Currency Forecast - Sterling Vs. American Dollar - 25/03/2010
A dip in inflation helped to confirm the Bank of England's view on price stability, but it doesn't do anything for interest rate expectations. Consumer Price Index fell to 3% from 3.5%, still well above the BoE's 2% target. The budget (or should we say the pre election budget, for there is certainly more to come once the election is out of the way!) delivered no market moving surprises, but did remove at least some of the short term uncertainly hanging over the pound.
Nevertheless, sterling fell to a two week low against the dollar and other currencies, while the real focus was on the Euro, which posted sharp losses across the board. The fact that Spanish national debt is yielding 3.82% versus 3.97% for sterling 10 year debt indicated that even after this week's heightened fears over the state of the euro zone economies, investors still demand a higher return on UK debt because they view it as a higher risk!
Meanwhile the dollar was broadly higher yesterday, partly driven by a credit rating downgrade for Portugal, and renewed fears about the Greek debt position. These concerns sent investors scurrying for the safe haven status of the US currency. Given the spate of sovereign debt stories, the dollar could continue to strengthen, especially if the negative sentiment spreads to the stock markets, which thus far have been relatively unaffected. The Dow Jones made another 18 month high on Tuesday, and only sipped modestly yesterday.
The technical outlook for sterling remains negative. We are now testing the recent lows. The key level to watch is 1.4777. This was the capitulation low from march 1st. Investors seemed to literally "throw in the towel" on that date, driving sterling sharply lower, but ultimately setting the scene for at least a short term recovery. The million dollar question is whether that low is likely to be durable, or whether we now slip through it to new lows. If that happens this exchange rate could embark on another rapid decline, this time toward 1.44, the April 2009 low. Buyers of the dollar should consider hedging at least half of any exposure now to reduce risk, trading the balance on a break below 1.4777.
Currency Forecast - Sterling Vs. American Dollar - 19/03/2010
Sterling has made some encouraging gains over the last few days, helped in part by lower than expected February budget deficit figures which were released yesterday. The data showed a deficit of £12.35bn, lower than the £14.75bn figure that analysts were expecting. The pound also drew support from market chatter about a possible acquisition of BG Group by Exxon Mobile; a transaction which would require the purchase of a large amount of sterling.
The pound has managed to stage a short term turnaround after being in dire straits just two weeks ago. The major problems still persist; namely the uncertain election outcome, a high twin deficit (although the budget side was slightly improved from terrible January figures) and persistent talk of a potential credit downgrade for the UK. In the short term, sterling is being squeezed higher on a largely technical basis.
After the dramatic and panic driven lows two weeks ago the market has spent time unwinding an excessively "oversold" position, helped by a short squeeze as investors who sold the pound betting on further falls now buying back to cover their positions, forcing the currency higher. Whether the medium term fundamentals will support a continued rally is largely guesswork.
The thing to focus on now is the chart. This shows a clear downward trend, with the recent bounce appearing as no more than a blip. That means the trend is still down until sterling can prove otherwise, and new lows are highly likely over the next couple of weeks. At least we now have a clear "stop level" to work with. We sold off down to 1.4777 in such dramatic fashion two weeks ago, and bounced very quickly from that low.
That is now a major technical support level, so in theory there should be investors waiting to buy sterling should it reach that level again. If that buying support does not materialise, it would be a clear signal that the pound has further to fall. Distilled into a trading strategy, we can offer the following; clients who are hopeful of a further rebound should consider placing a stop order below 1.4777 in case the pound's dramatic slide resumes. In the meantime, look to cover at least half of any dollar requirements on further rallies.
Currency Forecast - Sterling Vs. American Dollar - 10/03/2010
A successful government gilt auction helped sterling recovery its poise last Tuesday after a Monday which saw the currency slide over four cents against the dollar. The fact that investors are still happy to buy gilts (most of the demand was from pension funds and insurance companies) is reassuring, especially as buyers were bidding for twice the amount of stock than was on offer. That level of cover contrasts well with the March 2009 auction in which the government only sold £1.63bn of a £1.75bn offer, the first auction failure in 14 years. Another auction for £3bn of 2022 debt went well yesterday, achieving 2.01 times cover, but this was eclipsed by two other news items. Firstly the latest international trade figures which showed Britain's trade deficit reaching £8bn in January, far higher than analyst expectations. This comes despite the weak pound, which should boost demand for British exports. That demand is crimped however by the weak state of the European economy, out main trading partner. This was the sharpest fall in exports since 2006.
Another blow came in the form of a report from credit ratings agency Fitch, who yesterday labelled Labour's promise to cut the deficit in half by 2015 as "too slow". This sort of report only helps to recycle the persistent speculation of a possible cut in the UK's credit rating; and is very unhelpful to an already embattled pound.
The technical outlook remains negative. Last week's recovery looks like a correction, with new lows likely to be round the corner unless we have some positive newsflow to help underpin sterling. Memories of last Monday's dramatic "collapse" are still fresh, and as we drift back towards last week's lows investors may become nervous and skittish. Buyers of the US dollar should strongly consider covering any requirement now in order to remove the risk of a new sell off.
Currency Forecast - Sterling Vs. American Dollar - 02/03/2010
Sterling had already lost two cents last week, and promptly lost another four cents when things got nasty yesterday. Not a good start to the week! A weekend poll showing a high probability of a hung parliament set the scene for a bad week, but it was no one factor that triggered the big slide. Another contributor was Prudential's announcement that it will purchase AIG's Asian life insurance business. That will require the sale of a large amount of sterling to fund the $35bn price tag. Markets were also spooked by news items concerning Iran's failure to cooperate with nuclear watchdogs the IAEA. Sentiment toward the pound has been deteriorating sharply in recent weeks, and any one of these news items were excuse enough to cause a stampede for the exit. An apparent improvement in manufacturing activity was completely ignored, and mixed mortgage data did nothing to contribute. The break of 1.5000 caused further technical selling, causing a dramatic acceleration down to 1.4777, the day's low.
Although sterling did recover some of the lost ground and managed to end the day around 1.5000, it's not time to relax. We would need to recapture 1.5181 (the level from which yesterday's slide started) in order to give us any comfort. In the meantime the pound will remain highly vulnerable to further jitters. It's impossible to say whether yesterday marked a "capitulation", or whether it was just the start of a major sterling crisis. All is quiet so far this morning, but yesterday's drama started out of the blue, and the background for sterling's weakness remains intact. Buyers of the dollar should hedge most of their exposure at current levels to reduce risk. More than once in late 2008 the pound lost 20 cents against the dollar in just a few days. The current sell off is only ten cents deep thus far, so there could be some way to go.
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