STERLING LOWER AFTER BUDGET
Higher borrowing and higher taxes weigh on sterling. Investors nervous about Britain’s AAA credit rating. Unexpected rate cut from Bank of Canada.
For most of the week the pound preformed reasonably well against the Loonie. From $1.7850 it had managed to reach $1.8250 by Tuesday lunchtime. It fell to $1.79 on Wednesday, consolidated around there on Thursday and went down again on Friday. By the time London opened this morning it was plumbing the week’s low at $1.77.
There were two or three non-stories for sterling. Although the retail price index went negative, as expected, the consumer price index – the one the Bank of England follows, showed inflation still close to the top of its band at 2.9%. Unemployment continued its depressing upward trek with another 74,000 jobs lost in March that took the unemployment rate to 6.7%. Retail sales for that month were higher than in February, making for a 1.5% improvement over the 12 month period. None of these developments had much impact on the pound because there were bigger fish to fry.
The biggest of the lot was Wednesday’s budget speech. Investors – especially those based in London, and there are lots of them – focused on two aspects of the chancellor’s speech: the massive levels of government borrowing that they will be expected to fund and the 61% total tax that the more successful among them will have to pay on the top slice of their earnings. Investors found neither aspect particularly appealing and they reacted in time-honoured fashion by selling sterling.
The other big story was a bit of a fake, really, but it still led to the pound taking another hit on Friday. The Daily Telegraph cobbled together a piece about credit ratings agencies’ attitude to the UK economy post-budget. Even though the agencies – Moody’s and Standard & Poor’s – made particularly non-committal comments The Telegraph still managed to open its article with the headline “Borrowing puts UK’s AAA rating in danger”. The market swallowed the story hook, line and sinker, giving sterling its second kicking of the week.
Most of the week’s few Canadian data went through – as they tend to do – on the nod. Wholesale sales were down by a modest 0.6% in February. Retail sales rose by an even more modest 0.2%. The unexpected highlight of the Loonie’s week came on Tuesday with an unexpected announcement from the Bank of Canada that it was halving its target for the overnight rate – the Canadian Bank Rate – to 0.25%. The Bank said in its press release that “conditional on the inflation outlook, [it] commits to hold [the] current policy rate until the end of the second quarter of 2010.” Given that any further reduction would be of minimal effect that commitment looks entirely plausible.
A week ago it was clear that the pound faced specific risks, with the budget top of the list. Event risk this week is less evident and there is no obvious reason to look for sterling to escape the last seven days’ range. It is probably too much to hope for a recovery but after the stick it has taken recently sterling should at least be able to consolidate at these levels. Buyers of the Canadian dollar can therefore revert to the tried and tested strategy of hedging half their exposure. Those requiring absolute price certainty should, as usual, cover the whole amount.
Courtesy of TTT Moneycorp
