Published: 19 January 2022
Although it did not amount to three straight months of risk-aversion, investors did seem to spend more time than not hiding behind the sofa in the third quarter. That old favourite safe-haven, the Japanese yen, came away with the best result, with the relatively safe US dollar and the oil-rich Norwegian krone vying for second place. Sterling was very much in the back half of the field.
Financial markets’ concerns in Q3 were not markedly different from those of the second quarter. Covid lockdowns were less to the forefront in most countries, but supply-chain problems became more of a worry as economies reopened. Rising inflation, dismissed by most central bankers as “transitory”, was taken rather more seriously by investors. However, even they had no obvious problem with the dichotomy of America’s 0-0.25% federal funds rate and 5.4% inflation in the States.
Major-currency interest rates, which have been nailed to the floor for a year and a half, in most cases show no sign of going anywhere soon. The odd one out is New Zealand, where analysts see the potential for at least one increase before the end of the year.
Greg Smith, in the latest podcast for the Business Perspectives Series, discusses the key factors featured in this report. To listen to the podcast, click on the link below.
The UK continues to be affected by supply disruptions. Whilst the economy has continued to rebound almost to pre-pandemic levels, significant risks remain. The BoE are likely to raise rates sooner which could support sterling.
The European Union has also been hit by supply constraints and rising inflation, though the European Central Bank seems most keen to look through these issues. As the slowest to move, the euro may remain on the back foot.
Rising inflation and rebounding employment and economy are pushing the Federal Reserve to reducing asset purchases this quarter. Expectations of an improving economy and increasing rates have supported the dollar.
The Australian Dollar has had a tough time, with lockdowns in Australia and reduced orders from China. Going forward, Australia seems to be coming through the worst of the disruption and the Australian Dollar could make back some ground.
Although New Zealand has been the least affected by lockdowns and disruption, they are now following the path of others through vaccination. The central bank is keen to normalise rates and this could further support the Kiwi.
Despite an increase in the oil and commodity prices, the loonie has not seen much benefit. The supply disruptions have outweighed oil prices and inflation remains a concern, though the central bank does not look likely to act immediately.
Sterling’s performance in Q3 was uninspiring but not desperate. It lost more than two and a quarter cents to the charging US dollar but took two-thirds of a cent off the euro. Its outlook over the coming three months is uncertain, especially if the prime minister chooses to activate the Article 16 review of the Northern Ireland protocol threatened by Brexit Minister David Frost.
At a global level, the two most obvious threats are choked supply chains and the mystifyingly pervasive labour shortage, which together point to higher prices and non-transitory inflation. If the politicians are unable to address the former, the central bankers will have to figure out what to do about the latter. After years of near-zero interest rates and QE asset-purchase profligacy, it will not be an easy call.
A third risk, though thankfully not one at the forefront, is China’s ambition to bring Taiwan within its control. Beijing has recently ramped up its flag-waving and sabre-rattling, to the extent that there is a danger of Taiwan shooting down an overflying Chinese bomber, thereby inadvertently sparking conflict between China and the United States.
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