UK Growth Alert

                                         Actual        Expected       Previous

GDP quarterly (Q1)       0.3%            0.3%           0.2%
GDP annual (Q1)             -0.2%          -0.2%         -3.1%

It always takes a while for the Office for National Statistics to piece together its picture of overall economic performance. That is why it undertakes the cumbersome assessment of Gross Domestic Product (GDP) only every quarter, not every month. Evidence of the task’s complexity was clear when the ONS had to postpone the release of the data because it could not reconcile the numbers.

Today’s figures eventually showed what investors had been expecting all along; the UK economy grew by 0.3% in the first three months of the year. But they also contained a surprise. Earlier estimates for the peak-to-trough decline in GDP had put the figure at -6.2%. Today’s revision updated that figure to -6.4%. There was also confirmation that, in volume terms, the 4.9% fall in calendar 2009 was a record annual drop.

Whilst this data represents just about the most backward-looking statistics in the book (in that they relate to a period that ended more than three months ago) they are the most up-to-date and accurate measure of overall economic performance that is available. Investors therefore set great store by them. They also tend to be optimistic that successive revisions will show an improving picture. In that respect, today’s numbers were a disappointment, prompting a knee-jerk sell-off for the pound.

Very quickly, however, reality kicked in and the pound set off higher. Other than that figure relating to the 2008-09 recession overall, the numbers were no worse than analysts had predicted and were better than the equivalent statistics for the euro zone (subject to revision). From here on in, the questions will centre on the impact of Chancellor Osborne’s austerity budget. Will it, as some fear, derail what is clearly a fragile recovery?

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Regards,

Bill Cowie
www.BritishHomesGroup.com

April 15, 2010

From our colleagues at Moneycorps:
 
“The Pound benefitted from strong data released last week, including better growth estimates, rising house prices, and strong manufacturing statistics. Recent Sterling volatility concerning a possible hung UK Parliament was somewhat alleviated with the announcement of Britain’s general election, to be held on the 6th of May.
 
Uncertainty over these elections will still likely bring volatility as government agencies lean toward either the Tory or the Labor Party views for addressing Britain’s budget crisis. The result of this debate, basically whether to continue or to halt government spending post-election, will determine the success of the economic recovery. Although Sterling has indeed broken the trading range seen over recent weeks, looming fears leading up to the election should keep pressure on the currency.
 
Yesterday’s better-than-expected trade balance figures out of the UK, a £6.3 billion February deficit against the forecasted £7.3 billion deficit, was a vast improvement to the £8 billion deficit reported the previous month. With the lowest UK deficit reported since August, Sterling moved above the 1.54 GBP/USD technical barrier.
 
With the most US jobs created in three years in the month of March, it is natural that consumers are becoming more comfortable spending. Yesterday’s announcement of a widened trade deficit in the United States revealed economic growth, with a push from Americans purchasing more foreign-made goods, the highest demand since 2008. Watch for US unemployment & housing data being released this week.”
 
Recent Trading Range: $1.48 – $1.55

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This month’s Pound/Dollar update from our colleagues at Moneycorps:

How low can Sterling go?
 
February proved to be another uncomfortable month for Sterling as the US Dollar pushed the Pound below the key market level of $1.50. Both UK and US GDP figures for the 4th quarter of 2009 were revised up, 0.3% and 5.9% respectively – a clear indication of the rate of recovery in the US and the bumpy road ahead for the UK.
 
And so the Dollar remains in a strong position with traders buying on strong US fundamentals and buying even more aggressively as a safe haven play. Traders, frightened by continued concerns over Greek national debt, the possibility of the Spanish government following suit, and renewed concerns over Dubai World once again asking to delay its debt repayments, are moving into long Dollar positions. 
 
As the deadline fast approaches for Prime Minister Gordon Brown to call a general Election in the UK, opinion polls have taken center stage in setting traders’ sentiment about the Pound. Brown’s labor party closed the gap on the conservatives to just six points, suggesting the possibility of a hung parliament. With neither party having a clear majority, this would render the Prime Minster unable to effectively tackle Britain’s very serious deficits. The time between now and the election will be dangerous for the Pound, with only more downward pressure expected.
 
