The pound was an all round winner as the bears ran out of bad news. A probable Rate cut will weigh on sterling at least until Thursday. Canada’s economy shrank by 0.7% in November.
Sterling started off last Monday at $1.6750 close to a very long term low. It reached $1.75 on Wednesday morning and was up to $1.79 by the end of Friday. When London opened this morning it was off its peaks at $1.7550, eight cents and almost five per cent up on the week.
If only for one week, Sterling was the undisputed champion of the world. Over the seven days it gained 5% against the US dollar, 5.5% against the Swiss franc and 6% against the euro and the yen. Its performance against the antipodean dollars was even more striking, adding 8.5% against the Aussie and 9.5% against the Kiwi.
The two reasons for its success were a reaction to the trashing it had suffered earlier and a growing realisation that Britain’s is not the only economy in the firing line. UK economic data were few and far between, thus not providing too many opportunity targets for the bears. Of the figures that did come out some were even relatively benign for a change. The week got off to a good start for “risky” currencies with harmless data on all sides – not just the UK – setting a tone for greater risk appetite that would carry through most of the week.
For the rest of the week UK ecostats managed to dodge the bullets. The CBI’s retail survey was not as bad as feared. Nationwide’s house price index was in line with figures already seen elsewhere. Most of Friday’s money supply figures were positive, including a 15% increase in December’s mortgage approvals.
The Canadian dollar did not have many bullets to dodge. Apart from November’s monthly measure of GDP the only figures related to Industrial Product Prices (producer prices) and raw materials prices. Both fell, in line with similar price falls elsewhere, as a result mainly of cheaper energy and commodities.
With Friday’s GDP reading it was the same story. The United States’ economy shrank by 3.8% in the last three months of 2008. It was therefore no surprise that Canada’s economy contracted by 0.7% in one of those three months. The two countries are, after all, joined by the longest border in the world.
The last week of impressive gains will be a tough act for sterling to follow. A bounce in reaction to a long run of losses is not the same thing as a sustained rally. Moreover, the pound’s supporters will have to face their monthly test of nerve on Thursday with the Monetary Policy Committee’s decision on interest rates. The current guess is that a 50 basis point cut will take base rates down to 1%. Expectation of a cut this week already has investors looking ahead to the next moves. There is concern that sterling rates could follow Swiss, Japanese and US rates to I-can’t-believe-it’s-not-zero.
With most of the bad news already incorporated into its exchange rate the pound should not come under undue pressure but that does not mean it can replicate last week’s performance. Buyers of the Canadian dollar should hedge their exposure, buying forward around half the amount they will need.