Dusting off the tin helmets

Trump helps sterling

When the commander-in-chief of United States forces says North Korea is "looking for trouble", investors pay attention, especially after he has so recently shown a readiness to act by spanking Syria with five dozen cruise missiles. Add that to his spat with Russia and they start to fret.

Donald Trump made his comment yesterday afternoon and markets ran for cover. Equities and "risky" commodity-oriented currencies went down; gold and "safe" currencies went up. The losers were the Australian, Canadian and New Zealand dollars, all of which were down by -0.6% on the day, roughly a cent. The winner was the Japanese yen, which was stronger by 0.6% ahead of the second-placed…

…British pound. No kidding, investors saw sterling as a safe haven. It is not unheard of but it only happens when the circumstances are just so. In this case they were. Investors' knee-jerk reaction was to buy the euro but they quickly remembered their concerns about the French presidential election, so backed off. And if they couldn't buy the euro they couldn't buy the Swiss franc either, because the euro/franc exchange rate is policed by the Swiss National Bank. Both were down by nearly half a cent.

Inflation helps sterling

Although they did not do as much as Donald Trump for the pound, the UK inflation figures also had a mildly positive effect. The consumer price index went up by 2.3% in the year to March, leaving the headline rate of inflation unchanged on the month.

It was not that investors took a particular shine to the inflation data, which were affected by the moveable feast of Easter (March last year, April this). Rather, there was nothing there to worry them.

Nor is there any apparent concern about the yawning chasm between the input and output producer price indices. Output - factory gate - prices were up by an annual 3.6% while input prices, for materials and fuel, rose by 17.9% on the year. The gap suggests that manufacturers were swallowing the cost of sterling's devaluation.

Wages and jobs

A day after the Office for National Statistics showed consumer prices rising by an annual 2.3% (or 3.1% using the retail price index as a benchmark) today's numbers are expected to show wages rising by 2.2% over the same period. Will investors care?

When prices outstrip wages, consumer spending takes a hit because people cannot afford to buy as much stuff. Investors might take that into consideration when they appraise sterling at half past nine, especially if the jobs data fail to impress.

The other significant event today is the Bank of Canada's rate decision and statement. No change is expected to the 0.5% target for the overnight rate. However, the BoC governor, Stephen Poloz, has been oozing caution in recent months. If the rate statement is littered with references to prudence, circumspection and downside risks it could make investors more twitchy than they already are about the currency.