Moneycorp: Euro Weekly Update
October 22nd, 2009
An unusually good week for sterling. The coming week will be even more critical, bringing data for government borrowing, retail sales and third quarter GDP.
For the first half of the week sterling remained below Monday’s €1.0750 opening. On Tuesday it went as low as €1.06. A Wednesday bounce above €1.07 was followed by a storming rally on Thursday that saw the pound score its best one-day rise in a year. It peaked at €1.10 and spent the weekend consolidating around €1.0950. When London opened this morning it was trading at €1.09.
The early nervousness came as a result of a government initiative to raise £16 billion by selling off non-core assets such as the Dartford crossing. Compared with the admitted budget deficit of £175 billion this year, investors saw the measure as no more than a flea-bite out of the problem.
At the same time they also saw a report from the Centre for Economics and Business Research that suggested we could be looking at a 0.5% bank rate for another 18 months and one no higher than 2% by 2014. It was not new news but it was an unwelcome reminder of an unpleasant situation.
On Tuesday a speech by Bank of England Deputy Governor Charlie Bean on the subject of ‘Quantitative Easing: An Interim Report’ could have had the pound on the run, if only for its title. Investors do not like quantitative easing, which they see as an inflationary tactic; good for the economy maybe but bad for the value of the currency. In fact they took kindly to Mr Bean, perhaps because he was the first bank Grandee in recent months not to talk sterling down.
The following day the Financial Times published an interview with Paul Fisher, a Monetary Policy Committee (MPC) member and the Bank of England’s Director of Markets. He made several points, among them an observation that quantitative easing is working, a reminder that it may or may not be extended when the current £175 billion kitty runs out next month and a statement that the Bank does not deliberately set out to guide the currency in any particular direction (i.e. down), however it might appear.
Investors’ initial reaction was to focus on the “may or may not be extended” bit. Very quickly though, they looked harder at the “quantitative easing is working” part and decided they liked it. In reality, so much of the world had sold so many British pounds that they needed an excuse to buy them back. The sterling rally accelerated.
Once again the economic data had far less impact on sterling than did the Bank of England. It was not much different for the euro. Euroland industrial production was up by +0.9% in August, roughly as expected. Inflation – sorry, deflation – was steady at -0.3% and the trade surplus narrowed more sharply than predicted.
One of the main factors for the euro was a speech by European Central Bank President Jean-Claude Trichet. Although much of what he said was a rehash of recent ECB press conference pronouncements, he again made the point that it is still too early to say the financial crisis is over. Investors did not need to listen too carefully to his words to realise that he was trying to discourage them from buying the euro. With a weak dollar on one side and a weak pound on the other, the last thing Euroland’s economy needs is to have the only strong currency in town.
The coming week is peppered with uncertainties for the pound. Tuesday’s figures for net public sector borrowing will show the government needing another £15 billion pounds or so. Wednesday’s minutes of the September MPC meeting will reawaken fears that more quantitative easing could be in the pipeline.
Retail sales figures on Thursday will show how the consumer is faring. Top of the pile, and we will not see it until Friday, is the first estimate of how the UK economy performed in the third quarter of the year. Gross domestic product (GDP) has fallen by an average of -1.2% every three months in the last year. The forecast is that it will have risen by, well, not much in the three months to September.
As long as it did, the newspapers will be trumpeting the end of the recession. If the number is less than zero it will qualify as new bad news and sterling will come under renewed pressure.
With so many important UK data to come in the next four days it is impossible to take a sensible view about sterling’s direction. Last week’s strong rally proved that the game is not up.
Better-than-expected figures could extend the recovery but it is just as easy to imagine worse-than-expected data causing it to fall flat on its face. Buyers of the euro should hedge half their requirement with a forward purchase.
Those with a short time horizon who do not want to cover their whole exposure should at least protect themselves with a stop order.
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