A dull and unsatisfactory week for sterling took it an average of 0.3% lower against the major currencies. It was not that investors were actively selling the pound: they were not actively doing anything, and at times appeared to have difficulty in staying awake. Rather, there were no new good reasons to extend long positions. The pound is the top performer over the last month, with an average gain of 1.8%, but it was unable to extend its lead.
The economic data were nondescript. Fourth quarter growth came in at 1.0% while gross domestic product “fell by 9.9% in 2020, the largest yearly fall on record”. The data were not as bad as forecast. There was some optimism from the Bank of England though. In The Observer, Governor Andrew Bailey predicted a spending spree when lockdown restrictions are lifted. In the Daily Mail, Chief Economist Andy Haldane predicted that in spring, the economy will be firing on three cylinders.
Strengthening by an average of 0.2%, the euro’s week was no more exhilarating than sterling’s. In the end it picked up two thirds of a cent from sterling, though it is still more than two and a quarter cents down from a month ago. There was only one properly pan-Eurozone static to provide guidance. After a strong showing in January, the Sentix measure of investor confidence dipped back into the gloom zone, falling from 1.3 to -0.2. Sentix highlighted a divergence between Europe and the rest of the world. German investor confidence fell from 9.2 to 8.6, while in the United States it was more than seven points higher at 18 and in Japan it rose from 13.6 to 16.1.
The prospect – still not confirmed – of Mario Draghi’s installation as Prime Minister of Italy, looks like a done deal. Investors are pleased, as is the man who engineered the fall of the Conte government, Matteo Renzi. Eleven years ago Sig Draghi promised to do “whatever it takes to preserve the euro” and the hope is that he can do the same for Italy and the EU budget.
The dollar had a wretched week, losing an average of 1.2% to the other major currencies. It gave away a cent and a quarter to sterling and a cent and two thirds to the euro. Last Friday, the dollar swivelled to the rear and it continued to retreat until Thursday. Whilst it is true that the US economic data were on the whole less than helpful, there was only one instance of a statistic having a directly downward impact on the currency. That was last Friday’s US employment report. At first glance it looked alright. Nonfarm payrolls increased by 49k, roughly in line with consensus, and unemployment fell from 6.4% to 6.3%. However, some analysts had predicted an increase of 100k or more for payrolls. Disappointment on that count was compounded by downward revisions of more than 150k to previous months.
Wednesday’s consumer price index data were all lower than expected. Headline inflation was 1.4%, as was the core measure, which ignores food and energy prices. Investors are confused. On one hand, there has been much recent talk of reflation, and the ex-president of the New York Fed is looking in that direction. At the same time, though, the Fed chairman is adamant that employment, not inflation, is the main driver of monetary policy for now.
Canada fired off all its statistical bullets in a single 90-minute spurt last Friday, first with employment and the balance of trade and then with the Ivey purchasing managers’ index. The Labour force survey was uninspiring. It showed employment falling and unemployment rising to 9.4%, the highest rate since last summer. Employment was down by 858k compared with the pre-pandemic level in February 2020. The trade figures looked rather better, with exports rising 1.5% and imports falling 2.3% in December. The Loonie was fortunate that the US jobs data came out at the same time, to draw investors fire, and that the deficit was the narrowest since June last year.
The Ivey PMI was a couple of points higher on the month, at a seasonally-adjusted 48.4. However, it was in the contraction zone below 50 for a second month and therefore theoretically negative for the Loonie. It had no visible impact on the currency though. In the end, the CAD fell by an average of 0.4% against the majors and lost an insignificant sixth of a cent to sterling.
Parting company with its colonial cousins in New Zealand and Canada, the Australian dollar somehow managed to take first place for the week with an average gain of 0.7%. It added one and a half US cents, nearly 2%, and strengthened by 1% against sterling. The performance was doubly impressive given the Reserve Bank of Australia’s recent “aggressive” monetary easing and the sharp 4.1% monthly decline in retail sales.
However, not all of the news was negative for the Aussie. NAB’s Monthly Business Survey showed business confidence rising in January to “well above [its] long run average”. The confidence about the future was balanced by a decline in (current) business conditions. There was an improvement in consumer confidence too. Westpac’s index of consumer sentiment “continues to signal strong confidence”, with the index rising by two points in February to 109.1, just three points shy of December’s 10-year high. The Melbourne Institute survey of inflation expectations found the public anticipating a 0.3 percentage-point rise to 3.7%.
Public expectations for NZ consumer prices are less ambitious. The Reserve Bank of New Zealand’s survey of inflation expectations put CPI 1.89% higher in two years’ time. As usual, it was higher than the 1.4% inflation rate reported most recently for Q420. Statistics NZ’s data for electronic card spending (a quick and dirty proxy for total retail sales) in January put sales 0.4% lower on the month and 1.9% higher on the year. Higher spending on furniture, electrical and hardware “may reflect people nesting at home because they are unable to spend on overseas travel”.
Business NZ rounded off the week this morning with its Performance of Manufacturing Index. At 57.5 it was 9.2 points higher on the month and “a welcome start to 2021, with the result clearly above the long term average of 53.0 for the Index”. It did not do much for the NZ dollar though. The Kiwi was unchanged against sterling, and an average of 0.3% lower against the major currencies. It added two thirds of a US cent.