Weekly Brief

Confused by the Covid conundrum

GBP

It was a more interesting week for sterling than its supporters might have preferred. On Tuesday and Wednesday, it was at the back of the field, hit by political controversies and the reintroduction of working from home. On Thursday, the pound rebounded to share the lead with the safe-haven Japanese yen. Overall, sterling was the week’s weakest performer among the major currencies, falling by an average of 0.8% and losing ground to everything.

Sterling had no problem with the UK economic data, at least until today. The purchasing managers’ indices for services and construction were convincingly positive. The services sector saw the “strongest increase in new work since June” while construction enjoyed the “fastest rise in construction output for four months.” The BRC said retail sales in November were up by 5% from the same month last year. House prices increased by 8.2% on the year according to Halifax, after rising for a fifth successive month, and the RICS house price balance was unchanged at a punchy 71%. The production data for October, released this Friday morning, were much softer than expected.

 

EUR

A slight underperformance by the EUR cost it an average of 0.3% against the major currencies. It was unchanged against the USD and took two thirds of a cent off the GBP. The euro did little to shape its own destiny; its direction was mostly the result of the ebb and flow of risk-appetite, in which context the euro was seen as a relatively safe haven. That changing sentiment was driven, in turn, by the Covid Omicron narrative and by hopes and fears for the global impact of the imploding Chinese property giant Evergrande.

The Eurozone economic data did not make a great deal of difference to the currency, which was just as well because a couple of them looked quite ugly. German factory orders plunged 6.9% in October, supposedly because supply chain delays are discouraging potential buyers who see no point in ordering stuff that will take for ever to arrive. The Sentix index of Eurozone investor confidence fell five points to 13.5 as a result of the Covid Omicron threat. A similar measure from ZEW was less gloomy, with a one-point improvement to 26.8, though the reading for Germany alone fell two points to 29.9. The services and composite PMIs were higher on the month, but not by as much as forecast.

 

USD

Almost all of the week’s important US ecostats related, one way or another, to jobs. According to tradition, last Friday’s nonfarm payrolls figure was the main event. However, it took a while for investors to rationalise the apparent disparity between the smaller-than-expected 210k increase in nonfarm payrolls and the seriously above-forecast 1,136k rise in overall employment. Investors eventually came to the conclusion that there was nothing among the numbers to dissuade the Federal Reserve from tapering its asset purchase programme and, at some point, taking interest rates higher. The Job Openings and Labor Turnover Summary (”JOLTS”) painted the now-familiar picture of millions of unfilled vacancies. The services PMI report mentioned “sustained strong business growth” as “job creation quickens”.

Where investors are concerned about Covid Omicron delaying rate increases in Britain, they are less worried about the effect on US rates. They were not expecting any move before the middle of next year anyway, and the optimistic assumption is that by then, Omicron will not be seen as the hurdle it appears to be today. The USD was fractionally lower on average and strengthened by three quarters of a cent against the pound.

 

CAD

Where there was confusion about last Friday’s US employment data, there was none at all about the Canadian figures that came out at the same time. The labour force survey delivered better results than expected, with employment rising by 154k in November to a level 1% higher than its pre-Covid level and unemployment falling to 6%, within 0.3 percentage points of where it was in February 2020. By comparison with the US jobs numbers, the Canadian numbers looked good, and were briefly positive for the CAD. It was not until Monday, however, that the CAD began to make real upward progress against the USD. In the end it strengthened by an average of 0.5%, adding half a US cent and strengthening by two and a quarter cents against the struggling pound.

The other key moment for the Loonie came on Wednesday, with the Bank of Canada’s monetary policy statement. It was not helpful to the currency. The statement differed slightly from its immediate predecessors, in that the forces of inflation are no longer seen as “temporary". The bank expects CPI inflation to remain elevated in the first half of 2022 and ease back towards its 2% target in H2. Although the statement was by no means dovish, the market had evidently been hoping something further towards the hawkish end of the spectrum.

 

AUD

The Reserve Bank of Australia announced on Tuesday that it was keeping the Cash Rate steady at 0.1% and that asset purchases will continue until at least mid-February next year. Crucially, the bank altered the wording of its inflation guidance and the Aussie responded positively to what it saw as a “hawkish hold”. At roughly the same time, the ABS published its quarterly house price index which was 21.7% higher in September than a year earlier. Altogether, investors saw a greater chance of an upward move for the Cash Rate.

The only other Australian ecostats preceded the RBA statement and were thus, of limited impact. ANZ’s Job Ads measure showed a 7.4% increase in November as lockdown restrictions were lifted. AiG’s performance of services index improved by two points to 49.6, still in the contraction zone as a result of Covid lockdown restrictions, but close to breakeven after three months of decline. Altogether, the news and statistics were beneficial to the AUD. It went up by two and two thirds of a cent against sterling and strengthened by 0.6% on average.

 

NZD

Investors left the NZ dollar mostly alone for a second week. It lost ground over the weekend and began to perk up on Tuesday. The Kiwi was unchanged against the Japanese yen and almost so against the euro and US dollar. It weakened by an average of 0.4%, picking up three quarters of a cent from the pound.

With nothing from the Reserve Bank of New Zealand and no major political developments, the Kiwi had to rely on a handful of domestic economic statistics, most of which were of little interest to investors. The two that did count for something were manufacturing sales and the performance of manufacturing index. Manufacturing sales fell 6.4% in the third quarter, with metal products (-17%), oil and coal, (-13%) and transport equipment (-8.8%) the biggest culprits. Business NZ’s PMI was softer than expected, and three and a half points lower on the month, at 50.6. BNZ Senior Economist Doug Steel commented that “the PMI implications for economic (and employment) growth seem clear – soft.  But with obvious difficulties remaining on the supply side, we’d suggest that inflation is still rising."

 

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