of Covid vaccine. It now looks as though the EU will prohibit the export of vaccines.
The Eurozone economic data created no waves but the President of the Dutch Central Bank did. Klaas Knot, who is also an ex-officio member of the European Central Bank Governing Council, said in a TV interview that the ECB is not oblivious to the value of the euro. It is “something we of course monitor very, very carefully” and is “one of the factors we take into account” in setting monetary policy. He also indicated the possibility of even deeper rate cuts, saying; “We’ve explored the effective lower bound, but we haven’t found it yet.” The euro moved lower.
The US dollar shared first place with sterling, and the Swiss franc followed 0.5% behind in third place. With the USD and CHF, the attraction was their safe-haven qualities, at a time when investors were having second thoughts about the global economy. The emergence of new Covid varieties and slippage in many countries’ vaccination delivery made investors question the assumption that inoculation today would guarantee a return to economic normality tomorrow.
There was not much impact from the US economic data, which were generally at least as good as the numbers from other developed countries. Gross domestic product grew by an annualised 4% in the fourth quarter. Durable goods orders increased by less than expected in December. The Federal Reserve kept monetary policy unchanged on Wednesday, to no one’s surprise, and the Fed Chairman emphasised that it is too early to talk about winding down the quantitative easing programme.
The Loonie was rarely to be seen on the newswires. There were just two sets of Canadian economic data and both were better than forecast, but they were not sparkling enough to shift the currency. Retail sales went up by 1.3% in November, for a seventh successive monthly gain. The increase was led by higher sales at food and beverage stores, along with an uptick in e-commerce sales. Building permits fell in value by 4.1% in December, following a month during which several high value permits were issued.
They were decent enough data but not sufficient to bring out the buyers. Rather, the CAD suffered alongside the AUD (but not the NZD) as a result of increased caution among investors, who began to doubt that mass vaccinations would bring the tragic Covid pandemic to a speedy end. The Canadian dollar fell by an average of 0.5%, losing one and a quarter US cents and losing more than two and a half cents to sterling.
Australia Day on Monday meant a shortened working week for the AUD. The holiday did not refresh the currency in the way its supporters might have hoped. The Aussie lost an average of 0.3% to the major currencies, giving up one US cent and falling by two and a quarter cents against sterling. In the year to date it is up by an average of 0.4%, in third place behind the GBP and USD.
Wednesday’s quarterly consumer price index numbers were the week’s most important data. Inflation was higher than expected in Q4, with prices up by 0.9% on both the quarter and the year. Analysts had forecast increases of 0.7% and 0.7%. The Reserve Bank of Australia’s “trimmed mean” measure of CPI came in at 1.2% for a third consecutive quarter. NAB’s Monthly Business Survey found business conditions rising “further in December to its highest level since late 2018”. It was a fourth successive monthly improvement and put employment conditions “back in positive territory for the first time since the start of the pandemic”.
As with sterling, there was a sensation that investors leaned towards the Kiwi because of New Zealand’s relative success in mitigating the pandemic. In the case of New Zealand, it is not the vaccination programme that encourages investors (it will not even begin until March) but the way the country has closed its borders to prevent infection. The NZD strengthened by an average of 0.5%, enough to put it in joint third place for the week with the CHF. It lost one cent to the GBP.
Official ecostats covered just the balance of trade for December. The monthly surplus narrowed to $17 million as exports fell 2.7% and imports increased by 4.2%. Business NZ’s Performance of Services Index was up by a monthly 2.5 points at 49.2 in December, lifting the average for calendar 2020 to an unlovely 47.0. Consumer confidence was up by two points in January to 114, not far short of its historical average of around 120.