ECONOMIC DATA LINE UP AGAINST THE POUND
Sterling the loser on every front. RBS loss makes investors worry about other banks. Q4 GDP contraction confirms a UK recession. Canadian retail sales fall in November. The BoC cuts is benchmark interest rate to 1%.
Sterling had good reason to look uneasy when it opened in London last Monday at $1.83: it turned out to be the high of the week. By Wednesday evening the pound was down to $1.74 and it continued south. The low point came early this morning at $1.67 and sterling was trading half a cent above that level when London opened.
The pound could not put a foot right. There were several major ecostat obstacles for it to negotiate and it tripped over every one of them. The week got off to a bad start with the announcement from RBS that it had mislaid £28 billion last year, along with 97 per cent of shareholder value. Investors were entitled to wonder if its performance was symptomatic of some wider British financial malaise.
Consumer prices fell for the third consecutive month, taking CPI inflation down to 3.1 per cent. 80,000 people signed up for unemployment benefit in December and countless thousands more lost their jobs but were ineligible to claim. The CBI’s industrial trends survey, which measures manufacturers’ order books, fell sharply. In December it had scored -35 and analysts were looking for -39 in January. What they got was -48, the weakest figure since 1992. Firms were more pessimistic about the future as well. Expectations were down from -42 to -43, a 27 year low. The coup de grace came on Friday, with the long-awaited news that Britain’s economy was truly, madly, deeply in recession.
In common with every other country, Canadian economic data tended towards the negative. Retail sales were down by 2.4% in November, the pain being shared equally by automobile retailers.
As generally expected, the Bank of Canada lowered its benchmark interest rate by 50 basis points to 1.0%. Because the move had been widely anticipated it had little effect on the dollar. The Loonie did strengthen appreciably on Friday despite a fall in the inflation rate that was larger than forecast. There was no obvious reason for the jump. Some analysts ascribed it to market expectation of an even bigger fall, others said it was because Canada’s fiscal situation was better than that of the States or Europe.
After a week of severe punishment, the pound can look forward to a bit of respite. It has many fewer economic data to contend with and with the recession box now ticked the bulk of the bad news should have been incorporated into the exchange rate. That is not to say a spectacular recovery is on the cards but it should mean a period of consolidation, even possibly an upward drift. Buyers of the Canadian dollar should hedge their exposure, buying forward around half the amount they will need.