Recent Trading Range: $1.48 – $1.58

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Sterling slides into 2010.

The Pound declined throughout December, trading from a high of 1.66 and finishing the month just above 1.60. Whereas the Pound spent most of the year benefiting from risk appetite in the market, the Dollar ended the year stronger as traders became bullish on the US economy.

Why? With the US out of recession and non farm payroll figures showing a huge decline in the rate of US job losses, it would seem more likely that the Fed would consider an interest rate hike sooner rather than later.

The US economy showed strong manufacturing and retail indices, positive consumer confidence and better than expected existing home sales.

Well that was 2009… 2010 could yet see Dollar weakness again as doubts surfaced in early January with the latest nonfarm payroll figures showing 85,000 job losses in the US, when some analysts had even forecast job creation.

As the Prime Minister came under pressure so did the Pound. Although Gordon Brown fought off a small revolt in his ranks, Sterling bulls will still want to see a decisive victory in the UK’s general election to be held before June this year. Even just the possibility of a hung parliament could send the Pound lower as neither party would have a majority to push through the legislation needed to combat the UK’s ailing recovery.

January 26th will prove crucial to Sterling. Preliminary GDP figures will show if the UK did indeed come out of recession in the fourth quarter of 2009. If so, we could see a Sterling rally; if not, traders are certain to sell the Pound, sending it much lower than current levels.

EUR/USD

Having traded as high as 1.51 at the beginning of December, the Euro declined toward the end of 2009, finding support at 1.42. Credit downgrades for Greece and the budget deficits of Ireland, Spain and Italy caused continued sell offs.

The Euro zone has offered some very unimpressive data compared to the United States. The Euro, however, has returned to trade above 1.44 after the US’s poor non farm payroll figures.

For more information contact info@britishhomesgroup.com or Telephone (407) 396-9914

Renewed nervousness about financial institutions sparks another flight to safety. Failed gilt auction trips sterling. UK inflation refuses to die.

Having failed twice in the previous couple of days sterling eventually managed to break above $1.46 on Tuesday. It made it as far at $1.4750 before heading lower again. By the end of Friday it was down to $1.43 and it lost further ground this morning. When London opened it was trading at $1.4150.

Much as they had done during the previous couple of weeks, investors paid far more attention to politico-economic events and developments than they did to the boring old economic data – even when they were not so boring. There was one exception on Tuesday with the UK inflation numbers. Analysts and the media had confidently predicted that Retail Price Index inflation would be a negative number for the first time since 1960. In the event, editors had to tear up their pre-prepared deflation stories when RPI rose by 0.6% on the year. The Consumer Price Index was an even bigger surprise, rising by an annual 3.2% that left it still above its target range.

The CBI’s Distributive Trades Survey on Wednesday prepared investors for a dismal showing by the official Retail Sales figures. It was just as well; sales fell by 1.9% in February, four times as much as expected. Friday’s final revision to fourth quarter GDP was less of a disappointment. The 1.6% quarterly decline was very close to the earlier estimate of -1.5% and therefore not something to agitate the market.

What did get investors ticking was the “failure” of a 40-year government bond auction. With £1.75 billion of gilts on offer there were bids for only £1.63 billion. Various excuses were offered, principle among which was the fact that the 40-year issue would not be eligible for the Bank of England’s buy-back programme. Commentators were dubious at the time but a successful auction of 13-year index-linked gilts the following day helped the market to relax a little.

The US economic statistics had no more impact than the UK numbers, even though several of them pointed to greater optimism in the residential property market. Existing Home Sales (+5%), the Housing Price Index (+2%), weekly mortgage applications (+32%) and New Home Sales (+5%) all registered improvements. There is a sensation that analysts would love to call a turn to the US property market’s long downward trend but they dare not do so on the back of just one month’s data.

There was similar nervousness about the latest rescue package, the Public-Private Partnership Investment Programme. The aim of the scheme is to encourage private investors to buy the “toxic assets” that have been giving the banks a headache. If they do, the government will subsidise a significant chunk of the purchase price in return for a modest share of any profits. Bond and equity markets took a shine to the plan but it made the FX market nervous about potentially negative effects on the US dollar.

