Pound up, but not going anywhere


UK industrial production disappoints investors. IMF upgrades economic forecast for Britain but not by much. Canadian employment report better than expected.

With the Canadian dollar unchanged against the US dollar over the week sterling’s performance was underwhelming. It lost half a cent, touching a $1.8650 low and a $1.90 high along the way. When London opened this morning it was trading at $1.8750.

Sterling was looking reasonably comfortable until Tuesday morning when the industrial and manufacturing production data for May were announced. It was a similar story to what happened with the first quarter GDP numbers a week earlier. Investors became too optimistic about what the figures would show. For the second time running an important economic measure – industrial production this time – was a disappointment. The market had been looking for a second small improvement, something like 0.2%. What it got was a -0.6% fall.

The Halifax provided another reminder of recession with a -0.5% fall for its house price index in June. Even though the annual decline slowed from -16.3% to -15.0% it was not helpful to sterling.

Not that the week was entirely without good news. For long enough the IMF took a gloomy line on the UK economy. Its previous estimate, in April, was of a -0.4% GDP contraction next year. On Wednesday it revised its forecast to +0.2%. The upgrade is hardly reason for rejoicing but it does represent a positive shift from downbeat to feeble. Britain’s trade deficit was another positive surprise when it narrowed in May to its smallest in three years. More help came from the Bank of England after Thursday’s Monetary Policy Meeting. The bank announced it would not extend the Asset Purchase Facility which, to date, has spent £100 million on buying bonds. It might be a different story after next month’s meeting but, for the time being, investors are pleased to see a pause in the potentially inflationary programme.

Of all the Purchasing Managers’ Indices recently the Canadian Ivey PMI has been one of the strongest. That trend came into sharp focus on Tuesday when it leapt nearly ten points to 58.2, well into the growth zone that begins at 50. Supporting the strong PMI number was the residential property sector. Housing starts were up by 8% in June, building on the 14.8% May rise in building permits (planning permissions granted).

Friday’s employment report was similarly helpful. Instead of the 40,000 net job losses that analysts had been predicting there were only 7,400. That meant the overall unemployment rate was also better than expected at 8.6%. The only bad news came from a record $1.4 billion trade deficit and a 30.3% rise in the number of bankruptcies registered in May.

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. Now that sterling is off its highs buyers of the Canadian dollar should protect themselves with a 50% hedge.

Post courtesy of TTT Moneycorp

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