In this week’s Moneycorp update:
The upward revision to UK third quarter GDP was smaller than many investors had hoped. Dubai World’s default was worrying for UK banks and businesses.
Sterling made a disproportionately big fuss about losing a net half cent on the week. On Wednesday it was above $1.6750 and early on Friday morning it was below $1.63. When London opened this morning it was back up to $1.6550.
It was not vintage week for economic statistics. In sterling’s case there was really only one that counted; the first revision to third quarter gross domestic product; GDP. Whilst it has become fashionable to argue that there are better ways of counting economic success, GDP measures the market value of all goods and services produced within a particular country and is still the one to which most economists turn when they want to quantify overall performance. Investors had been expecting the Office of National Statistics to make an upward revision to their first estimate of a -0.4% shrinkage to GDP during the third quarter of the year. They duly got their positive revision but were disappointed that it only went as far as -0.3%.
Another negative factor for sterling was Bank of England Governor Mervyn King’s testimony to parliament’s Treasury Committee. He went there to talk about inflation but got sidetracked. The committee extracted from Dr King the admission that he had to inject a previously undisclosed £62 billion of liquidity into RBS and HBOS last autumn. The market could fully understand his need for secrecy at the time; goodness knows what the reaction would have been if it had become common knowledge that two of the country’s biggest banks were practically bust. Even so, a revelation like that was bound to raise question marks about what other skeletons might be lurking in the Bank’s closet.
Thursday’s ham-fisted announcement from Dubai was another minus for the pound, at least initially. Government-sponsored Dubai World took advantage – or so it thought at the time – of a four-day Eid holiday in the Arab world to tell its creditors that they would not be receiving any repayments for six months. In the great scheme of things, Dubai World’s default is only a fraction of the size of Lehman Brothers but it was an unwelcome reminder that there could be yet more dominoes to fall in this global downturn. Britain’s banks and businesses, with their historic ties to the Gulf, could have more grief in store.
The Thanksgiving holiday on Thursday effectively meant a three-day week for the States. There were rather more ecostats on offer in the US than in Britain but investors paid them scarcely more attention. Where UK third quarter GDP received an upward revision the US figure went the other way, down from an annualised +3.5% to +2.8%. Translating that into the way the UK data are stated it means the difference between +0.9% and 0.7% on the quarter.
The revision stoked the enthusiasm of dollar bears, who decided to test the resistance of euro/dollar at recent highs. They pushed through the €1=$1.50 barrier and might have taken the dollar even lower had it not been for the Dubai World default, which turned their whole argument on its head. Tantamount to a sovereign default – for Dubai World is owned by the ruling family in Dubai – the news instantly revived the bunker mentality among investors. On Thursday they sold equities and commodity currencies, at the same time filling their boots with ‘safe’ US dollars and Japanese yen. The panic abated on Friday, as the market rationalised the relatively minor scale of the problem, allowing the pound to recover some of its knee-jerk losses.
Between $1.60 and $1.70 it is hard to pick a direction for sterling, other than to speculate that both edges of that range are fair game. This coming Wednesday’s revised figures for third quarter growth could push it either way. 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.
Foreign Exchange since 1979