In this week's
update:
A GOOD BUDGET FOR STERLING
Britain's triple-A credit rating is no longer under threat. Canadian retail sales disappoint.
From $1.5150 the pound initially dropped back, touching a low of $1.50 on Tuesday morning. A post-budget rally achieved a two and a half cent rally almost immediately with another three following on Wednesday. Sterling peaked above $1.5650 on Thursday and then dipped to $1.55. When London opened this morning it was trading at $1.5550.
Mercifully, Britain's currency is doing better than its football team. There was no obstacle for sterling among the very few economic data that appeared during the week. The British Bankers' Association figures for mortgage lending showed a very slight increase in May and the Confederation of British Industry's distributive trades survey (a sort of private sector measure of retail sales) improved from -18 to -5. The minutes of the Bank of England's June Monetary Policy Committee meeting produced a positive surprise for sterling when they revealed that one MPC member, Andrew Sentance, voted to raise interest rates by 25 basis points from 0.5% to 0.75%%. Although the other eight members thought it better to leave the Bank Rate unchanged, , investors were heartened by the idea that rates can go up as well as down.
The main event for sterling was the much-trumpeted 'emergency' budget from the coalition government. For the person in the street there was no escaping the pain that the chancellor was dishing out by the bucketful. For sterling, however, the return to prudent stewardship of the economy was a godsend. For the first time investors could live with the growth forecasts that would make the formula work. Taking into account the measures set out in Mr Osborne's budget, the New Office for Budget Responsibility reckons the economy will grow at annual rates of 1.2%, 2.3%, 2.7%, 2.9% and 2.7% in the next five years. Those are not big numbers but they are credible. The market also has faith in the OBR's projection that government borrowing will fall from 10.1% of gross domestic product to 1.1% over those five years.
It will take time to see whether the government can deliver on its promise to reduce departmental spending by a fifth. However, there seems little doubt that it will do its best to make the savings. As far as investors are concerned, that is good enough for the time being. The ratings agencies are on side as well. One of the chancellor's opening remarks was to the effect that he was keen to preserve Britain's top-drawer AAA credit rating and the agencies were quick to say they had no problem with that.
There were just two sets of Canadian data in the week; inflation and retail sales. The former was not helpful and the latter was destructive. The consumer price index went up by 1.4% in the year to May, an appreciably lower number than the previous month's 1.8%. It was the retail sales figures that did the real damage though. Sales were down by -2.0% in the month of April; excluding the effect of vehicles, sales were -1.2% lower. The numbers were miles away from forecast and went a long way to reversing the previous month's improvements. Taken together, the data led investors to believe that the Bank of Canada would not rush to take interest rates higher.
The sharp reaction of sterling makes it look as though the market is satisfied with Mr Osborne's brutal austerity regime. The pound is unlikely to repeat the achievements of Tuesday and Wednesday but buyers of the Canadian dollar should hedge less than 50% of their requirement and hold on for better levels.
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