Loonie suffers as US economy improves

IMROVING US ECONOMY HURTS CANADIAN DOLLAR

Nationwide reports a third successive monthly rise for house prices. Loonie gets caught in the crossfire through no fault of its own.

It was not the most exciting week ever for GBP/CAD. Having set off from $1.7850 it took four days to move more than a cent and a half away from that level. On Friday the Loonie was dragged down by the US dollar, allowing sterling to jump to $1.80 where it opened in London this morning.

After the sell-off at the end of the previous week the market’s first instinct was to buy the pound, although nobody was quite sure why. Hometrack’s housing survey was vaguely helpful, inasmuch as it showed prices not falling, but investors found it difficult to get excited because prices were not going up either. It was a similar story with the CBI’s retail sales report for July: At -15 the figure was better than the previous month’s -17 but did nothing to motivate buyers. Money supply data on Wednesday were another net “don’t care” for the market. The number of mortgage approvals went up, true enough, but as Reuters put it; “British financial institutions lent less money to households last month than at any time in the past 15 years.” Gfk’s index of UK consumer confidence survey produced another utterly useless figure when it remained unchanged at -25.

Investors at last woke up on Thursday morning when Nationwide’s house price index came out. For a third successive month the building society saw a rise in the average price, this time by an entirely respectable +1.3%. The annual decline eased from -9.3% to -6.2%. The firm’s chief economist offered an impressive hostage to fortune, saying “there is now a reasonable chance that prices could end the year slightly higher than where they started.”

Sterling’s performance over the week obviously had something to do with the UK economic data – few thought they were – but mainly it was the by-product of another quiet week during which the mood of investors became more upbeat. As one of the allegedly riskier currencies it is more likely to find buyers when the market is less nervous.

The Canadian dollar fell through the cracks between investors’ guarded enthusiasm for commodity currencies and their underlying mistrust of the greenback. Although initially it managed to sidestep any collateral damage, and to keep pace with sterling, it came to grief on Friday. Figures showed a much smaller than expected slowdown in the US economy between March and June. As is now usually the case, the US dollar suffered as a result of the news. An improving US economy is symptomatic of an improving global economy: as that happens, investors become less nervous and less inclined to seek the sanctuary of the US dollar and the yen. This time the Canadian dollar became caught in the crossfire, through no fault of its own.

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 bang in the middle of that range buyers of the Canadian dollar should protect themselves with a 50% hedge.

Courtesy of TTT Moneycorp

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