Inflation and retail sales numbers improved the appeal of sterling. The US data were predominantly downbeat.
Sterling added three and a half cents over the week, all of which came on Friday and in early trading in the Far East today. During the first half of the week sterling pottered around between $1.41 and $1.43. A Thursday rally to $1.4450 was followed by a return to base at $1.42. Only on Friday did sterling move and stay moved. It opened in London this morning at $1.4550.
Sterling has done well against most currencies. Less than helpful news stories were offset by economic data which, though far from marvellous, were sometimes better than investors had hoped. Two statistics deserve particular credit. Consumer prices fell by a less than expected 0.7% in January, taking CPI inflation down from 3.1% to 3.0%. The modest decline made investors less sure of further aggressive rate cuts by the Bank of England. Friday’s retail sales figures had a similar implication. Up by 0.7% in January sales receipts were a surprising 3.6% higher on the year. These “official” retail sales data have developed a reputation for being erratic. Even the Monetary Policy Committee is wary of attaching too much importance to what it sees as potentially misleading figures. Yet the market could not ignore what looked like a decent performance by shoppers.
On Wednesday morning a rumour did the rounds alleging that Britain would lose its triple-A credit rating. That may or may not be the case but the UK is a long way back in the queue behind Italy, Ireland, Austria and goodness knows who else.
The Confederation of British Industry moaned that sterling weakness has done little to improve the export performance of British companies. How ironic that it made the complaint on the very day the minutes of February’s Monetary Policy Committee meeting came out. According to the minutes; “it appeared that UK exporters had, on average, responded to the lower level of sterling by boosting margins, rather than by cutting foreign currency prices and gaining market share.”
The Federal Open Market Committee is the US equivalent of Britain’s MPC. Like the MPC it publishes the minutes of its meetings. Last week’s issue revealed that the FOMC has become even more pessimistic. It now reckons the US economy will shrink by between 0.5% and 1.3% this year. The week’s few ecostats offered nothing to detract from that view. Both the New York and the Philadelphia Fed reported further slippage in their manufacturing indices; NY from -22 to -35 and the Philly from -24 to -41. Housing starts were down again. In January this year there were 80% fewer than in January 2006. That same month US inflation hit zero for the first time in 53 years.
The American Recovery and Reinvestment Act continued to befuddle investors who cannot work out whether it ought to be good or bad for the US dollar. They were also taken aback by news that the president is going to whistle up another $275 billion of stimulus, this time to shore up the residential property market. Investors were left to guess where the money would be coming from. Even news that Washington will give Citibank more money was not useful to the dollar. Rescues like that tend to be counterproductive for the US currency because they improve investors’ appetite for risk.
Sterling/dollar continues to behave erratically. Although it has gone nowhere in the last three months its frequent ten-cent excursions make people nervous. Buyers of the dollar should hedge half of their requirement, leaving the remainder uncovered in anticipation of better levels in the future. Use a stop order to protect the downside in case of unexpected alarms.
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