Firstly may I wish our cousins in the US a very happy holiday, but don`t forget to watch that budget at the shops tomorrow!
I was going to wait to hear Mr Carney again, but my appetite I am afraid is dimmed after a plethora of such events recently, and I guess the chances of him saying anything new are pretty remote, EXCEPT of course if he is asked about the recent strength of sterling!
A whole raft of views and a whole lot of questions arrived in my in-box yesterday as cable eventually pushed through recent highs, taking out a significant technical resistance level. Oddly enough (at least to me) a majority of the analysis pointed out that the `spur to sterling`s spurt` (!) was expectation of higher interest rates. If it isn`t clear now, I honestly don`t know when it will become so – interest rates in the UK are not going up any time soon, and the likelihood is that even when they do, they will remain at historically low levels for a considerable time after that! Equally dominant was the view that because Q3 growth was confirmed at its previous estimate, then this also was the reason for the acceleration in demand. All pretty much old news, and `curve fitting` ie. seeing the result and then justifying it by convenient reasoning. There doesn`t have to be, and there rarely is, one reason for every move, and the above factors of course contribute – as does demand from cable models, AND more of this will continue if cable demand continues to provide weekly and monthly closes above 1.6260.
Taken as a whole, there is no doubt that sterling deserves to be strong – and that is on an across the board bog standard analysis of where the UK economy is in relation to others in the global cycle. The interesting aspect of this latest recovery has been the acceleration in confidence we have experienced in the last 3/6 months, in as much as it has been predominately domestically driven. The better feel about house prices nationwide, (and the very real rises across the south) have certainly emboldened the consumer, and spending from this sector continues apace with recent figures confirming the eighth consecutive quarterly increase. Business investment has also been encouraging of late (if we can believe the ONS statistics!!) and the governor made hopeful noises earlier in the week about an expansion in this area next year.
But any recovery that relies mainly on the consumer is on fragile ground. The UK has accelerated its recovery against a backdrop of stagnant demand from our major trading partners in Europe, and the negative trade balance still weighs on overall GDP numbers. Should an appreciable further jump in sterling take place from here, we would not be best placed, at least in export terms, to benefit from any recovery in Europe where price competition through familiarity with the product is keen. However, an increasing share of exports are now going to non EU countries (a rise of 40% over the last five years), and in these markets, it is essentially the quality of the product and the `novelty` which has created the demand rather than price competitiveness.
So to square this particular circle, should the Fed AGAIN fail to bite the bullet on tapering, and should the EU continue to look towards deflation, then there is no reason why sterling should not make further gains, but this is not necessarily negative. On balance, as I have mentioned, I don`t think it will have a material impact on exports at this stage of recovery in Europe, and more importantly, a strong pound is beneficial in suppressing inflationary forces. If we can keep inflation at bay, then we stand a much better chance of keeping interest rates lower for longer, and that is the single most important factor just now, for longer term health in the economy.
So expect more questioning of Bank officials about the value of sterling, and don`t expect them to say that they fully approve (not unless they want it round their ears v quickly!), but I think that a rise in the value of sterling from here would not be terminal to the UK economy as is now, and a useful ally in keeping inflation under control.