Weekly Brief

Variable confidence

7 minute read


It was a sparkling week for sterling, delivering an average gain of 0.6% and allowing the pound to share the lead with the Swiss franc. It picked up half a euro cent and two US cents. For July as a whole the pound was an average of 1% ahead, beaten only by the safe-haven franc and Japanese yen. There were not many UK economic statistics and they were not all helpful to the pound. The 0.5% monthly increase in retail sales was alright but the provisional purchasing managers’ indices came in at four-month lows, house prices fell 0.5% and mortgage approvals declined by more than expected.

However, away from the up-to-the-minute UK economic data, the anecdotal evidence was supportive and the government’s decision to open the doors to foreign visitors was well-received by investors. A study by the Office for National Statistics revealed that retail sales have more than doubled since 1989, helped by an increase of more than two thirds in household disposable income. House prices are now 30% higher than they were at their peak prior to the 2008 global financial crisis. An updated and more optimistic World Economic Outlook from the IMF included a sharp upgrade for Britain’s economy this year, which it now sees expanding by 7% in 2021, “the same as the United States and the joint-fastest growth rate among major advanced economies”.



The Eurozone fared better than Britain on the purchasing managers’ index front. Helped by the accelerating withdrawal of lockdowns, “Eurozone business activity grew at the fastest rate for 21 years in July”. The readings from Germany and the Eurozone were all above 60, on a 0-100 scale in which 50 represents breakeven. It was a slightly different story with confidence. IFO’s measures of business clime, current assessment and expectations for Germany were all below forecast and lower on the month. The EU’s own assessments of business and consumer confidence were mixed.

The account (redacted minutes) of the European Central Bank’s policy meeting on 7 July did not shed much new light on that policy. Just about everything in it had already been reported by the ECB or the media. On average, the euro strengthened by 0.2% against the other majors. It added more than one US cent and was unchanged against the Canadian dollar and Norwegian krone.



It was very much a case of “not wanted” for the dollar. The US economic data were far from dreadful and the Federal Reserve delivered almost exactly what investors had been expecting, yet for much of the time it was downhill, with only the occasional respite. Overall, the dollar fell by an average of 0.8%. It lost two cents to sterling, more than one cent to the euro and one to the yen. The provisional PMIs were “robust”. House price indices from FHFA and S&P were not far adrift from one another, with annual increases of 18% and 16.6% respectively. The Richmond Fed’s manufacturing index was a point higher on the month at 27 and the Conference Board’s measure of consumer confidence was almost unchanged at 132.6, close to its highest since February 2020.

The FOMC statement, while not identical to the half dozen that preceded it, painted a similar picture. Crucially, there has been progress towards the FOMC’s goal of sustainable 2% inflation and full employment but it is not yet the “substantial” progress that the Fed demands before it will tighten monetary policy.



Oil prices were moderately helpful to the Canadian dollar, with WTI crude rising a little more than 2%. It was not entirely coincidental that the Loonie was unchanged on the week against that other oil-related currency, the Norwegian krone. Both were an average of 0.2% firmer, with the CAD losing two thirds of a cent to sterling and adding four fifths of a US cent.

The Loonie was not unduly troubled by the Canadian economic data, though they were not exactly helpful. Retail sales for May were arguably positive for the currency, in that the 2.1% monthly decline was smaller than the predicted -3% change. Wednesday’s inflation numbers were more of an issue. Not only was the 3.1% headline inflation rate a touch lower than forecast, Canada resisted the international trend with a declining inflation rate. The Loonie took a bit of a hit at the time but was rescued, six hours later, by general disappointment at the US Fed’s policy announcement.



The Aussie came out of the seven days in second-to-last place, a fifth of a cent ahead of the US dollar. Its average loss was 0.5% and it gave up a little over two cents - 1.1% - to sterling. Compared with a month ago the AUD is an average of 1.5% lower, with only the NOK having a less successful July. A large part of the Aussie’s problem is a perception that the government does not have a coherent strategy to tackle the pandemic.

At least the Australian ecostats did not provide too many stumbling blocks. The most important among them were the quarterly consumer price index data. They showed CPI rising 0.8% in Q2, which put the headline rate of inflation at 3.8%, with the Reserve Bank of Australia’s “trimmed mean” at 1.6%. Both figures were exactly in line with expectations, so had minimal impact on the currency. The international trade rice indices showed import prices falling by an annual 2.5% while export prices rose 26%.



The Kiwi had a better week than the Aussie but not a much better one. It fell by an average of 0.3%, adding a third of a US cent and giving up the thick end of two cents to sterling. Over July as a whole the NZD is on average just about unchanged.

The country renowned for the paucity of its statistical output excelled itself in the last seven days. Only on Thursday were there any even vaguely important NZ data, and ANZ bank provided most of them. Its Business Outlook pointed to a slightly less buoyant private sector, as “headline business confidence eased 3 points, while firms’ own activity fell 6 points to +26% [and] other activity indicators generally eased a little”. ANZ did, however, note that “Costs continue to rise, pricing intentions remain extremely high, and inflation expectations continue to lift. The latter hit 3.33% in the late-month sample, suggesting further increases may be in store”. ANZ’s consumer confidence index was down by a point at 113. “Inflation expectations remain extremely high at 4.9%, while house price inflation expectations lifted from 5.8% to 6.4%”.


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