Euro Weekly Update: September 9th 2009
September 9th, 2009
A swings and roundabout week for Sterling. UK manufacturing PMI disappoints; services PMI exceeds expectations. Euro zone economic shrinkage confirmed at -0.1% in the second quarter of the year.
The pound returned from its long weekend looking sickly and its first move was downward, touching €1.13 on Tuesday morning. Consolidation around €1.1350 followed and the pound edged higher on Wednesday and Thursday.
Sterling did not get quite as far as €1.15 on Friday but it go up there for a look. By the time London opened this morning it was trading closer to €1.13.
Sterling came unglued at the beginning of the week because of a couple of unhelpful economic data. Although the number of mortgage approvals increased slightly in July, repayments by existing borrowers exceeded new lending.
Technically this net repayment qualifies as a “first ever” but don’t get too excited; the Bank of England only started collecting these data 16 years ago. Even so, a newly-acquired savings habit is exactly not what is needed when the country is trying to haul its way out of recession.
People should be spending their money, not saving it. Coinciding with that announcement was a disappointing figure for the manufacturing sector purchasing managers’ index (PMI), which fell back into the shrinkage zone at 49.7: investors had been expecting it to come in a couple of points higher than that.
There was better news on Thursday from the services sector PMI. At 54.1 it led the field, beating Germany, France, the Euro zone and the United States. It was vindication of a sort and it allowed sterling to end the week slightly higher against the major currencies even though it was softer against the commodity and higher-yielding ones.
The Euro zone PMIs were all better than a month earlier but fell short of the UK figures. On the manufacturing front France and Germany achieved 50.8 and 49.2 with the zone as a whole at 48.2.
As in Britain, the services sector readings were more upbeat than manufacturing at 49.3, 53.8 and 49.9 respectively. Euro zone second quarter GDP received its first revision on Wednesday.
Shrinkage was confirmed at -0.1% for the quarter with a decline of -4.7% for the year to June. Investors seemed not to want to make much of the difference between those numbers and the worse figures from Britain the previous week (-0.7% and -5.5%).
Nor was there any great dismay when Euro zone retail sales fell by -0.2% in July, having been expected to increase slightly.
Investors were similarly unmoved by the European Central Bank’s decision to keep its policy interest rate – the Refinancing Rate – unchanged at 1%. ECB President Jean-Claude Trichet said the current level of interest rates was “appropriate”, which presumably explained the Governing Council’s decision not to change it.
Below €1.15 the pound is not looking good. €1.10 is a real possibility. Buyers of the euro should hedge up to 75% of their exposure. If the time horizon is close it would not be silly to cover 100%, just in case.
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