Delta variant disrupts the economic recovery

The US dollar is trading close its high this year against the euro (1.1704 on 31 March). It is supported by favourable economic data and the fact that, apparently, the Delta variant is not affecting the US as severely as other parts of the world. This new wave – which nevertheless did not prevent the UK from lifting almost all restrictions from Monday – is worrying the markets and is reflected in several sectors. Government bond yields fell on Monday to their lowest level in months. The rapid spread of the Delta variant could jeopardise the global recovery and induce a domino effect whereby central banks choose to extend their accommodative monetary policy. The yield on 10-year US Treasuries fell below 1.19%, the lowest since mid-February. Safe havens such as the Swiss franc, the Japanese yen and, yes, the dollar, are therefore once again in demand. The greenback is also being carried by good economic data. Retail sales rose by 0.6% in June, more than expected. The Consumer Price Index rose by 0.9% in the same month. This new rise is explained by a strong rebound in prices in areas largely affected by the pandemic, such as air travel, hotels and restaurants, and by the rise in used car prices (+10.5% over one month), which are being pushed up by delays in the production of new cars. These factors, which the Fed still believes are temporary, pushed the annualised inflation rate up to 5.4%, and 4.5% excluding food and energy. These values are still well above the Fed’s 2% target, even though it has become a flexible, rather than absolute, target.

The Swiss franc continues to go up as uncertainty returns. After touching 1.1152 against the Euro in early March, it is again approaching its high of the year at 1.0740. For the time being, the Swiss National Bank does not seem too concerned with the appreciating franc, as shown by the weekly demand deposit figures, which reflect the institution’s activity in the market. These demand deposits increased by CHF 200 million in the week of 12 July, compared with a decline of CHF 370 million in the previous week. This means the SNB is declining to act for the time being, and mostly likely will not act as long as the exchange rate remains above 1.0800, which in technical terms is the franc’s descending channel support. On the other hand, it will certainly interfere if the support is breached, which would entail a more or less rapid movement towards 1.0735 and 1.0660.  The recent decline in international yields is discouraging those who wanted to leave the franc in the hope of higher returns, so the timeliness of such an intervention is now more relevant. The German 10-year Bund yield also fell to its lowest level since 25 March, at -0.41%.  Similarly, the upturn in French 10-year government bonds has ended and the rate is once again in negative territory. It’s the first time since mid-April.

Members of the Organization of the Petroleum Exporting Countries and their allies have agreed to slightly increase their production from next month. The agreement provides for the 23 members to step up production by 400,000 barrels per day each month from August. The organisation will reassess the market situation in December. Under the agreement reached on Sunday, the final date for the production cap is pushed back from April 2022 to the end of 2022. The decision caused the WTI barrel to fall from $72 to $66.50. The fall in the price of crude oil is having an impact on the currencies of producing countries, including Russia. However, while oil prices have fallen by around 10% since the beginning of the month and more than 12% since peaking at $76.07 on 6 July, the Russian currency has lost less than 2% against the dollar. This is as the markets await the monetary policy meeting of the Central Bank of Russia on Friday. A 1% hike in the key rate is expected to curb rising inflation. But if the rouble were to stabilise or recover then analysts believe the CBR could settle for a 0.75% hike.

The New Zealand consumer price index rose by 3.3% year-on-year and 1.3% in the second quarter. These high figures open the door for the central bank to start raising interest rates as early as 18 August at its next monetary policy meeting. In Canada, the central bank left its rate unchanged at 0.25% but scaled back its bond purchases in the markets, saying it expected inflation to be higher than expected in the coming months. So which of the major central banks will be the first to return to normal monetary policy by raising rates? Canada, Norway and New Zealand have already taken steps to reduce their support for the economy and to slow inflation.

Since last Wednesday, stock markets around the world have fallen, also impacted by the unfavourable evolution of the pandemic.  The decline comes to 1% for Wall Street thanks to yesterday’s rebound and between 3 and 4% for Europe, which has also been affected by extreme weather events. Oil, banking and travel stocks were among the biggest losers due to the decline in oil prices, lower bond yields and the impact of the Delta variant on tourism.

On the agenda for the week ahead we have the ECB tomorrow, the much anticipated Central Bank of Russia on Friday and the Federal Reserve Bank next Wednesday. On the other hand, no major data will be coming from economic indices.