Quiet Relief for Sterling

In this week’s update by Moneycorp:

QUIET RELIEF FOR STERLING

Britain’s second quarter GDP revised higher. Bank of England has no plan to cut the discount rate. Job losses accelerate again in the States.

An up-down-up pattern kept the pound above its $1.5850 starting point for the entire week. It peaked on Wednesday at $1.6150 and had dropped all the way back by Friday lunchtime. It rallied from there to open in London this morning at $1.5950.

Except against a couple of the commodity and emerging market currencies the pound made modest gains last week. On all fronts it had a better run than the previous fortnight’s dire showing. Monday saw the market speculating on the purpose of Bank of England Governor Mervyn King’s recent visit to Stockholm. Had he gone there to see how the Swedish central bank was getting on with a negative interest rate on commercial banks’ reserves? On Tuesday the Bank reassured a meeting of economists that it has no current plan to do such a thing. The Bank also expressed dismay at the market’s “overreaction” to the governor’s comments the previous week when he said a weaker pound would be “helpful”. Quite what other interpretation they might have expected was left unsaid.

In fact we managed to get through the whole week without a sterling-negative comment from the Old Lady. That left sterling to trade on the hard economic evidence rather than being bounced around by gubernatorial comments. The final revision to second quarter gross domestic product left a -0.6% shrinkage in the economy, still not good but at least better than the -0.8% of the first estimate. The CBI’s distributive trades survey (the private sector’s retail sales figure) was also on the right side of expectations. Better than that, it was on the right side of zero; +3 after -16 a month earlier.

There was some nervousness at a report from the International Monetary Fund. The IMF fears that Britain’s widening budget imbalance could scupper the recovery. In the Daily Telegraph the headline read “Britain’s £215bn-a-year funding gap the worst in the world, says IMF”. The story gave sterling a bit of a headache for 36 hours but did no lasting damage. Balancing the equation was Nationwide’s house price index, which showed a +0.9% monthly rise that left the average house worth exactly the same as a year ago. Pathetically, in the current financial climate that was something to cheer about.

It was a different story in the States, where the Case-Shiller home price index (which only covers big cities) was -13.3% down on the year. But at least the US economy suffered less than Britain’s in the second quarter. The final revision to US GDP showed a shrinkage of just -0.2%.

As Friday approached, attention focused on the important US monthly employment report. In August 201,000 American jobs evaporated. Analysts predicted the September figure to show another 180,000 job losses. The figure that actually came out was -263,000. It was so much worse than expected that investors’ reacted by selling the dollar instead of buying it for the safety it offers.

With the Bank of England seemingly no longer on its case sterling should become less terrifying to investors. That is not to say it can expect a swift or dramatic recovery or that there will be no more shocks to tip it lower. Buyers of the dollar should hedge at least half their requirement with a forward purchase. Anyone with a short time horizon should cover their whole exposure.

For more information and expert guidance on the currency markets, call Moneycorp today on +44 (0)20 7589 3000, don’t forget to mention International Horizons to secure the best rates. Alternatively go to the Moneycorp Website where you can open a free, no obligation Trading Facility.

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