Despite the relentless flow of politically troubling news from Downing Street, the GBP has performed well over the last month, leading the premier currencies and strengthening by an average of 2.3%. Over the last week, although it was outperformed by the more volatile Northern Scandinavian crowns and by the Commonwealth dollars, it did well against the safe-haven JPY and took nearly two cents off the USD. Investors are apparently unconcerned by the possible defenestration of the prime minister, believing that his departure would not inevitably mean a major change in government policy.
Until this Friday morning, the week’s UK economic data gave investors little to work with. The Halifax house price index rose 1.1% in December for an annual rise of 9.8% in calendar 2021. The BRC reported satisfactory retail sales for the festive period but “head winds for 2022”. Today’s output and trade data were mostly ahead of forecast and better on the month. Manufacturing and industrial output were up by 1.1% and 1% respectively. Gross domestic product expanded by 0.9% in November. There was no immediate reaction to the numbers from sterling.
Where the GBP was resilient to the political risks, the EUR was similarly oblivious to the European Central Bank’s breezy dismissal of the risks posed by inflation. It was fractionally higher on average, firming by a fifth of a cent against the GBP and taking the best part of two cents off the USD.
This was perhaps a surprise, given the consumer price index data that appeared last Friday. Headline inflation was up at 5%, a record high that exceeded analysts’ predictions. The energy component of the shopping basket played a massive part, rising 26% in 2021. At the ECB, however, the official stance is one of insouciance.
The bank’s Chief Economist Philip Lane told RTE that “we do think in this year inflation is going to come down”. The current spike “is basically part of a pandemic cycle" and "in that sense it should not be interpreted in terms of historical norms: the pandemic is a unique episode". For the avoidance of doubt, Dr Lane also “reiterated the official ECB stance that it would be highly unlikely for interest rates to be changed this year.” Away from Frankfurt, many analysts are rather less nonchalant. They believe the ECB will be forced to reconsider its ultra-accommodative monetary policy, not least because of growing pressure from within the Governing Council.
In contrast to the politics-deniers and inflation-deniers who gave the GBP and EUR the benefit of the doubt, the USD ended up at the back of the field after doing almost everything right.
It lost an average of 1.5%, giving up more than a cent and three quarters to both the EUR and GBP. At the heart of its problems was buyer exhaustion. Investors spent the last quarter of 2021 filling their boots with dollars in anticipation of interest rate hikes and quantitative tightening by the Federal Reserve. Various Fed speakers all but confirmed this week that there will be three or four rate increases in 2022, and that the central bank will begin to offload – or allow to mature – the bonds it accumulated during QE. However, the promise of “action tomorrow” was not enough, and profit-taking sales ensued.
Last Friday’s employment report did not help. The 199k increase in nonfarm payrolls was less than half as big as expected. It did not deter Goldman Sachs and others from predicting four rate increases this year, but the almost ritual disappointment set a negative tone for the USD. Investors also managed to feign regret at the Federal Reserve Chairman’s presentation to the Senate Banking Committee, when it failed to be more bullish than they had priced in.
Although there was little to separate the Commonwealth dollar – AUD, CAD and NZD – the Loonie was a nose ahead of the other two, with an average gain of 0.3%. It collected one and a quarter US cents and strengthened by two thirds of a cent against the GBP. The attraction of the commodity-oriented dollars, including the CAD, was a shift in investors’ equity appetite. Having favoured tech stocks for years, despite the sometimes ridiculously high price/earnings ratios that have been driven by “free” money, they have swerved towards the more traditional businesses. Hand in hand with that, they are tending to prefer the currencies of commodity-producers.
The week’s Canadian economic statistics, all of which appeared last Friday, were positive for the CAD when viewed as a whole. The employment figures were once again, better-looking than those from the United States, with 55k new jobs and the 5.9% employment rate both better than expected. Ivey’s purchasing managers’ index provided an unwelcome counterbalance to the Canadian jobs numbers, falling 16 points to 45.
The Aussie was helped along by the same gentle pro-commodity sentiment that took the CAD ahead. It strengthened by an average of 0.2%, keeping pace with the NZD. The AUD took a cent and a quarter from the USD and firmed by two thirds of a cent against the GBP. Over the last month, the Aussie is 0.9% stronger on average and down by two and two thirds of a cent against sterling.
Tuesday’s balance of trade and retail sales data were of the greatest theoretical importance to the AUD, but they failed to move the currency. The trade surplus narrowed sharply in November, as imports rose by almost three times as much as exports. Retail sales for November were rather more constructive; 7.3% higher on the month and up by 5.8% on an annual basis. Other domestic ecostats showed building permits rising by a monthly 3.6% and mortgage approvals going up by 7.6% in November.
After a near-silent start to the year, New Zealand’s statisticians were still clearly in no rush to begin cranking out the 2022 ecostats. They managed to publish one set, for November’s building permits. They were obviously pleased, though, because they accompanied the data with a comment that “building consents hit new highs in November”. The 48.5k permits issued in the year to November were 26% more than in the previous 12-month period. The Reserve Bank of New Zealand will doubtlessly take an interest in the continued buoyancy of the residential property market.
So, the NZD was not driven by the domestic economic data. It had to rely on generally-positive sentiment towards commodity-related and higher-risk currencies, but that was enough to keep it level with the AUD and 0.2% firmer on average. The Kiwi went up by half a cent against sterling.