Lucky Escape for Sterling
March 10th, 2010
Positive economic signs from the UK economy allow a near-miraculous recovery for sterling after a sharp fall. Investors are more relaxed about the Greek budget problems.
Sterling fell sharply last Monday, losing nearly two cents before lunch. The remainder of the week was devoted to the slow and tedious process of recovery. Although it seemed an impossible ambition last Monday afternoon sterling opened in London this morning at €1.11, unchanged on the week.
At the beginning of the week the non-domiciled tax status of Baron Ashcroft dominated the media. Allegedly, the noble lord had bought his way into a peerage by making large donations to the Conservative party. For some reason this old tradition had become suddenly improper.
It would be an exaggeration to blame sterling’s sharp fall on Lord Ashcroft alone but the story will certainly have unnerved investors who were already nervous about the Tories failing to win a majority at the forthcoming general election.
From there it was uphill all the way but at least sterling managed to make it up the hill with the assistance of some positive news.
On Tuesday the government held a successful auction of 30-year gilts which attracted bids for nearly twice that much. The last five auctions of 30-year stock have achieved an average of 1.63 times cover so, whatever misgivings they may have about sterling’s short-term future, there is a degree of confidence among investors the current problems will be short-lived.
Having ignored Monday’s manufacturing purchasing managers’ index (their minds were on other things) investors took a great deal of interest in Wednesday’s services sector PMI. At 58.4 the services PMI was more than three points better than predicted, scoring a three-year high. It blew America’s 53.0 and Euroland’s 51.8 into the weeds.
Coming hard on the heels of a ten-point jump in consumer confidence it was another reminder to the market that not everything to do with Britain’s economy is in a state of collapse. There was more reassurance from the Bank of England when the Monetary Policy Committee voted to keep interest rates unchanged for a 13th month and to leave quantitative easing on hold.
A rash of data provided no coherent picture of the euro zone economy. The manufacturing and services PMIs were both a little softer on the month but not far adrift from what the analysts had forecast.
Consumer and producer price inflation were roughly in line with the market’s expectations but had no immediate implications for euro interest rates. A -0.3% monthly fall for retail sales was better than the expected -0.5% decline but still not exactly positive. The revision to fourth quarter GDP showed the Euroland economy growing by +0.1%.
The European Central Bank tightened monetary policy on Thursday with an end to the cheap three-month loans it had been offering to commercial banks. They will still be able to borrow one-week money at 1% but the three-month rate will depend in future on market rates.
The ECB had nothing to offer the Athens government and said it would oppose any attempt to approach the IMF for assistance. Nevertheless, Greece did manage to find buyers for a €5 billion bond issue.
By the end of the weekend it had become clear that, although Germany would not put its hand in its pocket for a Greek bailout, the EU had an emergency plan if push came to shove.
At least for the moment investors are comfortable, if not deliriously happy, about the situation but their next question will be whether France and Germany will be able to carry the euro zone economy ahead on their own if the economies of Greece, Spain, Portugal, Ireland and Italy are to be weighed down by austerity measures of one sort or another.
Whilst sterling’s recovery last week might be seen as a sign that there is life in the old dog yet, it is still hard to see the British currency as anything other than a dog. Opinion polls continue to indicate a hung parliament and investors fear that even after the general election Britain’s government will be paralysed by indecision, unable or unwilling to tackle the budget gap.
Buyers of the euro should hedge 50% of what they will need. If the money is required in the near future they should consider covering the whole amount.
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