The record low for base rates was widely anticipated. The plan for quantitative easing received qualified approval. The US economy lost 651k jobs in February. Sterling remains weighed down by nervousness about banks.
It was a messy and eventually expensive week for sterling. Starting from $1.42 the pound first attempted to make a break for the downside, bouncing repeatedly off newly-invented support at $1.40. A mid-week rally took sterling back up beyond its point of departure, peaking at $1.43 on Friday. It went into reverse on Friday afternoon and the pound was back down to support at $1.40 by the time London opened this morning. It was looking decidedly nervous.
A grab-bag of second division economic data had little visible effect on the pound. Money supply, consumer confidence, manufacturers’ costs and factory gate prices are all interesting in their way but do not make compelling reading when everyone is obsessing about base rates. Even when the Purchasing Managers’ Index for Britain’s services sector outstripped Euroland and the United States the impact was muted.
It was the Bank of England’s interest rate announcement on Thursday that held the market’s attention even after it had come and gone. The Bank’s decision to halve the Bank rate to 0.50% was no surprise, nor was the heavy hint that this could be the bottom. Attention centred on the other part of the package, “quantitative easing”, the £75 billion that the Bank intends to spend buying gilts in the next three months. After due consideration investors decided it was not such a bad idea.
Sterling’s stumbling block throughout the week was – and still is – investor nervousness about equities in general and financial shares in particular. Last month they were fretting about HSBC’s deeply discounted rights issue. On Friday they fretted about a report by Morgan Stanley that that corporate profits in Britain will fall by more than during the 1930s depression. The report highlighted banking losses and weak oil prices as major factors. This morning they were worried about the all-but-nationalisation of Lloyds Bank Group and the £260 billion of its assets that the government will guarantee.
The story was hardly different for the US dollar, at least as far as reaction to the economic data was concerned. Even Friday’s Non-farm Payrolls number managed to slip through without making waves. A month ago the US employment report showed a loss of 600k jobs in January. Analysts predicted that 650k more would have gone down the pan in February and the market spent the week building up that number in their minds to 700k, 750k, even a million. The number that came out on Friday was bang on target at -651k so there was little for the market to do other than prune short dollar positions.
Comments from Federal Reserve President Ben Bernanke helped the dollar in a roundabout way. In a typically po-faced closing sentence he told the Senate Budget Committee that “without fiscal sustainability… we will have neither financial stability nor healthy economic growth.” Equities plunged so the dollar went up. President Obama tried to do his bit for the market, saying in a televised interview that stocks are becoming a “a potentially good deal” for those willing to think long term. Investors did not fall in with his view. They believe stocks will be a potentially better deal at even lower levels. Again it was a case of equities down, dollar up.
With few heavyweight economic data from either side of the Atlantic this week it looks as though it will again be corporate news and official views that drive currencies. For sterling the risk is that nervousness about UK banks’ solvency and independence will weigh it down. Last week’s technical support has already given way and we could see another expedition to January’s lows.
Investors should be ready for sterling to drop another three cents in fairly short order. As long as that is the full extent of the damage it should not alter the risk management strategy. Buyers of the dollar should hedge their exposure, fixing a price for half of whatever they need and 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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