Weekly Currency Brief – 2nd Aug – 9th Aug 2016

Lower for longer
Prior to the EU referendum the general assumption was that the next move for UK interest rates would be upwards, after seven years of a 0.5% Bank Rate. That idea was kicked into touch by the Bank of England governor soon after the Brexit vote: it became a matter of when, and by how much the rate would be cut. It didn’t happen in July but it was widely expected that the Monetary Policy Committee would cut from 0.5% to 0.25% last Thursday.

Sure enough it did so. And to make clear its pessimism the bank also announced a resumption of its asset purchase programme, otherwise known as quantitative easing. It will buy another £60bm of government bonds and £10bn of high-quality corporate bonds. To rub salt into the pound’s wounds the governor also said that a further cut to “close to, but above, zero” was likely before Christmas.

While the rate cut had been well-telegraphed, the extension of QE and the threat of further rate cuts had not. So sterling has had an uncomfortable few days since Thursday morning, falling by an average of -2.2% against the other dozen most actively-traded currencies and gaining ground against none of them. Among its losses are three and a quarter US cents, two and a quarter euro cents and one and three quarter Swiss cents.

Growth vs jobs
The news, a fortnight ago, that the US economy had expanded by only 0.3% in the second quarter dented expectations of a rate increase by the Federal Reserve this year. And last Friday’s employment data went a long way to undenting them. US nonfarm payrolls increased by 255k in July. The number was not quite up to the 292k increase reported for June but both figures were well above last year’s monthly average of 213k. Together they put the possibility of a 2016 rate increase back on the table, helping the dollar to strengthen by a cent on the week against the euro and by two cents against sterling.

Patience in Frankfurt
The European Central Bank is doing a splendid job of sitting on its hands at the moment. Euroland’s recent economic data give it no cause for particular concern and investors’ eyes are focused elsewhere. Fears for the financial health of Italian banks are an ongoing concern, as is the Italian constitutional referendum which is due this autumn. But August in continental Europe is not a time to fret about such matters and the euro added a weekly three quarters of a cent against sterling.

Antipodean cuts
Nobody was surprised when the Reserve Bank of Australia cut its benchmark interest rate from 1.75% to 1.5% last week. The move had been so widely expected that the Australian dollar strengthened afterwards, adding a net one US cent. The Aussie gained more than five cents on the week against sterling.

Nor is the prospect of a cut by the Reserve Bank of New Zealand doing any obvious damage to the NZ dollar, which went up by more than a cent and a quarter against sterling. Just about everybody expects the RBNZ’s Official Cash Rate to go down from 2.25% to 2% on Thursday but even then the rate will remain hugely attractive in comparison with the near-zero yields available in Japan, Europe and North America.