Sterling unnerved by unemployment data. IMF predicts longer recession for Britain. Bank of Canada may decide to employ quantitative easing.
An erratic five days took sterling from $1.79 to $1.76 and back, visiting all points in between.
Although there was no particular shortage of data from the UK economy investors paid only selective attention to the numbers. They were far more interested in the anecdotal evidence, both from Britain and abroad. Perhaps the most irrelevant statistic of the week was Rightmove’s house price index. While the Nationwide and the Halifax report annual price falls of 18% or more Rightmove sees just a 9% decline. Unlike the first two indices, which are based on actual transactions, Rightmove measures the prices at which vendors would like to sell their properties. If they could.
The one set of figures that did hurt sterling was the unemployment numbers on Wednesday. Another 138,00 ex-taxpayers signed on the dole in February, taking the rate of unemployment past the two million mark. Having been primed by analysts and the media to expect it, investors could probably have lived with the 2 million unemployed. What they could not handle was the sharpest monthly leap in claimants since 1971.
Investors were more relaxed about the latest predictions from the International Monetary Fund. The IMF believes Britain’s will be the only western economy still in recession by the end of next year. News like that has brought the pound to its knees in the past. This time, everyone was far more concerned about the unemployment situation and about how the number could have risen from two to three million by the end of the year.
As was the case with sterling, the market not overly concerned about the Canadian data. Sentiment was by far the biggest influence on the Loonie. The Federal Reserve’s decision on Wednesday to take a further step down the road to quantitative easing made the Greenback the world’s whipping boy and allowed the Canadian dollar to add three US cents in a matter of hours. That rally coincided with a similar performance by sterling, allowing sterling/Canada to end the week unchanged.
That sentiment is now having to contend with the possibility that Canada will join Japan, Britain and the States with a programme of quantitative easing. The US approach started with non-government debt, only moving on to Treasury Bonds last week. The Canadian strategy, assuming it happens, is more likely to go straight to government bond buy-backs, as happened in London earlier this month.
Investors have become twitchy about quantitative easing, fearing that it really will amount to printing money in the medium term. As sterling and the US dollar have discovered to their cost, the market is not a big fan of QE, at least as far it relates to the currencies concerned. If the Bank of Canada follows the same path the Loonie can reasonably be expected to take its share of the pain. 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.
Post courtesy of TTT Moneycorp