FED’S BERNANKE SEES “GREEN SHOOTS” OF RECOVERY
Quantitative easing is underway in Britain. Rising equity markets are weighing on the dollar. G20 gives the impression of useful agreement. Canadian job losses are keeping pace with the US.
Sterling made heavy weather of losing a cent and a half to the Canadian dollar. From $1.8050 the pound fell quite swiftly to $1.7550 before reversing just as promptly to $1.79. It spent the rest of the week bouncing between $1.77 and $1.80, opening in London this morning at $1.79.
Sterling was handicapped for most of the week by investors’ nervousness about the much-trumpeted “quantitative easing” that is supposed to restore liquidity to the retail end of the financial system. The Bank of England intends to buy £75 billion of gilts in the next three months with the first £2 billion tranche going out last Wednesday. That first “Asset Purchase Facility gilt purchase operation” received guarded approval from the media but investors were twitchy about how well the reverse auction would go and were still twitchy afterwards because only banks were seen to have taken part. Pension funds and other institutions either decided not to take the risk or simply did not want the money.
As to the effectiveness of the programme, the jury is still out and will not be coming in anytime soon. Sceptics believe falling deposit rates and rising loan rates prove that commercial banks are following an agenda different from that of the government and the Bank. An attendant fear is that the government could be tempted to monetise its debt, leaving the purchased gilts on the central bank’s books until maturity and thus, in all but the literal sense, printing money.
Economic data from the UK did not particularly help matters for sterling. The two key figures released last week showed an acceleration in the slowdown of industrial production and a widening of the trade deficit. Industrial production fell by 2.6% in January and it was 11.4% down over the 12 month period.
Canada’s economy also had little to say for itself, again with just two salient and unhelpful data sets; trade and employment. In tune with the trend in other developed economies, imports and exports both fell in January for a third successive month. That the $1 billion deficit was in line with forecasts did not make it any more palatable. The labour market report maintained the impression that Canada’s job situation is proportionally just as unpleasant as what is happening in the States. Job losses since October already amount to nearly 300k and there are undoubtedly more to come. Unemployment went up in February to 7.7%, the highest level for six years.
The G20 finance ministers’ meeting in Horsham was a qualified success. With that many participants it was never likely to deliver a huge breakthrough but it could have created mischief for the global economy if participants had been seen to squabble. Some cynics have dismissed the communique as a list of platitudes, including as it did a bit of self-congratulation, a bit of commitment and a bit of coordination. But perhaps the most heartening part was the frequent use of the word “we” and the absence of any allusion to disagreement among the 20. It does not guarantee the emergence of global financial harmony when the leaders meet next month in Beckton but it does at least provide a stable platform upon which they might be able to build.
The most hopeful message came – surprisingly – from US Federal Reserve Chairman Ben Bernanke. He told a CBS interviewer that “I do, I do see green shoots [of economic recovery]”. Those who remember Tory chancellor Norman Lamont using similar words prematurely in 1992 may raise an eyebrow but Mr Bernanke’s sentiment seemed honest. Let’s hope his optimism is not misplaced.
Sterling’s potential obstacle this week will be Wednesday’s employment data as it continues to respond to general nervousness about the economy and the banks. The pound might have turned another corner against the US dollar but has yet to prove itself against the Loonie. Buyers of the Canadian dollar should hedge their exposure, fixing a price for half of whatever they need and leaving the remainder uncovered in anticipation of better levels in the future. Those of an optimistic bent may consider under-hedging, always bearing in mind the pound’s propensity to head south at the drop of a hat. Use a stop order to protect the downside in case of unexpected alarms.
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