Weekly Brief

An unexpected winner


Unusually, it has been a good finish to a good week and a good month for sterling. The pound was the winner on Thursday and top performer for the week with an average gain of 1.8%. For July as a whole it was outperformed only by the SEK, sharing second place with the NOK. The recent economic data certainly had something to do with sterling’s success; not only the UK numbers, all of which met or exceeded forecast, but also some of those from elsewhere which looked awful by comparison. Britain’s ecostat highlights were last Friday’s provisional purchasing managers’ indices, with the composite index at a five-year high, and mortgage approvals, which quadrupled in June.

Sterling also appeared to receive support from reports that EU Brexit negotiator Michel Barnier is confident that a trade deal with Britain remains possible. It was hardly a new point of view but it reminded investors of their underlying assumption that Britain will not deliberately throw itself under the no-deal Brexit bus and the EU will not push it.



With no blockbuster news to match the previous week’s trillion-euro fiscal stimulus bill there was an element of anti-climax about the euro. It still did well enough though, taking second place three fifths of a cent behind sterling and adding three US cents. A major aspect of the euro’s success was that investors were actively offloading the USD and, when they do that, their default alternative is the EUR.

Some, but not all, of the euro zone economic data were more upbeat than previously. Last Friday’s provisional purchasing managers’ index readings were all at or above the line at 50 that separates boom from bust (German manufacturing just made the cut at 50.0). German business confidence improved “considerably” in July. On the debit side, provisional second quarter gross domestic product readings from Germany and France would under other circumstances be considered shocking. Germany’s economy shrank by a quarterly 10.1% and France’s by 13.8%. Yet the shock impact was absent because investors had been steeled for disaster.



The dollar continued as the FX market’s whipping boy, sharing last place with the CAD and JPY and losing four cents to the class-leading British pound. It weakened by an average of 1.3% against the major currencies. The US economic data were mixed. As in Britain, the residential property statistics looked robust. National house prices were up by an annual 4.5%, way ahead of the 0.6% rise in consumer prices, and pending home sales in June were up by 16.6% from the same month last year. On the other hand gross domestic product shrank by 8.2% in the second quarter, an outcome that looks much worse when it is expressed in the American style as an “annualized” 32.9%.

The Federal Reserve made no change to monetary policy and its chairman pointed out that the bank has “lending powers not spending powers”. It can make loans available but it cannot influence loss-making businesses or unemployed workers to borrow and spend. Unfortunately, the government has no coherent plan – arguably not even an incoherent one – to make that investment. Roughly, the Democratic House wants $3 billion of stimulus, half of the Republican Senate supports a $1 billion package and the other half favours spending nothing at all.



The poor old Loonie did nothing wrong but, unfortunately, neither did it do anything right. A downward drift in oil prices took WTI crude 3% lower, hardly a big move but in no way a positive one for the CAD. In the absence of other influences the CAD was doomed to follow in the wake of its influential southern neighbour as the USD spent another week on the retreat.

The absence of other influences was most conspicuous on the statistical agenda. There were no Canadian economic data at all during the week.



In the front half of the field the Aussie strengthened by an average of 0.6% against the major currencies, adding one and a third US cents and losing a little over two cents to sterling. It made mostly upward progress against the USD, with a couple of noticeable setbacks that had no obvious cause.

The most important set of Australian economic data was Wednesday’s consumer price index numbers. Prices fell 1.9% in the second quarter, pulling headline inflation down from 2.2% to -0.3%. The most significant price falls in the June quarter were child care (-95.0%), automotive fuel (-19.3%), preschool and primary education (-16.2%) and rents (-1.3%). Investors had been prepared for a negative number so there was no reaction from the AUD. Building approvals fell for a sixth consecutive month in June, with total approvals down by 15.8% from the same month last year. Statistics Australia noted that “the effects of COVID-19 on Building Approvals were mixed. For residential approvals, there was a broad-based fall in dwellings approved… In contrast, the value of alterations and additions to residential buildings rose sharply.”



On average the Kiwi was unchanged against the other major currencies. There was no clear trend as the NZD rallied, retreated and rallied against the US dollar, ending up four fifths of a cent ahead on the week. It lost three and two thirds of a cent to sterling, following a more obvious downward path.

The “hard” economic data showed a recovery in job numbers in May and June after a substantial fall in April, though they are still below pre-Covid levels. Building permits went up by a monthly 0.5% in June, a somewhat less spectacular increase than May’s 41.7%. The “soft” – subjective – data came in the shape of business and consumer confidence. ANZ’s Business Outlook report put business confidence two points lower at 31.8 in July, with the activity outlook also down by two points -8.9%. The suggestion was that “the vigorous bounce out of lockdown appears to be topping out”. Consumer confidence was almost unchanged at 104.3, “still well under its historical average but also well off its lows”.

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