In this week’s Moneycorp US Dollar update:
UK manufacturing PMI disappoints; services PMI exceeds expectations. Dollar falls on improved jobs figures.
The pound returned from its long weekend looking dreadful. Starting at $1.6350 on Tuesday morning it slumped quickly to $1.61. The following day it pulled itself together, embarking on a rally that took it up to $1.64 on Thursday. On Friday the pound covered every point between $1.63 and $1.64 at least twice and it opened in London this morning at the top of that range.
Sterling came unglued at the beginning of the week because of a couple of unhelpful economic data. Although the number of mortgage approvals increased slightly in July, repayments by existing borrowers exceeded new lending. Technically this net repayment qualifies as a “first ever” but don’t get too excited; the Bank of England only started collecting these data 16 years ago. Even so, a newly-acquired savings habit is exactly not what is needed when the country is trying to haul its way out of recession. People should be spending their money, not saving it. Coinciding with that announcement was a disappointing figure for the manufacturing sector purchasing managers’ index (PMI), which fell back into the shrinkage zone at 49.7: investors had been expecting it to come in a couple of points higher than that.
There was better news on Thursday from the services sector PMI. At 54.1 it led the field, beating Germany, France, the Euro zone and the United States. It was vindication of a sort and it allowed sterling to end the week slightly higher against the major currencies even though it was softer against the commodity and higher-yielding ones.
On Tuesday it had been the States that put in the best manufacturing PMI at 52.9, a four-point improvement over the previous month. In fact the US continued to deliver vaguely positive figures throughout the week, rather hampering the dollar. Pending home sales increased by +3.2% in July. There was a +6.6% improvement in non-farm productivity, partly arising from a -5.9% fall in unit labour costs. Factory orders went up for another month, this time by +1.3%. The minutes of the recent Federal Open Market Committee meeting were uncontroversial. They contained no clues as to what might come next – or when – other than a vague hope that the economy could pick up in 2010.
As on the first Friday of every month, the highlight of the week for the whole market was Friday’s US employment report, specifically the change in non-farm payrolls. It transpired that 216,000 jobs were lost in August, the smallest monthly number for a year and better than the -225k predicted by economists. Although the unemployment rate went up to 9.7%, a 26-year high, investors decided the improved payrolls figure was more important. After throwing it around for a couple of hours the market decided that good US data were still a sell signal for the dollar because they reduced investors’ need for its safe-haven features.
Sterling’s bounce from $1.61 could mean there is no appetite for an expedition below $1.60 or it could mean there is unfinished business that it will eventually have to handle. A stop order somewhere south of $1.60 should be a serious consideration and buyers of the dollar should hedge up to 75% of their exposure. If the time horizon is close it would not be silly to cover 100%, just in case.
For more information and expert guidance on the currency markets, call Moneycorp today on +44 (0)20 7589 3000, Don’t forget to mention International Horizons to secure the best rates. Alternatively go to the Moneycorp website where you can open a free, no obligation Trading Facility.
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