Posted on | April 22, 2011 | No Comments
The dollar outperformed sterling last week but the 0.3% advantage it gleaned can hardly be described as a resounding success.
Sterling covered a range of almost exactly two cents, an achievement it had completed by the end of Tuesday. It spent the next three days making itself comfortable, and when London opened this morning it was nursing a net loss of half a cent.
Sterling managed successfully to negotiate three major data threats on consecutive days. It did not come out of the exercise in triumph but it did escape without coming to serious grief.
The first two hurdles were on Tuesday, with the UK balance of trade and the inflation numbers. The trade figures were good, with the lowest deficit for more than a year. With inflation it was a different – and curious – story.
Analysts had expected consumer price index (CPI) inflation to be unchanged from February at 4.4%. For a change, they overestimated the figure, which came in at 4.0% with retail price index (RPI) inflation down from 5.5% to 5.3%. It was disconcerting for sterling. If the Bank of England had not been minded to increase interest rates with inflation at 4.4% it would be even less inclined to do so now.
Wednesday’s employment data were more helpful. Unemployment fell by 17,000, bringing the unemployment rate down from 8% to 7.8%, and the number of people in work went up by more than that. In the three months to February employment went up by 143,000.
For spread betting investors the one disappointment was the 700 increase in the number of jobseekers instead of the 3,000 reduction they had been led to expect. There was consolation for them next morning in the shape of Nationwide’s index of UK consumer confidence, which improved by six points to 44, ahead of forecast.
The only other headline-grabbing statistic was the Rightmove house price index. It rose by 1.7% in April, putting the average asking price at £235,822. That is 44% more than the £163,832 average selling price reported by the Halifax and Nationwide. The discrepancy probably accounts for what Rightmove described as “the biggest jump in unsold stock on agents’ books that we have recorded in nearly four years”.
The dollar’s failure to shine was no surprise. The market is still unhappy with the scale and duration of the Federal Reserve’s “quantitative easing” programme, which investors find increasingly difficult to distinguish from “printing money”.
A growing number of Federal Open Market (monetary policy) Committee members are speaking out against perpetual policy relaxation but they are in the minority.
US ecostat announcements last week were generally positive for the dollar but not to the extent they brought more buyers to the party.
Retails sales rose by 0.8% in March, as did industrial production. Both figures were stronger than predicted. The University of Michigan’s consumer sentiment index improved by a provisional two points to 69.6. The New York Fed’s manufacturing index was four points higher at 21.7. Even inflation exceeded expectations in March, clocking 2.7% instead of the forecast 2.6%.
Yet that last figure was the one that typifies investors’ arms-length attitude to the dollar. Inflation in Euroland is 2.7% too, but there the central bank has already increased its policy interest rate and it will probably reach 1.75% before the end of the year.
In the States the equivalent rate is 0.125% because American inflation, like British inflation, is a temporary quirk. Investors cannot be sure which faction has got it right, the Chicken Littles in Frankfurt or the ostriches in London and Washington, but they know they don’t like near-zero interest rates when better is available elsewhere.
A slowish week for US data brings three residential property indicators including existing home sales, weekly jobless claims, the Philadelphia Fed’s manufacturing survey and very little else.
On Wednesday the Bank of England publishes the minutes of the monetary policy committee’s April meeting. Critical here will be the number of votes in favour of a rate increase.
Thus far there have been three. If the number went up to four in April the pound will get a boost. The other important figure will be Thursday’s retail sales. Here, any positive number would be good for sterling; sales fell in February and are expected to have done so again in March.
Also in FX spread betting, Sterling has failed to establish itself above $1.64 and is vulnerable to a reversal. With sterling still within two cents of a 15-month high, buyers of the dollar should fix a price for half the money they will need.
The coming three weeks will include just 11 UK business days. With London responsible for more than a third of global FX turnover the holiday mood will mean, at best, reduced market depth and liquidity. At worst there will be price spikes and troughs that make it more difficult than usual to figure out what is going on.
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