Weekly Brief

Commodity currencies higher


Sterling came out of the last seven days with an average gain of 0.9%, losing out only to the North American dollars. It conceded two thirds of a US cent and one third of a Canadian cent. However, it was not all plain sailing. Last Friday and again this Wednesday, the pound was the top performer, while on Monday it was the back marker. The week’s biggest event for sterling was the Chancellor’s budget on Wednesday. It went down fairly well with voters, and investors will have been heartened by the Office for Budget Responsibility’s upgraded economic forecast. The OBR lowered its estimate of peak unemployment from 7.5% to 6.5% at the end of this year and hopes the combination of budget stimulus and vaccination will bring “a swifter and more sustained economic recovery”.

UK ecostats did not get in the way. The manufacturing and services sector purchasing managers’ indices were much as expected at 55.1 and 49.5. The Bank of England credit statistics showed mortgage lending remaining “robust” in January and Nationwide said house prices rose 6.9% in the year to February.



There was a great deal of indecision among investors with regard to risk-appetite. In general they claimed to favour risk, and to chase returns, but that did not translate into steady upward pressure on equities and nor did it mean any further concerted markdown for bond prices. It did, however, result in losses for the safe-haven Japanese yen and Swiss franc, as well as for the euro. The EUR fell an average of 0.2% on the week, losing nearly two US cents and giving up a cent and a third to sterling.

Economic data from the Eurozone suggested that Germany is continuing to re-establish itself as Europe’s industrial prime mover. Manufacturing sector PMIs put Germany in first place with a 37-month high of 60.7. Italy achieved a 56.9 and France was at 56.1. Only Greece missed the cut at 50, with a score of 49.4. Predictably, in view of Covid restrictions, the services PMIs were a bit sketchy, with Germany and pan-Eurozone both at 45.7. Lockdowns also dampened retail sales, with monthly and annual declines of 5.9% and 6.4%.



The biggest individual influence on the dollar was Federal Reserve Chairman Jerome Powell. He said on Thursday that he is not inclined to take measures to correct the recent upward moves in bond yields. “We monitor a broad range of financial conditions and we think that we are a long way from our goals” (of 2% inflation and full employment). His comments sent share prices lower and encouraged investors to stock up with safe-haven currencies, most notably the US dollar itself. An average gain of 0.8% on the day contributed to a 1.3% gain for the week as a whole.

Along the way, most of the US economic statistics also helped the constrictive attitude towards the dollar. The data for US personal income and personal consumption expenditure showed incomes rising 10% in January as spending went up by 2.4%. In normal circumstances such numbers would raise eyebrows but the mismatch was caused by the distribution of government stimulus cheques.



The Canadian ecostats also tended to work in their currency’s favour. They did not start off particularly well. Industrial product and raw materials price indices both rose in January. Material costs went up by 5.7%, mainly as a result of energy prices, while factory gate prices increased by 2%, with lumber and other wood products leading the way. The mismatch did not work in manufacturers’ favour. There was better news from the manufacturing PMI. At 54.8 it showed “solid expansion in new order volumes” and “a strong improvement in overall operating conditions.

The first showing for fourth quarter GDP in Canada put growth at 2.3% quarter-on-quarter, an annualised 9.6% in US terms and ahead of the 1.8% growth forecast by analysts. In 2020 as a whole the Canadian economy shrank 5.4%, “the steepest annual decline since quarterly data were first recorded in 1961”. Investors focused on the Q4 growth number, which helped the Loonie into second place for the week. It strengthened by an average of 1.1%, adding a third of a cent against sterling.



Australia’s gross domestic product also grew by more than expected in Q420, expanding by 3.1% over the three months. Investors were not unduly impressed, even though the figure was comfortably stronger than the forecast 2.5% growth. The purchasing managers’ indices all came in well above the line at 50 which separates growth from contraction. Manufacturing PMIs from Markit (56.9) and AiG (58.8) were higher on the month, while the services readings were 53.4 and 55.8.

The Reserve Bank of Australia had quite a busy week. Last Friday and again on Monday it bought bonds, as well as announcing that it would purchase a further $3 billion of longer-dated paper. On Tuesday, the RBA kept monetary policy unchanged, as expected. On Wednesday, investors' had a rethink about the central bank’s statement: They came to the conclusion that the RBA was not perhaps as dovish as they had feared. The Aussie eventually put in an average performance, losing one US cent and falling by a cent and two thirds against sterling.



A week behind the sandbags did the NZ dollar no good whatsoever. Its average loss of 0.9% was exceeded only by the Swiss franc’s 1.2% decline. The NZD lost a cent and two thirds to the USD and three and two thirds of a cent to sterling. As usual, the domestic economic data added little to the debate. The GDT Index showed dairy prices rising 15% over the fortnight. Building work done in the fourth quarter was down by 1.5% from the September quarter.

In a speech at the University of Waikato, Reserve Bank of New Zealand Governor Adrian Orr returned to one of his favourite topics; house prices. Less than a week after he acknowledged the government’s instruction to bear them in mind when setting policy he conceded that “there are big question marks” around asset prices and that the ease with which homeowners can borrow against their properties is a significant risk. However, Mr Orr stopped short of asking the government to empower the bank to restrict the use of interest-only mortgages.


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