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Market Update - GBP HKD 16th April 2010
Sterling has come a long way in the last couple of weeks, capturing the key technical resistance at 11.94. As long as we don't make a daily close back below that level we remain optimistic of further upside in the short term. US stock markets surged to their highest levels since September 2008 yesterday, the month that marked the start of the credit crisis. Investors' willingness to take on risk tends to weaken the dollar and strengthen high yielding and riskier assets.
Ironically, any positive economic data from the US only tends to reinforce that trend and result in further dollar weakness. That is exactly the opposite of what we saw during the credit crisis, when most of the bad news was emanating from the US mortgage market, and yet the dollar strengthened as frightened investors dumped high yielding assets and bought US treasury bills.
This week's data has been a mixed basket, including manufacturing rising to a six month high, and industrial production for March falling short of expectations. Jobless claims increased, but capital inflows also increased as demand for US securities rose. The net effect has been a range bound US / Hong Kong dollar!
Much chatter has been made of the Singapore government's decision to revalue the local dollar higher after strong growth data confirmed the sustained recovery and raised the threat of inflation. Other Asian nations are expected to follow, with talk of the Chinese Yuan trading band being raised by up to 5%. The Yuan has been held steady since 2008 after it was allowed to appreciate around 20% against the US dollar over three years. The HK dollar has been pegged to its US counterpart for 26 years and is expected to remain so despite the Singapore dollar's appreciation.
News of mushroom clouds and airport chaos also had little effect on sterling, given that most European countries have been similarly impacted.
The pound was largely unchanged against the dollar after last night's "presidential" style TV debate between the three party leaders. The clear winner was Nick Clegg of the Liberal Democrats. News snippets through the week suggested that the Tory's lead was widening over Labour, but any swing towards the Lib' Dem's as a result of last night's debate will make the election outcome less stable and increase the likelihood of a hung parliament. That theme was starting to recede earlier in the week, but is now likely to weigh on the pound again during the build up to the vote. Markets are still pricing in a Tory victory with a narrow majority, so sterling's better mood is vulnerable to break if that view changes.
The technical outlook is positive. We've made a new high above 11.94 and spent the whole week consolidating those gains, which tends to skew the odds in favour of further upside. The next key technical barriers are 12.09 (late February peak) and the more important 12.29 level which marked the high in mid February.
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