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UK GDP Misses Estimates!
By Mike Conlon | January 26, 2010
UK GDP came in this morning at a less than expected .1%, missing analyst expectations of .4%. However, the good news is that their economy did indeed expand, officially removing the “recession” tag from their economy. Now the question remains what happens from here.
Will policy makers see this growth as a sign that the economy is still fragile, or will they be inclined to believe that recovery is under way? My experience tells me that that the British tend to err on the side of caution, which means that they could leave the stimulative measures they took in place for an extended period.
Had growth come in as expected, then most analysts were expecting a withdraw of quantitative easing. As a result of this shift in sentiment, the British pound (GBP) is down against all but the commodity currencies, as risk-aversion is the play of the day.
As can be expected, stock market futures are down pre-open, and it looks like there’s some pressure on gold and oil.
Adding to the mix is the strength in Japanese yen (JPY). Their growth outlook was cut to “negative” by S&P, which essentially means that interest rates will remain extraordinarily low and stable for a long time, helping the yen to reassert its dominance as the funding currency of choice for the carry trade. This causes demand for the currency which helps it to strengthen, even though this seems counter-intuitive to most investors.
Also contributing to yen strength is the fact that China is trying to slow its own growth and has restricted lending to attempt to prevent asset bubbles, though they may be too late. Should the Chinese restrict growth, then the possibility of a global double dip recession increases. This also plays into the risk aversion play.
So not surprisingly, the largest movers are the AUD/JPY and NZD/JPY pairs, down 1.6% and 1.9% respectively which of course, show yen strength.
As I mentioned yesterday, this is a heavy week for economic data so should it continue to come in worse than expected, we could see some serious moves in the broader markets.
So remember to stay nimble when volatility picks up!
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