GLOBAL NERVOUSNESS WEIGHS ON STERLING
The prospect of “quantitative easing” by the Bank of England turns off investors. House prices lose their impact. President Obama’s stimulus package leaves all markets unconvinced. Having little to say for itself the Canadian dollar tagged along with the US dollar
Sterling was the net loser on the week, falling from $1.82 to $1.7650. A brief initial rally above $1.83 quickly went into reverse and the week’s low was not far short of $1.75 on Friday.
Bizarrely, for the third week running, it was Barclays that opened the batting for sterling. Investors were enthusiastic about its announcement of better than expected profits, setting a positive tone for the pound. More good news came with the British Retail Consortium’s report that sales in January showed the biggest monthly improvement since May. It was the first increase of any sort since September.
House prices have taken a back seat in recent weeks. Investors are more concerned about the recession and the health – or otherwise – of the financial infrastructure than they are about further confirmation that the property market remains soggy. Neither the lowest turnover for 31 years, as revealed by the RICS, nor the 1.2% monthly rise in asking prices reported by Rightmove had any appreciable impact. Even Rightmove admitted the improvement was a function of “false optimism” among would-be sellers.
Most distressing for the pound was Bank of England Governor Mervyn King’s press conference after publication of the Bank’s Quarterly Inflation Report. Among other things he said we were in the midst of a “deep recession” that could see the economy shrinking at a 4% annual rate this summer. (The CBI sees the economy shrinking by 3.3% this year.) Investors were less concerned about the Bank’s recognition of the blindingly obvious state of the economy than they were about the proposed remedy: Quantitative easing or, as the media see it, “printing money”. The Monetary Policy Committee has not yet agreed on this course of action but the Governor gave every impression that it would do so before long.
The main driver for currency movements during the week was the progress of President Obama’s stimulus bill through Congress. The American Recovery and Reinvestment Act will spend $787,000,000,000 on everything from tax breaks to “weatherizing” (insulating) homes. Unfortunately, markets are not convinced that it will do anything other than blow more money away in return for unpredictable economic benefits. This uncertainty encouraged the hoarding of safe-haven currencies and a drift away from the riskier ones, including sterling.
The Canadian dollar attached itself to the US dollar’s coat tails and kept pace with the greenback through most of the week. It had little alternative. There were few economic data to give it a life of its own. Housing starts slowed in January (on a seasonally adjusted basis, not just because it was too cold). The trade balance moved into a very small deficit. New home prices fell for a third month, but only just. New motor vehicle sales fell by 15% in December; twice as quickly as in November.
In Rome at the weekend the G7 finance ministers’ meeting had little to say about exchange rates. Because it came up with no panacea for the world’s economic ills investors took it as carte blanche to fill their boots with yen and Swiss Francs and to sell the riskier currencies, including the pound.
Buyers of the Canadian dollar should hedge their exposure, buying forward around half the amount they will need.
Courtesy TTT Moneycorp