Sterling survives largest borrowing deficit since 2009 – 20th November 2015

UK retail sales for the month of October reported a decline of -0.6% for the month of October yesterday. Expectations were for a decrease, however, the result actually came in worse than expected. Retail sales had previously surged in the month of September due to the Rugby World Cup and the additional spending and economic activity while October’s decline was due to a drop if food sales.

Sterling has already survived a shot across the bows from figures for public sector net borrowing which showed the worst deficit for any October since 2009, leaving Chancellor George Osborne a challenge to meet his borrowing goals as he prepares a major review of government spending. Britain’s headline public borrowing rose to £8.2 billion pounds in October from £7.1 billion pounds a year earlier. Despite being over £2 billion pounds higher than forecast Sterling hasn’t really reacted this morning and remains steadfast against the Euro and US Dollar.

With relatively little in the way of significant data due for release through the end of the trading week is likely to keep investors focused on central bank commentary. The European Central Bank is in the spotlight this time around, with remarks from President Mario Draghi of particular significance today.

Comments suggesting the central bank may adopt a restrained approach – such as expanding the spectrum of QE-eligible assets – could help the recover some of the ground it has lost however, hints at an increase in the size of monthly purchases or a cut in the deposit rate may weigh on the single currency. Sterling is currently trading around 1.43 – a 3-month high – so any inference the markets may take that more QE is on the way will see Sterling get closer to 1.44, the 8-year high we saw in July 2015.

The end of the week has seen an appetite for riskier assets benefiting the Aussie and Kiwi Dollars which have both strengthened. The markets have priced in the prospects of the Federal Reserve hiking interest rates and the European Central Bank easing monetary policy next month and investors are looking for value elsewhere. They might have had some in South Africa too where the SARB surprised the markets by raising interest rates 0.25% to 6.25%. It was widely expected that the bank would keep rates on hold as weak oil prices and a struggling local economy continued to keep inflation in check.

Have a good weekend.