A sixth consecutive quarterly decline in British GDP marked the longest recorded string of negative growth readings since records began in 1955. A 0.4% quarterly decline confounded expectations for a 0.2% gain and created an immediate slump in the value of the pound, which has lost almost three cents against the dollar at $1.6356 and has ceded almost a penny-and-a-half against the euro, which buys 91.15 pence. In Monopoly terms, Britain drew a miss-a-turn card from the Community Chest pile. Today's data gives the British economy the appearance as the clear laggard mired in recession. But when you look at the pound relative to recent lows against its two majors, it's actually performing rather well.


That means one of two things: Investors are stupid to resign the pound to the gutter today because the third quarter report should be consigned to history, or possibly a better explanation is that there's far more downside in store as investors conclude that growth will be even slower than in the United States. Interest rates will remain lower for longer and further quantitative easing will be required, which ought to send the pound to test last week's lows.

The Japanese yen was weaker overnight with media reporting diminished appetite for safe havens and lower yielding units. While this is perhaps accurate, it's a slight change in the recent script that global recovery would favor the yen on fundamental political changes causing investors to choose the dollar rather than the yen as the carry-trade victim. It appears that today the strength in corporate earnings is favoring high yield rather than a broad based economic recovery that might sit well with Japan. The dollar today has risen to ¥91.94 while the euro is up to ¥137.93.

The euro is facing some headwinds to end the week and currently buys $1.50 exactly. A weekly close above here would be bullish for the euro, which was earlier bolstered by a strong October reading of 91.9 for the IFO institute index of the investor business climate from 91.3 in September. The survey of 7,000 German business executives also showed a forward expectations reading of 96.8 from 95.7.

Unless the euro can build on this week's advance above $1.50 investors will likely grow less enamored with the theory of swift gains. Implied volatility has risen and the likelihood is for a sharp move in either direction. The euro could easily add four cents in either direction as the euro accelerates sharply in the face of wilting confidence in the dollar. Or investors could be spooked by sharper European tongues crying foul as the euro's ascendancy cripples exports and therefore the recovery.

The Canadian dollar took another tongue-lashing earlier from Bank of Canada chief, Mark Carney. He warned that intervention indeed remains an option for the central bank struggling to maintain a level playing field for the recovery. Rising commodity demand as a result of broader global recovery is raising the appeal of the domestic currency, which puts the economy under more pressure. Today the local dollar buys 94.90 U.S. cents.

Andrew Wilkinson

Senior Market Analyst