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Covid concerns grow


After bringing up the back of the field last Thursday and Friday, the pound had a mostly uneventful week. It was unchanged on average against the other major currencies and flat against the euro and Australian dollar. Sterling looked less than impressive in comparison with the leaders though. It was 1.2% behind the US dollar and lost 1.7% to the safe-haven Japanese yen, both of which got a leg up as a result of a resurgence in the tragic Covid-19 pandemic and the new lockdown measures brought in by governments. On Wednesday, the jitters sparked a widespread, almost random, offloading of risky assets.

UK economic data were few and far between. The provisional purchasing managers’ indices for manufacturing and services were lower on the month but, at 53.3 and 52.3, still comfortably within the expansion zone above 50. The Brexit negotiations continued mostly in secret. On Thursday, European Commission President Ursula von der Leyen said “We are making good progress but the two critical issues, level playing field and fisheries, there we would like to see more progress”.



The euro was hobbled by the renewed Covid concerns, principally because the EU’s two biggest members, France and Germany, both announced new lockdown measures. France’s began on Thursday night and will continue for at least a month. Germany’s begins on Monday. The EU has created a common strategy for the roll-out of a vaccine but that vaccine is not yet available and might not be for another two years. If that does turn out to be the case, the negative economic implications will be considerable.

There was not too much sign of that in this week’s data. Most of the provisional purchasing managers’ indices for October did not differ greatly from the September readings. At 49.4, the composite figure was a touch higher than forecast. The EU’s confidence measures were little changed while the IFO reported that sentiment among German business leaders “has clouded over” and export expectations were “much worse”. The euro was unchanged on the week against sterling and on average.



With a watershed election only days away, the USD came away with its best weekly result in a while. Although it lost half a Japanese yen, it was a winner on every other front, strengthening by an average of 1.1%. It took a cent and a half off the pound and a cent and a quarter off the euro. The domestic economic data were mostly helpful, beginning last Friday with monthly improvements in the provisional purchasing managers’ indices. Durable goods orders rose 1.9% in September with nondefense capital goods excl. aircraft up by 1%. The numbers were stronger than forecast. That was also true of the Case-Shiller house price index, which was 5.2% higher than a year earlier. The Richmond Fed’s manufacturing index also looked good at 29 after improving by eight points to a record high. Consumer confidence headed in the opposite direction, with the Conference Board index half a point lower at 100.9 in September.

Four days ahead of the vote, the opinion polls point to a “blue sweep”, with the Democrats taking the White House and the Senate as well as retaining control of the House of Representatives. Investors appear comfortable with the idea, even though it would mean higher corporate taxes.



In the middle of the field, the CAD was hampered by lower oil prices and a general avoidance of commodity-and energy-related currencies, but it did not suffer alone. Where the oil-oriented Norwegian krone took a 2.2% hit, the Loonie lost an average of only 0.3%, giving up a third of a cent to the GBP. There were almost no domestic economic data to get in its way. Building permits went up by 17% in September, with gains in every sector. On the face of it the number looks impressive but double-digit monthly increases and falls are not a rarity.

The Bank of Canada’s interest rate decision and Monetary Policy Report comprised the main event for the CAD. The benchmark target for the overnight rate remained unchanged at “the effective lower bound” of 0.25%, as expected, and the language implies that a further reduction is unlikely. In his opening statement, Governor Tiff Macklem’s “main message” was that the economic recovery will be slow and the RBC “will keep providing monetary stimulus to support the economy”. Investors heard a dovish message and marked down the CAD.



The Aussie was unchanged against sterling and the euro and flat, on average, against the other major currencies. In common with other commodity-oriented currencies, it struggled as the week wore on, hurt by the prospect that renewed anti-Covid lockdowns will dampen global economic activity and trade. On the plus side, Reserve Bank of Australia Deputy Governor Guy Debelle put a spring in the Aussie’s step on Tuesday. He told a Senate committee that “it looks like the September quarter for the country probably recorded positive growth rather than slightly negative”. Optimists took this as confirmation that the recession is over.

Consumer price index data from Australia showed inflation rebounding in Q3 as prices went up by a quarterly 1.6%. The annual rate jumped from -0.3% to 0.7%, in line with forecast. The acceleration in inflation was mainly the result of an end to free child care in most states. Housing costs failed to deliver the expected fall and car pieces surprised with a 2.5% rise. Business confidence improved by five points to -10 in the third quarter, according to NAB.



The Kiwi did what it does best: it stayed below the parapet and dodged most of the bullets. Where the less liquid commodity and energy-related currencies suffered as a result of fears that renewed lockdowns will hurt global trade, the NZD manoeuvred itself into fourth place for the week behind the JPY, USD and CHF. It strengthened by an average of 0.3% and added four fifths of a cent against sterling.

That is not to say that the NZ ecostats brought out the buyers. The trade figures for September showed the widest deficit in four months. ANZ’s Business Outlook put business confidence a point lower than expected, though significantly better on the month at -15.7. Consumer confidence, also from an ANZ survey, was back up to pre-Covid levels at 106.3 after a nine-point rise. “It remains under par – its historical average is around 120 – but it’s much improved”.

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