The dollar started to come back into its own after Nobel Prize winner Paul Krugman offered his opinion that the government will eventually have to “seize” big banks as the economic and financial crisis deepens. “In the end we’ll come to it,” he said. Although investors had earlier seemed to desert the dollar as a safe-haven currency they suddenly decided they could not do without it after all. There was more of the same after Treasury Secretary Tim Geithner said in a TV interview on Sunday that “some banks are going to need some large amounts of assistance.” His comments sounded suspiciously similar to those of Professor Krugman and sparked another rush for cover.

The focus this week will be on the G20 meeting and what it might achieve. Most observers are not unduly optimistic about the outcome. They are more interested in guessing what new stumbling blocks the meeting might throw up. Already on the unofficial agenda is the status of the US dollar as de facto global reserve currency. China would like to see greater use of the International Monetary Fund’s Special Drawing Rights – a suggestion to which Secretary Geithner apparently does not object – and Russia would like to see a partial return to the Gold Standard. There will doubtless be more off-the-wall proposals as the week progresses.

The dollar’s return to favour has been quite swift, taking it 4% higher against the pound and adding 4.5% to its value against the euro since the early part of last week. Although it could go further, the market’s readiness to change direction at the drop of a hat has become very obvious in the last couple of weeks. Buyers of the dollar should therefore hedge their exposure, fixing a price for half of whatever they need. If price certainty is essential there is no alternative but to cover the whole amount. Otherwise use a stop order to protect the uncovered portion in case another disaster strikes the pound.

For more information and expert guidance on the currency markets, call Moneycorp today.

Laura McLoughlin – Laura.McLoughlin@moneycorp.com
Regional Manager – Florida

Moneycorp Inc
7380 Sand Lake Road
Suite 410
Orlando
Florida 32819

TEL: +1 407 352 5890
FAX: +1 407 352 5893

http://www.moneycorp.com

Inflation and retail sales numbers improved the appeal of sterling. The US data were predominantly downbeat.

Sterling added three and a half cents over the week, all of which came on Friday and in early trading in the Far East today. During the first half of the week sterling pottered around between $1.41 and $1.43. A Thursday rally to $1.4450 was followed by a return to base at $1.42. Only on Friday did sterling move and stay moved. It opened in London this morning at $1.4550.

Sterling has done well against most currencies. Less than helpful news stories were offset by economic data which, though far from marvellous, were sometimes better than investors had hoped. Two statistics deserve particular credit. Consumer prices fell by a less than expected 0.7% in January, taking CPI inflation down from 3.1% to 3.0%. The modest decline made investors less sure of further aggressive rate cuts by the Bank of England. Friday’s retail sales figures had a similar implication. Up by 0.7% in January sales receipts were a surprising 3.6% higher on the year. These “official” retail sales data have developed a reputation for being erratic. Even the Monetary Policy Committee is wary of attaching too much importance to what it sees as potentially misleading figures. Yet the market could not ignore what looked like a decent performance by shoppers.

On Wednesday morning a rumour did the rounds alleging that Britain would lose its triple-A credit rating. That may or may not be the case but the UK is a long way back in the queue behind Italy, Ireland, Austria and goodness knows who else.

The Confederation of British Industry moaned that sterling weakness has done little to improve the export performance of British companies. How ironic that it made the complaint on the very day the minutes of February’s Monetary Policy Committee meeting came out. According to the minutes; “it appeared that UK exporters had, on average, responded to the lower level of sterling by boosting margins, rather than by cutting foreign currency prices and gaining market share.”

The Federal Open Market Committee is the US equivalent of Britain’s MPC. Like the MPC it publishes the minutes of its meetings. Last week’s issue revealed that the FOMC has become even more pessimistic. It now reckons the US economy will shrink by between 0.5% and 1.3% this year. The week’s few ecostats offered nothing to detract from that view. Both the New York and the Philadelphia Fed reported further slippage in their manufacturing indices; NY from -22 to -35 and the Philly from -24 to -41. Housing starts were down again. In January this year there were 80% fewer than in January 2006. That same month US inflation hit zero for the first time in 53 years.

