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The CAD - Canada Dollar weekly update 08 Mar 2010
In this week's
update: LUCKY ESCAPE FOR STERLING
Positive economic signs from the UK economy allow a near-miraculous recovery for sterling after a sharp fall. Canadian interest rates will head north in June, maybe.
Sterling fell sharply last Monday, losing three cents before lunch. It continued lower and it was not until the following day that it found bottom at $1.54. The rest of the week was spent in what is generously known as 'consolidation' (i.e. it could not recover) between there and $1.56, where it opened in London this morning.
At the beginning of the week the non-domiciled tax status of Baron Ashcroft dominated the media. Allegedly, the noble lord had bought his way into a peerage by making large donations to the Conservative party. For some reason this old tradition had become suddenly improper. It would be an exaggeration to blame sterling's sharp fall on Lord Ashcroft alone but the story will certainly have unnerved investors who were already nervous about the Tories failing to win a majority at the forthcoming general election.
From there it was uphill all the way but at least sterling managed to make it up the hill with the assistance of some positive news. On Tuesday the government held a successful auction of 30-year gilts which attracted bids for nearly twice that much. The last five auctions of 30-year stock have achieved an average of 1.63 times cover so, whatever misgivings they may have about sterling's short-term future, there is a degree of confidence among investors the current problems will be short-lived.
Having ignored Monday's manufacturing purchasing managers' index (their minds were on other things) investors took a great deal of interest in Wednesday's services sector PMI. At 58.4 the services PMI was more than three points better than predicted, scoring a three-year high. It blew America's 53.0 and Euroland's 51.8 into the weeds. Coming hard on the heels of a ten-point jump in consumer confidence it was another reminder to the market that not everything to do with Britain's economy is in a state of collapse. There was more reassurance from the Bank of England when the Monetary Policy Committee voted to keep interest rates unchanged for a 13th month and to leave quantitative easing on hold.
The news from Canada was uniformly great but it was pretty good all the way through. Not only did the economy grow by +1.2% in the fourth quarter of last year but third quarter growth was revised upwards from +0.1% to +0.2%. The purchasing managers' index went up by a point in February to 51.9 but the figure was not a patch on the 55-56 that investors had been expecting.
Tuesday's announcement from the Bank of Canada was not a surprise. The overnight rate will remain steady at 0.25% for an eleventh month. It was helpful to the Loonie that the BoC said in its statement that it will hold the current policy rate 'until the end of the second quarter of 2010'. Perhaps optimistically, investors took this as a promise that tightening will begin in June.
Whilst sterling's recovery last week might be seen as a sign that there is life in the old dog yet, it is still hard to see the British currency as anything other than a dog. Opinion polls continue to indicate a hung parliament and investors fear that even after the general election Britain's government will be paralysed by indecision, unable or unwilling to tackle the budget gap. Buyers of the Canadian dollar should hedge 50% of what they will need. If the money is required in the near future they should consider covering the whole amount.
For more information and expert guidance on the currency markets, call Moneycorp today on +44 (0)20 7589 3000. Alternatively go to www.moneycorp.com where you can open a free, no obligation Trading Facility.
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