Shared honours

The confused response to last Friday's North American employment data set the tone for week of capricious sentiment and unusual currency reactions. Sterling shared the honours with the euro, strengthening by an average of 1.1% against the other dozen most actively-traded currencies. It was not a smooth cruise to victory though: the lead changed hands almost on a daily basis. At the back of the field it looked for most of the week as there would be no contest for the Japanese yen's wooden spoon. The NZ dollar made a late bid though: its -2.4% loss on the week was not a whole lot more impressive than the yen's -2.7% decline.

The reason for sterling's success was a bit of a mystery, given the mostly-mediocre UK economic statistics and news. The British Retail Consortium reported increased sales but at steadily-falling prices. July's trade deficit was the widest in 19 months as the exports of goods fell to its lowest level since September 2010. Manufacturing and industrial output both registered unexpected monthly declines in July. The National Institute for Economic and Social Research estimated that economic growth slowed to 0.5% in the three months to August. 

Sterling did react positively to a couple of bullish house price reports, from the RICS and the Halifax. It also enjoyed a modest relief rally when the Monetary Policy Committee minutes revealed an 8/1 vote in favour of keeping interest rates unchanged: there had been some concern that one member might vote for a cut.
The NZ dollar had no such luck. It suffered a major setback when the Reserve Bank of New Zealand cut its Official Cash Rate from 3% to 2.75%. It was not the cut itself that did the damage: there had been almost universal expectation of the move. But the Kiwi was hurt by the RBNZ's comment that "some further easing in the OCR seems likely". 

Australia's dollar was only fractionally behind the leaders, losing a quarter of a cent to the pound. It suffered a little slippage when the deputy governor of the Reserve Bank of Australia praised the weakness of the currency for helping to support economic growth but benefitted 24 hours later from unexpectedly strong Australian employment data.

The two North American dollars were unchanged on the week against one another, both falling by -1.5% against the pound and the euro. In each case, investors were confused by last Friday's employment numbers. In Canada a net gain of 12k jobs was overshadowed by an uptick in unemployment from 6.8% to 7%. In the States, August's 173k rise in nonfarm payrolls was well short of the expected 218k increase. Although upward revisions to previous months made up for the shortfall, investors focused on the most recent number.

Like sterling, the euro's advance was unconnected to any compellingly-vibrant economic data. German factory orders and industrial production were disappointing, as were French industrial output and Euroland investor confidence. The one bright light was an upgrade to euro zone economic growth in the second quarter, from 0.3% to 0.4%.

Although China's yuan is still not a freely-exchangeable currency the country's economic performance does have considerable influence on other currencies. By and large, when things are going well in China the currencies of its major trading partners are buoyant. But things are not going well in China right now. Economic growth has slowed considerably, share prices are under downward pressure and data this week showed a sharp fall in international trade. Exports were down by an annual -5.5% in August while imports plunged -13.8%. 

Investors' reaction to the news was, to say the least, unusual. Normally they would have offloaded the commodity-oriented South African rand and the Australian, Canadian and NZ dollars while filling their boots with the "safe-haven" yen, Swiss franc and, nowadays, the euro. Instead they did the exact opposite for the next 24 hours, based on a belief that the Chinese authorities will introduce fresh stimulus measures. The yen suffered doubly when the prime minister's economic advisor said the Bank of Japan would have to step up its money-printing programme.

In the week ahead the most important event, by far, will be the US Federal Reserve's interest rate statement on Thursday evening. Whilst most analysts expect the Fed to keep its benchmark interest rate unchanged there is the possibility that it will announce the long-awaited increase. Either way, there is likely to be spirited - and unpredictable - currency action in the aftermath of the announcement.