The American Recovery and Reinvestment Act continued to befuddle investors who cannot work out whether it ought to be good or bad for the US dollar. They were also taken aback by news that the president is going to whistle up another $275 billion of stimulus, this time to shore up the residential property market. Investors were left to guess where the money would be coming from. Even news that Washington will give Citibank more money was not useful to the dollar. Rescues like that tend to be counterproductive for the US currency because they improve investors’ appetite for risk.

Sterling/dollar continues to behave erratically. Although it has gone nowhere in the last three months its frequent ten-cent excursions make people nervous. Buyers of the dollar should hedge half of their requirement, leaving the remainder uncovered in anticipation of better levels in the future. Use a stop order to protect the downside in case of unexpected alarms.

For more information and expert guidance on the currency markets, call Moneycorp today.

Laura McLoughlin – Laura.McLoughlin@moneycorp.com
Regional Manager – Florida

Moneycorp Inc
7380 Sand Lake Road
Suite 410
Orlando
Florida 32819

TEL: +1 407 352 5890
FAX: +1 407 352 5893

http://www.moneycorp.com

The Committee’s latest inflation and output projections will appear in the Inflation Report to be published on Wednesday 11 February.

The minutes of the meeting will be published at 9.30am on Wednesday 18 February.

The previous change in Bank Rate was a reduction of 0.5 percentage points to 1.5% on 8 January 2009.

Read the full report: http://www.bankofengland.co.uk/publications/news/2009/008.htm

The Pound stopped short of £1=€1, interrupted by the new year holiday. House prices are still falling in Britain and the States, dampening consumer spending. Britain’s manufacturing PMI improved slightly.

Although the turn of the year was a little more volatile than Christmas week Sterling still managed to stick within a four cent range against the US Dollar. It had a look at $1.44 several times but always rebounded, on one occasion as high as $1.48. When London opened this morning the Pound was trading at $1.45.

As the old year ended investors were taking a particular interest in the Pound against the Euro. Having spent the year on Sterling’s case they found themselves within striking distance of their long term objective: £1=€1.

One way or another the holiday fortnight, and especially the New Year break, got in the way. Enough players were ready to lock in some end-of-year profits on their short Sterling positions to prevent the Pound hitting the magic number.

There were precious few UK economic data to affect the Pound one way or the other. Home buyers once again used spare cash to reduce their mortgages rather than leaving in the bank for a diminishing return. The implication was that spending money is not at the top of most families’ to-do list, as evidenced by well known high street names going out of business and M&S issuing a profit warning. Mortgage approvals fell to a record (ten year) low in November and the Halifax announced a 16 per cent annual fall in house prices. The one positive note came with a rise in the manufacturing sector Purchasing Managers’ Index. It was still at a lowly 34.9 but the improvement was unexpected.

In the States the presidential election process continued at its glacial pace towards Mr Obama’s inauguration. The latest proposal from the Obama camp is that $300 billion of tax cuts will be introduced to help the economy recover its momentum. That would no doubt be a relief to householders, who saw the value of their properties slide further with an 18 per cent fall in the year to October, according to the Case/Shiller index. The US manufacturing PMI fell nearly four points to 32.4, its weakest reading since 1980.

Investors are still nervous about the Pound, particularly about the continued decline in UK interest rates and the government’s intention to use quantitative easing (printing money) to stimulate the economy. US interest rates can fall no further and the world is all too well aware that quantitative easing will be a major feature of the Obama administration’s strategy. The supply of Dollars is likely to grow more quickly than the supply of Pounds, suggesting a weakening Dollar this year.

For more information and expert guidance on the currency markets, call Moneycorp today.

Laura McLoughlin – Laura.McLoughlin@moneycorp.com
Regional Manager – Florida

Moneycorp Inc
7380 Sand Lake Road
Suite 410
Orlando
Florida 32819

TEL: +1 407 352 5890
FAX: +1 407 352 5893

http://www.moneycorp.com

Sterling was steady against the Dollar as others moved ahead. UK economic data conspired to encourage the bears. McDonald’s is “a safer investment” than gilts. The US government deficit has risen sharply as a result of bail-outs. There are reasons to be optimistic about Sterling/Dollar.

The Pound’s three-cent swoop from $1.50 on Monday and Tuesday was worrying at the time but the following two days’ rally took it back up to peak at $1.51. A correction to $1.48 on Friday was followed by a weekend recovery and Sterling was trading at $1.50 when London opened this morning, unchanged on the week.

