SECOND QUARTER GDP HOBBLES STERLING
Investors are still nervous about sterling after Britain’s economy shrank by more than expected in the second quarter of the year. Canadian interest rates remain steady for another month.
Sterling continued last week’s downward trek at roughly the same pace. With minor variations it headed southeast from $1.82 on Monday to $1.7750 on Friday. A bounce this morning took it to $1.7850 in time for London’s opening.
The FX market was not alone in feeling the stultifying effects of the summer slowdown. Price movements were either dampened by lack of interest or intensified by lack of liquidity. Sterling did not have a particularly easy run. The week began with news that Treasury revenues fell by more than £30 billion in the last tax year. Expenditure had clearly gone up so investors were left to fret about what the government was going to do about the mismatch.
Wednesday’s Monetary Policy Committee’s minutes failed to provide sterling bears with any ammunition. There was no hint that the Bank of England would extend its Asset Purchase scheme – “printing money” as some would have it – beyond the £150 billion already earmarked. Even the last £25 billion of that is not yet committed to the programme.
That revelation was good for sterling, as was the following day’s retail sales figure for June. Sales were up by 1.2% on the month and 3% higher than a year earlier. It was a different story on Friday, however. Every three months the Office of National Statistics correlates all the available information to see how the British economy as a whole has performed. For the first three months of the year investors already knew that Gross Domestic Product shrank by -2.4%. They were expecting the first estimate of second quarter GDP (it will be revised a couple of times before the final figure) to show a much smaller -0.3% contraction. What they got was a -0.8% shrinkage, more than twice the forecast decline. Not surprisingly, sterling took a hit.
Canada was more forthcoming than some others with its supply of data last week but the Loonie’s main driver was the market’s growing appetite for “risk”. The Canadian, New Zealand and Australian dollars all outperformed the pound as investors broadened their net. On the data front Canadian retail sales did better than wholesale sales, rising by 1.2% in the year to may while wholesale sales drifted -0.3% lower. The Bank of Canada did exactly as expected at its monthly meeting, leaving the policy interest rate steady at o,25%.
Still in 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. The $1.75 support level could well be the next port of call. With sterling well off its highs buyers of the Canadian dollar should protect themselves with a 50% hedge.
Post courtesy of TTT Moneycorp