The prospect of “quantitative easing” by the Bank of England turns off investors. House prices lose their impact. President Obama’s stimulus package leaves markets unconvinced. G7 opens the door to further exchange rate imbalances.
Sterling gave back five and a half of the previous fortnight’s hard-won cents, falling from $1.4750 to this morning’s $1.4200 opening in London. The high came last Monday at $1.4950. On Thursday and again early this morning it had a look at support near $1.4150.
Bizarrely, for the third week running, it was Barclays that opened the batting for sterling. Investors were enthusiastic about its announcement of better than expected profits, setting a positive tone for the pound. More good news came with the British Retail Consortium’s report that sales in January showed the biggest monthly improvement since May. It was the first increase of any sort since September.
House prices have taken a back seat in recent weeks. Investors are more concerned about the recession and the health – or otherwise – of the financial infrastructure than they are about further confirmation that the property market remains soggy. Neither the lowest turnover for 31 years, as revealed by the RICS, nor the 1.2% monthly rise in asking prices reported by Rightmove had any appreciable impact. Even Rightmove admitted the improvement was a function of “false optimism” among would-be sellers.
Most distressing for the pound was Bank of England Governor Mervyn King’s press conference after publication of the Bank’s Quarterly Inflation Report. Among other things he said we were in the midst of a “deep recession” that could see the economy shrinking at a 4% annual rate this summer. (The CBI sees the economy shrinking by 3.3% this year.) Investors were less concerned about the Bank’s recognition of the blindingly obvious state of the economy than they were about the proposed remedy: Quantitative easing or, as the media see it, “printing money”. The Monetary Policy Committee has not yet agreed on this course of action but the Governor gave every impression that it would do so before long.
The main driver for currency movements during the week was the progress of President Obama’s stimulus bill through Congress. The American Recovery and Reinvestment Act will spend $787,000,000,000 on everything from tax breaks to “weatherizing” (insulating) homes. Unfortunately, markets are not convinced that it will do anything other than blow more money away in return for unpredictable economic benefits. This uncertainty encouraged the hoarding of safe-haven currencies and a drift away from the riskier ones, including sterling.
In Rome the G7 finance ministers’ meeting had little to say about exchange rates. Because it came up with no panacea for the world’s economic ills investors took it as carte blanche to fill their boots with yen and Swiss Francs and to sell the riskier currencies, including the pound.
As if to prove its independence the pound refused to hold above the three month moving average that we discussed last week. The correction could go further this week if CPI inflation falls to even lower levels than the 3.1% we saw last month. Buyers of the dollar should hedge half of their requirement, leaving the remainder uncovered 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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