Moneycorp: Euro Weekly Update
April 30th, 2009
Higher borrowing and higher taxes weigh on sterling. Investors nervous about Britain’s AAA credit rating. Euro keeps a low profile.
Sterling gave back the previous week’s gains, falling from €1.13 to €1.1050. A brief spike to €1.1350 on Tuesday was easily reversed. On Friday the pound had a serious look at €1.10 before getting its act back together.
There were two or three non-stories for sterling. Although the retail price index went negative, as expected, the consumer price index – the one the Bank of England follows, showed inflation still close to the top of its band at 2.9%.
Unemployment continued its depressing upward trek with another 74,000 jobs lost in March that took the unemployment rate to 6.7%. Retail sales for that month were higher than in February, making for a 1.5% improvement over the 12 month period. None of these developments had much impact on the pound because there were bigger fish to fry.
The biggest of the lot was Wednesday’s budget speech. Investors – especially those based in London, and there are lots of them – focused on two aspects of the chancellor’s speech: the massive levels of government borrowing that they will be expected to fund and the 61% total tax that the more successful among them will have to pay on the top slice of their earnings. Investors found neither aspect particularly appealing and they reacted in time-honoured fashion by selling sterling.
The other big story was a bit of a fake, really, but it still led to the pound taking another hit on Friday. The Daily Telegraph cobbled together a piece about credit ratings agencies’ attitude to the UK economy post-budget. Even though the agencies – Moody’s and Standard & Poor’s – made particularly non-committal comments The Telegraph still managed to open its article with the headline “Borrowing puts UK’s AAA rating in danger”. The market swallowed the story hook, line and sinker, giving sterling its second kicking of the week.
The euro, like the US dollar, kept a lower profile than usual, assisted by a mid-month shortage of economic data. As far as pan-Euroland statistics were concerned the only numbers to speak of were Purchasing Managers’ Indices and industrial new orders. The PMIs, although still well below the boom/bust dividing line, were an improvement on the previous month at 43.1 for the services sector and 36.7 for manufacturers. Industrial new orders, on the other hand, were just as weak in March as in February, down by 34.5% on the year. The best result for the euro was ZEW’s survey of German economic sentiment, which went up from -3.5 to +13.0.
A week ago it was clear that sterling faced specific risks, with the budget top of the list. Event risk this week is less evident and there is no obvious reason to look for sterling to escape the last seven days’ range. It is probably too much to hope for a recovery but after the stick it has taken recently sterling should at least be able to consolidate at these levels. Buyers of the euro can therefore revert to the tried and tested strategy of hedging half their exposure. Those requiring absolute price certainty should, as usual, cover the whole amount.
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