Monday’s FX market did not promise much, and so the week got off to a less than riveting start, as expected. The eventual 0.5% gap between the outlying Australian dollar and Japanese yen was just wide enough to verify that safe-haven currencies did not particularly interest investors, and aside from football and freedom day, there was little else to sway the pound one way or the other. By mid-week, British CPI numbers stepped in to keep us on our toes – they were bigger than expected, with deadline inflation up from 2.1% to 2.5%, reaching an almost three-year high. Released at the same time, the producer price inflation data showed manufacturers’ costs increasing by an annual 9.1%, while factory gate prices rose by 4.3%.
The pound is closing the week standing strong despite the latest UK labour market report detailing a 4.8% rise in unemployment. Predictably, Covid and inflation developments remain the central themes, and the pound has rallied off the back of both this week. The first boost came with the government’s confirmation that freedom day will go ahead next week as planned and the majority of UK restrictions will be lifted. The second came yesterday as sterling latched onto the hawkish suggestion that an interest rate hike from the Bank of England may be “appropriate” in coming months. There was a discernible rise in the pound’s value against both the euro and the US dollar in the wake of these comments, though caution is the word as the expected rise in Covid cases is likely to weigh on the pound.
The euro has enjoyed a week of consistency, at least, with little to add any real shock factor to the mix. Eurozone Industrial Production dropped by 1% in May, which was unexpected with economists polled by The Wall Street Journal forecasting a 0.1% drop. The suggestion is that the manufacturing sector could be losing its recovery momentum. Output from factories, mines and utilities across May fell, with the blame being laid at the feet of supply chain disruptions.
Despite this, the euro didn’t really wobble, propped up against the US dollar after Powell’s speech on transitory inflation. The euro ends the week struggling slightly for direction as investors appear to monitor data, earnings and, as elsewhere, the spread of the Delta variant of the virus. This morning brings news of easing inflation within the Eurozone, confirming a slowdown in June following an acceleration in the early months of 2021. Also confirmed is the shrinking of the bloc’s trade surplus in May as European exports declined. The European Central Bank expects inflation to rise later in the year, but assures low borrowing costs are here to stay for many years.
Across the pond, inflation, monetary policy and Covid remain the central topics of conversation, too. The Federal Reserve still assures that inflation is “transitory”, but when confronted with alarming US consumer price index numbers, investors were forced to consider what exactly constitutes “transitory” upward pressure on prices. With only a couple of hesitations last August and September, headline inflation has been progressively rising for 12 months. The 5.4% print for June 2021 was the highest in 13 years. Oil value and Covid-depressed prices may be largely to blame but investors could be forgiven for wondering at what point high, “transitory” inflation is, in fact, just the new normal. This week, they couldn’t settle on an outcome, and neither could the US dollar, which climbed, dropped, and then climbed again.
On Wednesday, Federal Reserve Chair Jerome Powell tried to ease the pressure on US central banks, sticking to his story that the “overheating” of the world’s largest economy – as the FT put it – will subside in due course. He and the banks in question were accused of complacency, and the US dollar suffered slightly, unaided by Powell’s further admission that inflation will remain high for months to come. In other unhelpful news for the USD, retail sales are predicted to have dropped by 0.4% in June and the University of Michigan's preliminary Consumer Sentiment Index for July is projected to climb higher. Investors will be keeping an eye on subsequent inflation change indicators.
The Bank of Canada revealed this week that they are willing to let inflation run faster than its 2% target through to 2023 at least. The sentiment is in alignment with governor Tiff Macklem’s favouring of taking calculated risk in order to arrive at a complete recovery in the long run. “This adjustment reflects continued progress towards recovery and the bank’s increased confidence in the strength of the Canadian economic outlook”, Macklem and his deputies on the Governing Council said in a statement at the end of their latest round of interest-rate deliberations.
In correlation with a vastly successful vaccination program in Canada – one of the world’s fastest rollouts – the Loonie is enjoying further growth projections for the second half of the year and well into 2022. Investors will be keeping an eye on housing data, however, as a slump could pose a risk to the optimistic outlook for the economy.
Despite last month’s encouraging Australian employment figures, which reported some 30,000 new jobs, the escalating Covid situation down under is posing huge risk to the country’s recovery. What was once looked to as a marker of successful containment over the course of the pandemic is now something of a lesson, as the ‘fortress mentality’ has only stalled the inevitable spread of the virus. Prime Minister Scott Morrison has come under increasing fire for pairing the toughest border restrictions in the world with a ‘vaccine strollout’.
As a result, Australian residents have been either locked in or locked out of their borders, separated from loved ones only for the country to face strict lockdowns, soaring cases and a glacially slow vaccination program anyway, begging the question, “What was the point?” The economy now faces stagnation in the second half of the year, with the long-awaited government road map taking Covid management measures similar to those seen elsewhere in 2021, well into 2023. The Aussie remains dismal against the US dollar, pushing to multi-month lows, and hitting a fresh one-year low against the pound. An increase in consumer confidence, however, is providing some buoyancy for the Aussie.
Where the Fed talks of transitory inflation, the Reserve Bank of New Zealand sees “near-term spikes” reflecting “factors that are either one-off in nature, such as high oil prices, or expected to be temporary in duration, such as supply shortfalls and higher transport costs”. Is there a difference? Spikes or not, the RBNZ still saw a need for action and as a result, the news and upbeat data from New Zealand have seen the Kiwi rally against the US dollar, strengthen against the pound and emerge as a top performer this week.
The Kiwi’s success this week comes largely from the surprisingly strong Consumer Price Index (CPI) data for Q2, which surpassed the 2.8% YoY forecast and the 2.6% RBNZ projections to 3.3%, putting a rocket under the Kiwi. So far this morning, some of these CPI-related gains have been trimmed slightly, with Covid nerves relating to the spread of the Delta variant in the largely unvaccinated New Zealand adding some risk to the mix and capping any further gains against the US dollar. Today’s US retail sales data release will be looked to for fresh momentum for NZD/USD one way or the other.