The McCafferty effect
Fairly hard on the heels of the Bank of England governor’s threat that Bank Rate could fall even further from its new 0.25% level, one of his henchmen drove home that threat in an article he wrote for The Times. Ian McCafferty made no new points but his warning of near-zero rates before Christmas carried extra weight because it was out of character: no member of the Monetary Policy Committee has voted more often than he for a rate increase.
QE or not QE?
An important plank in the Bank of England’s stimulus plan is the purchase of £60bn of UK government bonds. It suffered a glitch last Tuesday. When the bank tried to buy £1.17bn of 15-year-plus gilts it came up £50m short because the holders of the bonds – many of them insurance companies and pension funds – did not want to sell. The effect was to push up the price of the bonds. At higher prices the return on the bonds became less, making them less attractive to foreign buyers. That, in turn, reduced demand for sterling, further weakening it. The Bank of England, of course, would have been delighted: two of its ambitions are lower long-term interest rates and a weaker pound.
When rate cuts help
As just about everyone had anticipated, the Reserve Bank of New Zealand reduced its benchmark interest rate from 2.25% to 2%. The effect of the cut was almost identical to that achieved ten days earlier by the Reserve Bank of Australia: the NZ dollar went up. Investors decided that 2% still looked pretty good alongside the ultra-low rates in Europe, Japan and North America. Over the week the Kiwi strengthened by 2.1% against sterling.
The good news
Consumer price index data released this Tuesday showed UK inflation accelerating to 0.6% in the year to July. That is still some way below the Bank of England’s 2% target but it is a step in the right direction. Sterling reacted positively to the news.
The bad news
There are no prizes for guessing which was the poorest performer in the FX market for a second successive week. Sterling lost an average of -2.3% to the other dozen most actively-traded currencies, taking its cumulative loss since the EU referendum to -13.7%. It is down by an average of -18.1% for the year to date.
Europe at the beach
Across large swaths of Europe even the restaurants close for lunch in August. It is no great surprise, then, that the European Central Bank has added nothing to the currency debate in the last couple of weeks. The euro strengthened by 1.8% on the week against the pound, as did its mini-me, the Swiss franc.
Hope deferred maketh the dollar sick
The US dollar was the second weakest performer, strengthening by less than a cent against the pound. Its principal stumbling block was Friday’s retail sales data, which showed zero growth in July where a 0.4% increase had been expected. Consumer spending accounts for a large part of the US economy and investors saw the stall as another reason for the Federal Reserve not to raise interest rates.
More hoops for sterling
This week’s UK ecostats will be of particular interest to investors because they relate to the situation in July. They will be the first hard data to shed light on the economic situation in the aftermath of the Brexit vote. Wednesday’s jobs numbers and Thursday’s retail sales figures will be of great importance to sterling’s wellbeing.
Sarah, Senior Account Manager at Moneycorp
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