In this week’s Dollar update by Moneycorp:
UPS AND DOWNS BALANCE OUT
Poor trade figures and positive UK house prices have equally little effect on the pound. US consumer confidence remains softer than analysts have been expecting.
A roughly three-cent range took sterling occasionally above its September highs but the early August peak remained out of its reach. It opened in London this morning at $1.67, about half a cent lower on the week but comfortably above Thursday’s $1.65 low.
There were not too many UK economic data and events to worry the pound last week but almost every one of them engendered some sort of reaction – mostly negative. It is a tribute to sterling’s growing resilience that on every occasion the loses were temporary.
The pound’s toughest hurdle was Tuesday’s trade figures. September’s trade deficit was substantially worse than investors had been led to expect. Instead of remaining steady at just over £6 billion the trade gap widened to more than £7 billion. The announcement coincided with unhelpful news about Britain’s credit rating. Ratings agency Fitch said the government’s reluctance to cut public spending could mean a downgrade of Britain’s sovereign debt, making it harder to sell.
Thursday’s unemployment figures could have been worse. The unemployment rate actually fell to 7.8% in September from what had originally showed as 7.9% in August. Instead of the expected 20,000 job losses in September “only” 13,000 extra people found themselves on the dole. The Bank of England’s Quarterly Inflation Report was a little strange, if not for its content then for the way it was spun by Governor Mervyn King. The detail of the report suggested that the Bank’s economists are optimistic about an economic rebound next year. The tone of the governor’s speech was gloomy. Nobody is sure whether he was deliberately trying to manage expectations (and the pound?) downward or if he was simply suffering from swine flu.
One almost consistently bright topic was house prices. In the last eight days the RICS, the government and property website Rightmove have all – one way or another – reported positive news about UK residential property. For the RICS it was another improvement in its price balance, this time to its highest level in three years. At Rightmove, where they measure asking prices rather than actual transaction prices, a -1.6% monthly fall still left the index +1.6% higher than a year earlier.
Where the pound managed to recover from everything that was thrown at it the dollar managed to avoid incoming missiles almost entirely. Its position against the euro this morning was unchanged from a week ago. Other than Thursday’s weekly jobless figures the only data of any importance were Friday’s balance of trade and the University of Michigan’s index of consumer confidence. US trade figures do not carry the weight they once did, mainly because dollar weakness has roughly halved the deficit in the last two years. Even so, at -$36.5 billion the September shortfall was more than $4 billion worse than expected and 20% wider than the previous month.
The University of Michigan’s consumer sentiment index, an hour and a half later, was perhaps more predictable but no less of a disappointment. After September’s 70.6 the October reading was forecast to improve to a provisional 71.2. Instead it dropped by three and a half points to 66.6. In the last few months both of the major US confidence indices (Michigan uni and the Confidence Board) have made a habit of falling short. Analysts (and the market) seem to think that if the economy is growing, consumers must be feeling better about spending their money. But evidently they are not. They are worried about their jobs.
Neither the pound nor the dollar has any clear sense of purpose. There is movement but the ups and the downs are roughly in balance. For several weeks now the conservative strategy has been to maintain a neutral stance on currency exposures. There is as yet no reason to modify this stance. 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 protect themselves with a stop order.
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