As the week progressed, investors and the media became steadily more transfixed by the spectacle of the Pound heading towards parity with the Euro. The possibility of that outcome affected every other Sterling exchange rate, even where it was not strictly relevant. Having seen the Pound fall by a substantial margin in the last 18 months investors seemed inclined to push for the obvious £1=€1 objective, if for no better reason than that of Mallory for wanting to climb Everest.

The UK economic data conspired to keep the bears supplied with ammunition. The RICS agreed with the government that house prices were still moving lower; it recorded the lowest number of November sales since the beginning of its data series 30 years ago. Rightmove told a similar story on Sunday night, conceding that its index of offered prices was some way adrift of what was actually being realised by vendors. UK industrial production fell by 1.7 per cent in October, down by 5.2 per cent from a year earlier. Both components of the producer price index went down between October and November with manufacturers’ costs 3.3 per cent lower on the month. There were no cheers to be heard though. The CBI’s industrial trends survey, which asks manufacturers how business is going, matched October’s 28 year low.

For Sterling the deepest cut of all was the media’s discovery that McDonald’s is a safer bet than the UK government. Credit default swap market prices revealed a cost of 1.2 per cent to insure five year gilts. Cover for five year bonds issued by the burger joint cost just 0.77 per cent.

For the US Dollar there was a slightly less rude awakening. Although it lost little or nothing to the Pound it cut six Euro cents and three Yen. It could be that investors are modifying their attitude to the haven-currency-of-choice. It could also be that they are falling in with the immense size of the bail-out packages being lobbed out to all and sundry. The $50 billion that Bernard Madoff (with the money) has purloined in 50 years pales into insignificance against the $402 billion deficit recorded by Washington in the first two months of this financial year. The total deficit for the whole of the previous 12 months was just (just!) $482 billion. Investors are starting to wonder where the money is coming from.

Nor were those same investors impressed when the Senate kicked out the bill to inject $14 billion into Detroit motor manufacturers. It’s a flea-bite; why are they fretting so? Until only recently the market saw any new US cash hand-out as a calming influence, an inducement to embrace risk and therefore bad for the US Dollar. That attitude now seems to be morphing into a realisation that failing US businesses are bad for the buck.

That the Pound can make progress against the US Dollar, even as it loses ground to the Euro, is reason for optimism. For some time we have advocated hedging at least half of any requirement to buy Dollars. There are now grounds to reconsider that strategy. The Pound has been hammered for five months because it has been the softest target. Investors are increasingly beginning to wonder if it has gone too far. US treasuries remain – and will probably always remain – a more attractive vehicle to investors than UK gilts. The market is much bigger and liquidity is assured. But that does not mean investors’ appetite for US treasuries is infinite, especially if the supply is infinite.

Buyers of the Dollar who need certainty should, as ever, cover their whole amount immaterial of the current exchange rate. For those with a taste for risk, look for a Sterling/Euro base that will spark a turnaround in Sterling/Dollar. Place a stop order, in case it all goes haywire, and look for better levels early in the new year. That’s today’s hostage to fortune.

For more information and expert guidance on the currency markets, call Moneycorp today.

Laura McLoughlin – Laura.McLoughlin@moneycorp.com
Regional Manager – Florida

Moneycorp Inc
7380 Sand Lake Road
Suite 410
Orlando
Florida 32819

TEL: +1 407 352 5890
FAX: +1 407 352 5893

http://www.moneycorp.com

In the United States, a number of indicators had suggested that the slowdown was intensifying. The latest release of the Q3 GDP data had confirmed a small fall in output and the latest monthly data were consistent with a larger fall in the fourth quarter. Declines in both the manufacturing and non-manufacturing had also been very downbeat.

Monthly figures for US consumption expenditure had fallen for five successive months. There as no sign yet of any turnaround in the US housing market, with a large overhang of unsold homes, house building at a 50-year low and house prices falling. The labour market data for October had shown a large fall in employment.

Read the full report here:

http://www.bankofengland.co.uk/publications/minutes/mpc/pdf/2008/mpc0812.pdf