In this week’s Moneycorp update:
UK industrial production falls sharply in August. Sterling interest rates unchanged for another month. “Secret” plan to shift oil-pricing away from the dollar. Fed chairman looks ahead to higher US rates.
It took sterling all week to lose the cent between its starting point at $1.5950 and Friday evening’s $1.5850. It took it only a couple of hours in the Far East morning to lose another. By the time London opened sterling was trading at $1.5750.
Some aspects of last week’s UK economic data were half-decent. Monday’s services sector purchasing managers’ index (PMI) was the best of the international bunch, improving by more than a point to 55.3 in September. The Halifax house price index went up by 1.6% in the same month. Nationwide’s consumer confidence measure jumped six points to 71, its highest level in 15 months. Britain’s balance of trade registered its narrowest deficit in three years.
But when the figures were bad they were horrid. Economists had forecast that industrial production would show a +0.2% increase in August, small but enough to reassure everyone that the recovery was under way. The number that actually came out was -2.5%, the worst figure since January and more negative than anything seen from any major economy in the last six months. It coloured the market’s judgment for the rest of the week, weighing on sterling.
The Bank of England’s Monetary Policy Committee did what sterling required of it on Thursday, leaving the Bank Rate at 0.5% and saying nothing about any extension to its programme of quantitative easing – “printing money”. The outcome was more of a relief than a surprise and it helped sterling only briefly.
The dollar found itself under pressure after The Independent reported a “secret” agreement between “Gulf Arabs, China, Russia, Japan and France… to end dollar dealings for oil, moving instead to a basket of currencies.” Included in that basket would be the Japanese yen and Chinese yuan, the euro, gold and the single Gulf Co-operation Council currency planned for the new year. The story had a ring of truth about it and it will inevitably resurface in due course.
It was news and comments that had more effect than economic data on the dollar. The American services sector PMI moved up to the growth zone at 50.9. Weekly jobless claims were slightly better than expected and the trade deficit narrowed unexpectedly in August. But investors were more interested in what Federal Reserve Chairman Ben Bernanke had to say. He used a couple of speaking engagements to paint a guardedly upbeat picture of monetary policy. On Friday Mr Bernanke said the Fed would raise interest rates once the US economy “has improved sufficiently” and “to prevent the emergence of an inflation problem down the road”. He warned investors not to hold their breath because “accommodative policies will likely be warranted for an extended period” but his gently positive outlook gave the dollar a boost.
With the Bank of England no longer on its case sterling should have become less terrifying to investors but last week’s dire industrial production figures have reignited the old economic fears. There will be no swift or dramatic recovery and there could be 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.
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