Will The Recession Blight Spread To England Next?

Includes: FXB, FXE, UDN, UUP
by: Ralph Shell

This past week it was confirmed the EU, with two consecutive negative quarterly GDP numbers, officially slipped into a recession. With the Brits' biggest trading block contracting, can the UK economy be far behind?

Had it not been for the London Summer Olympics, which provided a spurt of summer economic activity, Britain might be on the cusp of another recession. Still with the EU debt issues not going away, and the U.S. only commencing to negotiate the resolution of the "fiscal cliff," a British recession may have merely been delayed.

After the financial meltdown, following the Lehman collapse in 2008, and the subsequent election of the Conservative coalition, the new government embarked on conventional economic remedies. There were some tax increases and some attempted spending reductions, but no economic stimulants. The Bank of England increased the money supply with their version of quantitative easing but, to date, the recovery has lacked vigor.

Data released this week showed the yearly PPI was up 2.5%, a little higher than the 2% target. The UK Claimant Count Change showed the unemployed numbers increased by 10.1K, but the unemployment rate did go down a tick to 7.8%. UK retail sales were up 1.1% on a Y/Y basis but went down 0.7% in the latest month. There is nothing here that points to a rapid recovery?

According to our analysis of the COT currency reports, the speculators have fashioned the pound as a thing of beauty. They are currently long 33,281 futures contracts, although this is down from the 55.4K at the beginning of October. These contracts are traded in the U.S., so the pound long is by default a USD short. So why then, is the pound so popular?

It might be a bit simplistic, but the pound is a safe haven from the economic turbulence next door in the euro countries. In Britain there is one central bank to respond to the countries needs, while in the EU, the single central bank (ECB) serves many masters.

There is a single currency value in the EU, leaving the less efficient countries unable to use a lower currency value to be more competitive, be it products or tourist destinations.

Another British attraction is its real estate market. Recently, it was disclosed, via Bloomberg:

"U.K. properties returned 7.6 percent annually in the last 10 years, according to an Investment Property Databank index. That compared with 3.2 percent in Germany and 7.9 percent in the U.S.

At One Hyde Park, the U.K.'s most expensive residency complex, an investor from Kazakhstan bought a four-bedroom apartment for more than 25 million pounds last month, according to company data. People from 25 countries own apartments there."

Demand for London trophy real estate has been brisk. Many more high-end flats are under construction, perhaps too many, but there appears to be no end of wealthy buyers. The result is a large capital movement into Britain that causes a demand for pounds.

Another sector that overcomes some of the economies deficiencies is the education business. During the 2010/11 academic year, there were 428,225 international students enrolled in Britain. The top five countries sending students to England were China 67,325, India 39,090, Nigeria 17,585, Ireland 16,865, and Germany 16,265. For a country with a population of only 64 million, this is a good size addition of people who need to buy pounds to finance their British education.

The GBPUSD chart does not tell me much. The USD has been gaining on the pound since the high of 1.63 made in late September, but if there is a trade here, I fail to see it.

Looking at the pound (FXB, GBPUSD) versus the euro, the chart is more interesting. This has been a wide swinging market, and today's action suggests there may be a return to the 79 handle. Earlier in the week, we voiced the opinion that euro might be making a bottom. The rally from midweek has been feeble, and the weekly chart now shows another failed bull move. Buying the pound and selling the euro with protection above the .8060 level looks like a way to cast a bearish euro bet.

(click images to enlarge)

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.