Moneycorp: GDP Data Scuppers Sterling
October 29th, 2009
The UK economy shrank in the third quarter of 2009, seriously disappointing investors. Purchasing managers say Euroland is back to growth in all sectors.
Starting from €1.09 sterling rose to €1.11 before running into serious resistance on Wednesday. It had another look at that level on Friday morning before turning tail. A sharp fall saw it lose two cents in as many minutes and it carried on down to open in London this morning at €1.0850.
Sterling had a potential mountain to climb almost every day last week. Public sector net borrowing would show just how deep in the mire were government finances. The Monetary Policy Committee (MPC) minutes may point to more “money printing” by the Bank of England.
Retail sales data for September would show whether to not the consumer was back in business and Friday’s figures for third quarter gross domestic product (GDP) would hopefully show the British economy was out of recession.
The first three of those obstacles were handled without drama. Monthly government borrowing was slightly less than forecast; box ticked.
The MPC minutes said nothing that Bank officials had not already said in the previous couple of days; box ticked. Retail sales did not rise by as much as expected, in fact they did not rise at all, but they did not go down; box ticked.
The unhappy denouement came on Friday, with a consensus among analysts that GDP would have grown by +0.2% in the third quarter of 2009. Most of them got it dreadfully wrong. Instead of the small but still positive increase they expected, investors were asked to swallow a -0.4% decline. Not surprisingly, they choked. A lot of psychological stock had been invested in the GDP number and most of it had to be written off.
The euro’s biggest problem last week was its position against the US dollar. The $1.5=€1 level provided both a technical and a psychological obstacle that has carried through to this morning (although it is now coming under pressure).
There were very few pan-euro-zone economic indicators to carry things along. The only ones that mattered were the provisional purchasing managers’ indices (PMIs).
The PMI aims to quantify whether business is growing, in which case the index will be between 50 and 100, or shrinking with an index between 50 and zero. For the first time in nearly two years both the manufacturing and services sectors reported growth, with PMIs of 50.7 and 52.3 respectively.
The PMIs were accompanied by data showing a third successive month of growth for industrial orders. Orders are still more than a fifth below the levels of a year ago but they are up by more than 8% since May.
At first glance that negative GDP number appears to have undone all the good work that sterling had put in during the previous ten days. On the other hand there are signs that sterling’s weakness might have run its course.
A growing number of commentators believe it is wrong to think that things can only get worse. Accountancy firm KPMG reckons confidence among UK executives is as an 18-month high. Goldman Sachs is sticking to the “buy” recommendation it made a month ago.
There is even talk that the budget deficit might be smaller than we thought, although it will be difficult to know for several months.
The events of last week were a salutary reminder that sterling can go up-and-down, as well as down-and-up. With that uncertainty in mind there is no reason to adjust the hedging strategy.
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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