In this week’s update:
STERLING HIGHER AGAIN ON MOST FRONTS
Investors paid less attention than usual to the economic data. Sterling rallied after the Bank of England cut interest rates to a record low. The US economy lost another 600,000 jobs in January. The technical picture is positive for sterling.
The pound began February as it had ended January; on the way higher. After briefly dipping to $1.4050 on Monday it repeated the steady upward progress of the previous week, reaching almost $1.49 on Friday. It was trading at $1.4750 when London opened this morning, 10% up from its January lows.
It did not look too good at the beginning of the week. Seven days earlier Barclays had helped sterling with a promise of profits exceeding £5 billion. This time it was Barclays that tripped it when Moody’s downgraded its long term debt in anticipation of further “significant” losses at the bank. Things started to look up when the market took a positive view of Chancellor Alistair Darling’s proposal for the appallingly nicknamed “Toxic Bank”, which will mop up the junk assets that nobody else will touch. It was seen as another step towards normalisation of the credit market and therefore a good thing.
There was no shortage of UK economic data but the figures had less than their usual impact on currencies. It seemed almost as though the market was taking a perverse pleasure in reacting unpredictably to announcements. On Wednesday Gordon Brown’s allusion in parliament to “the depression” was ignored: it would normally have had investors running for the hills. On Thursday the pound went down after the Halifax house price index went up for the first time in nearly a year. Most interesting of all was the way sterling rallied after the Bank of England lowered its Bank Rate by half a percentage point to 1%, the lowest ever level. The relief rally was apparently because the Bank made no mention of further cuts in the future, making it possible that 1% might be as low as base rates go.
An increasingly relaxed attitude to risk weighed on the “safe haven” yen and Swiss franc as well as the US dollar. The dollar did best of the three but it still lost ground against the euro. It was sometimes helped, sometimes hindered by the tortured passage of President Obama’s stimulus package through the committee rooms on Capitol Hill. Investors still believe the bill will eventually reach the statute book but are nervous about excessive tinkering in aid of vested interests.
Such US economic data as came out between Monday and Thursday mainly went through on the nod. The world was waiting for Friday’s Non-farm Payrolls figure, as it does at the beginning of every month. It was at least as bad as investors had feared, with just short of 600,000 non-farm jobs disappearing in January. An upward revision to December’s tally meant a total of 3.6 million Americans had lost their jobs in 2008. The unemployment rate has ballooned from 4.7% to 7.6% in 13 months.
Yet the bad news provoked no sell-off for the dollar. In fact it strengthened briefly on the announcement. There is a sensation that with the US economy, as with the UK, investors have come to the conclusion that most, if not all, of the bad news is built into the price. That does not mean investors will greet weak data with joy but it does mean they will need to see something particularly dreadful before they get back into selling mode.
After a difficult January sterling has returned to the roughly $1.45-$1.55 range that contained it during the last two months of 2008. On its own that would imply a neutral stance with a 50% hedge. There is one other development however. On Friday sterling closed above its three month moving average for the first time since August and it is still up there today. It is not the strongest technical indicator in the book but it is a positive sign. Buyers of the dollar should hedge less than a half of their requirement in anticipation of better levels in the future. Use a stop order to protect the downside in case of unexpected alarms.
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