GDP Data Scupper Sterling

In this week’s Moneycorp Dollar update:

The UK economy shrank in the third quarter of 2009, seriously disappointing investors. Sellers of the US dollar lost interest when it reached $1.50 against the euro.

Sterling spent four days rising by three and a half cents from $1.63 to $1.6650 and rather less than four hours falling all the way back. It opened in London this morning unchanged on the week at £1.63.

Sterling had a potential mountain to climb almost every day last week. Public sector net borrowing would show just how deep in the mire were government finances. The Monetary Policy Committee (MPC) minutes may point to more “money printing” by the Bank of England. Retail sales data for September would show whether to not the consumer was back in business and Friday’s figures for third quarter gross domestic product (GDP) would hopefully show the British economy was out of recession.

The first three of those obstacles were handled without drama. Monthly government borrowing was slightly less than forecast; box ticked. The MPC minutes said nothing that Bank officials had not already said in the previous couple of days; box ticked. Retail sales did not rise by as much as expected, in fact they did not rise at all, but they did not go down; box ticked.

The unhappy denouement came on Friday, with a consensus among analysts that GDP would have grown by +0.2% in the third quarter of 2009. Most of them got it dreadfully wrong. Instead of the small but still positive increase they expected, investors were asked to swallow a -0.4% decline. Not surprisingly, they choked. A lot of psychological stock had been invested in the GDP number and most of it had to be written off.

Just as psychology was driving sterling, so it had a hand in the dollar’s movements, if only because there was little else in the way of news or data to push it. Its biggest help came in from the euro’s failure to continue its rally beyond $1.50. That level is psychologically and technically important and investors hesitated to sell dollars with the euro any higher.

The week’s crop of US economic data was much less fruitful than Britain’s so investors did not have much to get their teeth into. Even things like factory gate prices – normally dissected as a pointer to inflation – failed to raise a ripple. Most of the figures relating to residential property were disappointing; home-builders’ confidence was lower and the numbers for building permits and housing starts both fell in September. The offsetting factor was a surprisingly strong figure for existing (second-hand) home sales which rose by +9.4% on the month.

At first glance that negative GDP number appears to have undone all the good work that sterling had put in during the previous ten days. On the other hand there are signs that sterling’s weakness might have run its course. A growing number of commentators believe it is wrong to think that things can only get worse. Accountancy firm KPMG reckons confidence among UK executives is as an 18-month high. Goldman Sachs is sticking to the “buy” recommendation it made a month ago. There is even talk that the budget deficit might be smaller than we thought, although it will be difficult to know for several months.

The events of last week were a salutary reminder that sterling can go up-and-down, as well as down-and-up. With that uncertainty in mind there is no reason to adjust the hedging strategy. Buyers of the dollar should hedge half their requirement with a forward purchase. Those with a short time horizon who do not want to cover their whole exposure should at least protect themselves with a stop order.

For more information and expert guidance on the currency markets, call Moneycorp today on +44 (0)20 7589 3000, do not 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.

Foreign Exchange since 1979.

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