There has been a whiff of “risk off” in financial markets last week.
The US Dollar gained 0.4% and has appreciated a further 0.1% since Friday while the S&P 500 fell in all four sessions (Monday was a public holiday) by a cumulative 1.7%. There was arguably no one catalyst, with markets seemingly concerned about the impact of the Delta-variant on economic growth, particularly in Asia Pacific, and central banks’ only very tentative tightening of monetary policy. Nevertheless, it is worth noting that the Dollar trade-weighted index remains in the lower half of a narrow 6-week range of just 1.7%.
The Australian and Canadian Dollars underperformed last week, depreciating about 1.3-1.4% versus the US Dollar, with both currencies under modest pressure following their central banks’ policy meetings on respectively 7th and 8th September. The Reserve Bank of Australia RBA left its policy rate unchanged as expected and stuck to its plan to start this month shrinking its weekly asset purchases to AUD 4bn from AUD 5bn. However, the RBA opted to maintain this level of QE until February, having previously said it would review its pace of asset purchases in November.
The EUR/USD cross ended the week down 0.6%, having shown little reaction to the European Central Bank policy meeting announcement – a likely modest tapering of QE – and press conference on 9th September. The ECB stated that it would reduce in Q4 its emergency bond purchases under the €1.85 trillion PEPP which have been running at about €80bn per month in the past two quarters. The central bank did not specify the monthly amount of bonds it was planning to purchase going forward or whether/ when it would end the PEPP which is formally due to end in late-March. Like other major central banks which have started to taper their asset purchases, including the Bank of England and Reserve Bank of Australia, the ECB is proceeding very cautiously.
The New Zealand Dollar also weakened only modestly last week (-0.7%). The currency got some support from a strong dairy auction on 7th September (with prices up 4% from 17th August) and markets are now fully pricing in the RBNZ to hike its policy rate 25bp at both its October and November meetings.
Sterling came under a bit of pressure mid-week following Prime Minister Johnson’s announcement that from April onwards every UK worker and employer will pay a new 1.25% tax on their earnings to pay for a £12bn a-year package to fund the National Health System (NHS) and reform social care. At the same time markets seemingly ignored another strong set of UK house prices (for August) and comments by hawkish MPC member Ramsden that the Bank of England may have to hike policy rates next year. However, Sterling rebounded on Thursday-Friday to end the week down only 0.2% versus the Dollar, while the GBP/EUR cross crept over the 1.17 mark.
