The last month brought a major development, not in the reality of the global financial situation but in the way investors perceive it. Several months ago the Federal Reserve chairman said he would consider winding down the Fed’s $85bn-a-month quantitative easing programme when the US economy was in better shape. He said it again in late May to a congressional committee and the world’s investors suddenly realised that, sooner or later, the money tap would be turned off.
As well as sending bond yields higher and shares lower, the effect was to further dampen demand for commodity-related and emerging market currencies. In the last three months the South African rand has fallen by -15%, the Australian dollar by -14%, the Brazilian real by -13%, the Indian rupee by -11% and the NZ dollar by -10%. A major chunk of those losses came in the last month.
The effect on the dollar has not been as positive as might have been expected. Whilst investors can envisage an end to the Fed’s money printing in the future, for the moment the cash is still flowing. That is not the case in Britain, where better economic data have all but killed the chance of any further asset purchases by the Bank of England. In Frankfurt the European Central Bank made clear in early June that it had supplied as much stimulus as it felt necessary; investors should not hold their breath in anticipation of any additional “non-standard” measures.
With no new crises in Euroland and Britain’s economy gathering a little momentum, investors were happy to give the European currencies the benefit of the doubt and leave them alone. The Swiss franc put in the best performance, adding two cents against sterling, and the euro strengthened by one cent. But the pound had nothing to be ashamed of; except against those two currencies and the yen it was higher on the month against everything.