Sterling Rides Most of the Blows
March 16th, 2010
Sterling proved to be slightly less fireproof than it had been the previous week, losing the half- cent between €1.11 and €1.1050. The low came at €1.0950 on Wednesday and sterling was staring at that same level as things got under way in London this morning.
In a dull week for hard data the British economy did not have a whole lot to say for itself and what it did manage to scrabble together was not particularly edifying. Two house price indices, one from the Royal Institute of Chartered Surveyors and the other from estate agents’ website Rightmove, damned the property market with faint praise.
The RCIS house price balance, which compares the number of members reporting higher prices with those reporting lower ones, fell from 32% to 17%; still positive but more reservedly so. Rightmove’s index of asking prices went up by 0.1%; positive buy only by a technicality. UK industrial production figures were a bigger disappointment and took sterling to the lows of the week. Production (manufacturing, mining and energy lumped together) fell by -0.4% in January.
Manufacturing alone was down by -0.9%. January’s trade deficit was £8 billion, the biggest since August 2008. Between August ’08 and January ’10 Sterling’s trade-weighted value became 23% weaker yet imports were up and exports were down. The significantly more competitive currency is still not having any positive effect on the balance of trade.
Sterling also had to contend with unhelpful comments from several quarters. Credit ratings agency Fitch was ‘uncomfortable with the fiscal adjustment path set out by UK authorities’ and looked for ‘more credible and stronger fiscal consolidation plans during 2010. Credit Suisse anticipated that UK banks, collectively, would have to reduce their balance sheets by more than £500 billion over the next three or four years in order to meet new regulations.
The prime minister reassured investors that Britain’s AAA credit rating was solid but not all of them were convinced, especially the researchers at UniCredit Bank who predicted that the government would have problems selling all the bonds they need to shift to finance the budget deficit.
Euroland was just as starved as Britain when it came to useful statistical guidance. Investor confidence improved from -8.2 to -7.5 but the figure was still negative. It was only really euro zone industrial production that counted for anything. The +1.7% increase in January was way better than Britain’s anaemic performance, even if it did only represent a +1.7% improvement over the same month last year. More salutary than that were Germany’s trade figures.
In the same month that the UK made an £8 billion loss, Germany turned a profit of almost the same amount. It did so despite what the authorities in Berlin and Paris describe as an overvalued euro.
Underlying everything to do with the euro was still the co-ordinated (or not) bailout programme for Greece. Another week went by without any sign of final sign-off for the €25 billion (or thereabouts) mix of loans and guarantees that the Greek prime minister spent half the week travelling the world to engineer. As things presently stand there are several schools of thought.
One believes that Greece will be able to work its own salvation, if only because it must. Another has it that Germany and France will eventually get off their high horse and put their hands in their pockets. Yet another argument is that, with or without Germany’s co-operation, Brussels cannot afford to see the economy of a euro member crumble for lack of cash.
The market’s point of view, for the moment at least, is Micawberesque; ‘something will turn up’. Investors are not sweating too much as long as nothing explodes.
Sterling surprised many with another refusal to lie down last week despite a string of potentially damaging developments and data. However, as long as the opinion polls continue to indicate a hung parliament investors will continue to fear that even after a general election Britain’s government will be 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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