STERLING SCUPPERED BY FIRST QUARTER GDP
Downward revision to Q1 growth scares investors. Loonie struggles alongside other commodity currencies.
A good start to the week took sterling from $1.9050 almost to $1.93. The reversal came quickly and by Thursday the pound was down to $1.8750. A rally to $1.91 was followed by a fresh decline. When London opened this morning sterling was trading at $1.88.
The clear and obvious culprit for sterling’s decline last week was the final revision to first quarter Gross Domestic Product on Tuesday. After the modest upward revision to the US figure a week earlier investors had got it into their heads that the UK figure would receive the same positive treatment. The more optimistic among them had bought sterling in anticipation of a figure better than the -1.9% quarterly change that had been estimated previously. The realists were primed for disaster and began to sell sterling even before the announcement. When everyone saw that -1.9% had changed into -2.4% they threw up their hands in horror (even though these numbers relate to stuff that finished happening three months ago). Sterling came under immediate pressure.
The Purchasing Managers’ Index for Britain’s manufacturing sector on Wednesday was better than expected at 47. Friday’s services PMI was in the growth zone at 51.6. Compared to the US and Euro zone opposition they were good figures. Yet neither was enough to reverse the negative sentiment that had set in after the GDP numbers.
Where the pound could blame the first quarter GDP downgrade for its lack of performance the Canadian dollar had no single point of failure. Its initial decline and subsequent turnaround against the US dollar on Wednesday had no obvious connection with any bad news from Canada (or good news from elsewhere). As much as anything the Loonie’s performance was down investors’ changing appetite for safety or risk and their worsening perception of the global economy. April’s figure for Canadian GDP was exactly in line with forecasts. The industrial product price data were softer than expected but not by so much as to change expectations for Canadian interest rates. It was all down to mood, and the mood last week did not favour the commodity dollars.
Although still above its recent range of $1.75-$1.85 the pound is going nowhere fast. Having failed to push past $1.92, the pound clearly has no secret reserves of power. Buyers of the Canadian dollar should take advantage of an eight month high to build their position. Sterling could well be higher in the future but when?
Post courtesy of TTT Moneycorp