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Research Edge Position: Short the British Pound via FXB

 

We’ve maintained a bearish view on the UK since we began publishing research early last year and the data out late last week continues to provide confirmation for our thesis. It is noteworthy that the UK reported a -0.4% contraction in GDP in Q3 quarter-over-quarter, surprising forecasters that expected a modestly positive growth rate, and calling into question the ability of substantial stimulus programs issued by the Central Bank and government over the last months to right the economy.

The UK has now underperformed both Germany and France for two consecutive quarters, as the Eurozone’s largest economies returned to growth (+0.3% Q/Q) in Q2.  Italy already released its Q3 GDP at 1.0% Q/Q and we’ll be waiting for other countries to release their GDP figures in the coming weeks. Clearly the inability of PM Gordon Brown and Co. to lead the economy out of recession bodes not only poorly for his party which is fighting for reelection next year, but puts into question the Bank of England’s latest decision to not increase its 175 Billion Pound program to further aid the economy.  

The lack of confidence in management along with burgeoning government debt has encouraged Pounding the Pound (see chart below).  Friday’s GDP announcement put monster downward pressure on the Pound, sending it down 2.2% versus the Euro and 2.3% versus the USD intraday. Fortuitously, we shorted the Pound via FXB (British Pound Sterling Trust) on 10/16 in our model portfolio, a position we’re comfortable holding for a TRADE.

 A separate report out on Friday from the Statistics Office showed that industrial production declined 0.7% Q/Q, manufacturing contracted 0.2%, and construction fell 1.1%, a cocktail of negative data to add to rising unemployment and a annual inflation rate (+1.1%)  that is running higher than in the Eurozone (-0.3%), a bearish point as the economy comes off its bottom. In aggregate, the FTSE has underperformed the DAX and SP500 by a measurable spread for most of the year, a trend we expect to continue.

Matthew Hedrick
Analyst

United Kingdom – Prognosis Negative - Pound1