Moneycorp: Sterling Struggles with Skeletons but Survives
December 2nd, 2009
The upward revision to UK third quarter GDP was smaller than many investors had hoped. Dubai World’s default was worrying for UK banks and businesses.
The pound hovered around €1.11 until midweek, when it found itself heading lower. Support at €1.0950 was necessary on several occasions, including early this morning, and sterling opened in London at €1.0950.
It was not a vintage week for economic statistics. In sterling’s case there was really only one that counted; the first revision to third quarter gross domestic product; GDP.
Whilst it has become fashionable to argue that there are better ways of counting economic success, GDP measures the market value of all goods and services produced within a particular country and is still the one to which most economists turn when they want to quantify overall performance.
Investors had been expecting the Office of National Statistics to make an upward revision to their first estimate of a -0.4% shrinkage to GDP during the third quarter of the year. They duly got their positive revision but were disappointed that it only went as far as -0.3%.
Another negative factor for sterling was Bank of England Governor Mervyn King’s testimony to parliament’s Treasury Committee. He went there to talk about inflation but got sidetracked.
The committee extracted from Dr King the admission that he had to inject a previously undisclosed £62 billion of liquidity into RBS and HBOS last autumn.
The market could fully understand his need for secrecy at the time; goodness knows what the reaction would have been if it had become common knowledge that two of the country’s biggest banks were practically bust.
Even so, a revelation like that was bound to raise question marks about what other skeletons might be lurking in the Bank’s closet.
Thursday’s ham-fisted announcement from Dubai was another minus for the pound, at least initially. Government-sponsored Dubai World took advantage – or so it thought at the time – of a four-day Eid holiday in the Arab world to tell its creditors that they would not be receiving any repayments for six months.
In the great scheme of things, Dubai World’s default is only a fraction of the size of Lehman Brothers but it was an unwelcome reminder that there could be yet more dominoes to fall in this global downturn.
Britain’s banks and businesses, with their historic ties to the Gulf, could have more grief in store.
Euroland’s connections with Dubai seemed not to bother it and the euro completed another week of low-profile inactivity. On Wednesday it looked as though it might crack the resistance at US$1.50 but the flight to safety on Thursday scuppered the rally.
Ecostats from the euro zone were there or thereabouts: Purchasing managers’ indices for the manufacturing and services sectors showed slight improvements in November.
Industrial new orders put in a healthy monthly increase of +1.5%, slowing the annual rate of decline from -23.2% to -16.5%. The only slightly jarring notes came with confidence measures at the end of the week. Industrial and consumer confidence were both lower by a couple of points in November at -19 and -17.
In the last couple of months the pound has had an unpredictable ride between €1.15 and €1.05 but has become mired between €1.10 and €1.13 with no sense of direction.
For several weeks now the conservative strategy has been to maintain a neutral stance on currency exposures. There is as yet no reason to modify this stance.
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 protect themselves with a stop order.
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