Weekly Brief

Gaining confidence


A mostly losing week for sterling took it an average of 0.3% lower against the other major currencies. It was not a tidy process though. The pound covered cent-and-a-half ranges against the euro and US dollar in one day. Grotesquely weak UK economic data did not do much damage. The retail sales figures were just as awful as expected, with a 22.6% fall in April. Public sector net borrowing at £61.4 billion for April would have been a shock compared to the predicted £35 billion but furloughs, grants and subsidies have been scattered like confetti in recent weeks and ridiculously large deficits are the new normal.                     

Politics were the main stumbling block for the pound, partly in relation to the government’s fumbling of another Covid-19 target and partly with regard to the prime minister’s tenacious defence of his special adviser. Brexit was not an issue but could well become one when talks recommence next week.



Ten days after France and Germany proposed a €500 billion rescue package for member countries hit by Covid-19, the European Commission came back with its own €750 billion plan. The package will be part of the next long-term EU budget as long as the EC can secure the unanimous support of all 27 members. It would be financed by bond issues, to be repaid through future EU budgets. Distribution would take the form of €500bn in grants and €250bn of loans. That mix is hoped to win the grudging support of the “frugal four” countries which instinctively oppose the exercise. Investors are generally in favour of the scheme, which they see as positive for European cohesion and the long-term survival of the single currency.

Euroland economic data were no more shocking than any others, though the 31.6% monthly fall in Spanish retail sales was a bit of an eye-opener. Other than confirming a broad lack of confidence, the EC sentiment surveys told no compelling story. The euro put in a slightly above average performance, adding half a cent against sterling.



The US president’s relatively high media profile during the week was not helpful to the dollar. It was the weakest among the major currencies, falling 1.5% - a cent and two thirds – against the euro and losing a cent and a third to sterling. Investors are uneasy about Trump’s intentions towards China. On top of his long-standing resentment about trade and the more recent antagonism relating to the “Chinese virus” his new beef concerns Beijing’s new “security” legislation, intended to quash democracy advocates in Hong Kong. At a press conference this Friday he will set out his plan for retaliation and investors are nervous.

There was no help for the dollar from the US economic data either, though some analysts saw chinks of light among the gloom. Another 2.1m people registered as unemployed last week, bringing down the 4-week average for new claims from 3m to 2.6m. Along with the jobless numbers, other data on Thursday confirmed the dampening effect of lockdown upon the economy. Durable goods orders fell 17.2% in April and pending home sales were down by 17.2%.



The Canadian dollar’s performance over the week was identical to those of its Australian and NZ cousins. All strengthened by 0.6% - a cent and a tenth in the Loonie’s case – against sterling and by 1.7% against the US dollar. It was mostly a matter of sentiment. The progressive unwinding of lockdown measures suggests economic activity will be rekindled and that will in turn revive demand for energy and commodities. Oil prices did not fly – WTI crude is just 4% higher on the week – but it is up by 230% from its lows a month ago.

The statistical highlight of the Loonie’s week was last Friday’s retail sales data for March. Sales fell for the first time in five months and did so in a major way, “plunging 10% to $47.1 billion”. In common with many other countries, the monthly drop was the largest on record. Also in line with the global trend, spending at beer, wine and liquor stores was up by 18% on the month.



Increased optimism about the global economy was supportive for “risky” assets in general, including the Commonwealth dollars. The Aussie added one US cent (1.7%) and went up by a cent (0.6%) against sterling. Compared with a month ago the Australian dollar is four and a third cents higher against the pound and seven eighths of a US cent to the good.

The Aussie stayed mostly well away from the headlines. A 1% quarterly fall in construction work done was worrying, given that most of the first quarter of 2020 was mostly unaffected by the pandemic, and the decline in Q2 is likely to be steeper. Private capital expenditure fell 1.6% in Q1, less than the predicted 2.6% drop. Private sector credit was flat in April. The only story really to influence the Aussie concerned China. Apparently it intends to cut imports of coal and, in the opinion of a BMO analyst, “given current relations, Australian coal is definitely the initial target”.



All of the Commonwealth dollars delivered similar performance to one another and all for the same reason: the easing of lockdown restraints around the world makes investors optimistic that economic activity can begin to get back to normal. Even if that normal is a new and unfamiliar one, at least it will involve more people working for more companies making – or doing - more stuff that more people will buy. That optimism makes investors readier to put their money into supposedly “risky” assets such as the commodity-related antipodean and Canadian dollars, which all strengthened by 0.6% over the week against sterling. The Kiwi also gained just over one US cent. 

Some help came from the NZ ecostats, which were better or less bad than forecast. The goods trade surplus widened in April in comparison with the same month last year as imports fell by five times as much as exports. Business and consumer confidence both improved, though consumers are “still subdued”.

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