STERLING DRIVEN BY RISING INVESTOR CONFIDENCE
UK data were of little consequence to sterling. An IMF review of the British economy was less than complimentary. Canadian business optimism jumps sharply.
On most fronts (US Dollar, Japanese yen, euro) the pound did well but it lost ground to the “risky” commodity dollars – including the Loonie – and emerging market currencies. It never traded only above last Monday’s $1.8750 starting point and spent the rest of the week going downhill. It ended Friday at $1.82 and was still down there when London opened this morning.
Sterling’s survival had little to do with the UK economy and everything to do with outside influences. Underlying the whole FX market was a positive attitude to risk driven by renewed optimism among investors. There was, at least at the beginning of last week, no particular reason for their newly upbeat view but nobody was bothered by that minor detail. Equities were bid, as were the commodity dollars. Sterling was able to bob along in their wake without too much interference.
Economic data from the British economy were relatively scarce and such as did appear had only a modest effect on the currency. Inflation figures on Tuesday were exactly in line with expectations. A curious feature was the almost diametrically opposite outcomes for the harmonised European-style Consumer Price Index and the old Retail Price Index. CPI went up by +1.8% in the year to June and RPI was down by -1.7%. After Wednesday’s employment numbers, which showed a smaller than expected rise in jobless claims, there were no further official statistics.
Trouble appeared on Thursday with a review of Britain’s economy by the International Monetary Fund. The report highlighted the “significant uncertainties [which] remain about the adverse impact of the recession on banks’ asset quality” and again raised the possibility of a double-dip recession. Ajai Chopra, the IMF’s chief of mission to the UK, told journalists that “the UK has been getting the benefit of the doubt, both in the Government bond market and also the foreign exchange market.” “This benefit of the doubt is not going to last forever and it’s going to be important that the Government does not test the limit of the market’s confidence.” Investors took him at his word and stopped giving it the benefit of the doubt.
Just as investors’ sentiment overrode hard economic data for the pound, so it did for the Canadian dollar, as it did for its Australian and New Zealand counterparts. Increased investor confidence means an increased appetite for currencies that might benefit from a resurgence in global trade. In almost every case the appetite for “risky” currencies and the antipathy towards “safe-haven” US dollars and yen overrode any influence from the domestic economic data. One of the few exceptions came on Monday when the Loonie jumped nearly a cent against the US dollar after the Bank of Canada’s business outlook survey showed firms to be much more optimistic. The sales outlook index jumped a massive sixty points in the second quarter from -22 to +38, a ten year high.
The week ahead brings several potential challenges for sterling. Public sector borrowing, the minutes of July’s Monetary Policy Committee meeting, June retail sales and the first estimate of second quarter GDP could all provide rods for sterling’s back. Even if the first three prove harmless it will not be until Friday that the GDP figure either kills or cures.
Back into 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