SWINGS AND ROUNDABOUTS
Weak data and unhelpful news held sterling back. Sterling and Canadian interest rates will probably fall further this week.
Another modestly winning week for sterling took it from $1.8050 to $1.82. During most of the week sterling traded below its starting point but Friday’s rally took it from $1.7750 to $1.81 and it built on its gains early this morning.
It was a scrappy week for the pound. The economic statistics were not bad enough to do serious damage but bad enough to get in the way. It was the same with non-data economic news; nothing totally nasty but nothing good either. The CBI’s distributive trades survey damned with faint praise: Having been expected to worsen from -47 to -52 it improved to -25, not exactly a miracle recovery. The first revision to fourth quarter Gross Domestic Product left the economic shrinkage unchanged at -1.5%, in line with the Euro zone’s as yet unrevised performance. However, sterling’s critics pointed to the downward revisions to earlier periods. News from Nationwide and Hometrack confirmed – as if it were necessary – that house prices are still falling.
As for the non-data news David Blanchflower, the MPC’s über-dove, said the UK economy was “in dire straits”. With investors in profit-taking mode at the time he provided support for any selling decision. Another argument for sending the pound lower came from the European Commission. In a document prepared in January officials expressed concern that the pound’s “very rapid” drop “raises questions about the financial stability of the British economy.” Kate Barker, Mr Blanchflower’s MPC colleague, wrote in the Northern Echo that “growth may not resume until towards the end of this year.” Her words of caution came as a disappointment to those who thought it would resume next Tuesday.
Last week’s Canadian ecostats comprised just two sets of figures; those for retail sales and the Industrial Product Price Index. The 0.1% fall in the IPPI was slower than in recent months, mainly because coal and oil prices had stabilised. The retail sales number was a different matter. The 5.4% monthly decline was the biggest in 18 years. New car sales fell by 15% and petrol sales were down by nearly 12% in value terms.
The coming week brings the Bank of Canada’s decision on interest rates and fourth quarter GDP. A rate cut of at least 25 basis points is anticipated. The GDP number is likely to show a contraction in the economy at the end of last year but one that is less severe than those already logged by the United States, Britain and the Euro zone.
The currency outlook remains unchanged from last week. Analysts are divided about the future of exchange rates and each camp has its own, equally valid, arguments. Sterling has gone nowhere in the last four months and its frequent ten-cent excursions make people nervous. Tomorrow’s BoC meeting [where they reduced overnight rate by one half a percent] and Thursday’s meeting of Britain’s Monetary Policy Committee makes them more nervous still. Buyers of the Canadian dollar should hedge half their requirement, leaving the remainder uncovered in anticipation of better levels in the future. Use a stop order to protect the downside in case of unexpected alarms.
This article is courtesy of Moneycorp : http://tinyurl.com/moneycorp
Moneycorp Foreign Exchange Services