Currency Watch: UK out of recession

The UK is out of a recession. While this is definitely a welcome surprise, upon breaking down the numbers it is easy to not get caught up in a flurry of champagne corks and party poppers.

0.2% of the 1% growth figure was down to Olympic ticket sales and we estimate that 0.5% was as a result of an extra working day between Q3 and the Jubilee affected Q2. So, overall underlying true growth is only at 0.3% at the moment; very much in the “bouncing along the bottom” region.

Obviously significant risks remain with falls in construction output a real concern. Inflationary pressures will weigh on the consumer expenditure portion of output and Eurozone issues will keep international trade and sentiment low. Enjoy the positivity while it lasts, as we are not out of the woods yet.

Sterling traded well both before and after of the GDP announcement and closed in on 3 week highs against the USD.

AUD has had a bit of a resurgence over the course of the week following a strong Australian inflation number and a good manufacturing PMI from China. Aussie CPI hit 1.2% versus an expectation of 0.9% and the market began to price out expectations of any rate movement from the RBA at its November meeting. Chinese PMI rose to 49.1 against last month’s number of 47.9 reinforcing hopes that the dip in Chinese fortunes has now passed.

Despite the victory for the Spanish government in the Galician polls, Moody’s moved to downgrade five Spanish regions on Tuesday night saying that; “driven by the deterioration in their liquidity positions, as evidenced by their very limited cash reserves as of September 2012 and their significant reliance on short-term credit lines to fund operating needs”.

This isn’t anything new, of course, but these moves were to either move regions into “junk” status initially or to further exacerbate their lack of quality. The regions concerned were Castilla-La Mancha, Andalucía, Murcia, Extremadura and Catalonia which still needs to hold its referendum on Spanish independence on November 25th.

The rating of the Spanish state still sits on a knife-edge at the moment and has been saved from going “junk” by the promise of aid from the ECB.

Jeremy Cook is chief economist at World First foreign exchange.