Sterling unnerved by unemployment data. IMF predicts longer recession for Britain. Investors twitchy about latest US bailout.
The first half of the week saw sterling on the retreat. Having touched a $1.3850 low on Wednesday it bounced viciously and 24 hours later it was seven cents higher. Three attempts to break above $1.46 met with failure. The third of those took place when London opened this morning, leaving sterling struggling to extend the week’s four and a half cent net gain.
Although there was no particular shortage of data from the UK economy investors paid only selective attention to the numbers. They were far more interested in the anecdotal evidence, both from Britain and abroad. Perhaps the most irrelevant statistic of the week was Rightmove’s house price index. While the Nationwide and the Halifax report annual price falls of 18% or more Rightmove sees just a 9% decline. Unlike the first two indices, which are based on actual transactions, Rightmove measures the prices at which vendors would like to sell their properties. If they could.
The one set of figures that did hurt sterling was the unemployment numbers on Wednesday. Another 138,00 ex-taxpayers signed on the dole in February, taking the rate of unemployment past the two million mark. Having been primed by analysts and the media to expect it, investors could probably have lived with the 2 million unemployed. What they could not handle was the sharpest monthly leap in claimants since 1971.
Investors were more relaxed about the latest predictions from the International Monetary Fund. The IMF believes Britain’s will be the only western economy still in recession by the end of next year. News like that has brought the pound to its knees in the past. This time, everyone was far more concerned about the unemployment situation and about how the number could have risen from two to three million by the end of the year.
As was the case with sterling, the US ecostats had only a peripheral influence on the US dollar. The market ignored positive data for housing starts and building permits just as they had ignored a 1.4% fall in industrial production and the lowest level of capacity utilisation since the war. Even the reported outflow of $43 billion of foreign capital in January failed to ring any alarm bells for the dollar. Analysts had forecast a net inflow of similar size but nobody seemed to care.
What they did care about was the Federal Open Market Committee’s announcement on Wednesday evening. As expected, the FOMC left its interest rate target steady at 0%-0.25%. There was surprise, however, when the FOMC announced that it would step up its purchase of mortgage-backed securities and extend the asset purchase programme to include $300 billion of Treasury Bonds. The whole package of quantitative easing amounted to more than a trillion dollars of extra support for credit markets. Equity and bond markets boomed. The dollar choked.
It was still choking this morning because investors had found something else to stress about. For three months they had been waiting for Treasury Secretary Geithner to put some flesh on the bones of his plan to relieve banks of their “toxic” assets. With the plan scheduled for release today they now have worries at several levels: Will it win congressional approval? Will it be big enough? Is it too small? Will it work? What if it doesn’t?
Investors are fickle. At the beginning of the month they were all over the dollar like a rash, impressed by its safe-haven qualities and full of enthusiasm for all the relief and recovery bail-out programmes. Three weeks later their inclination is to sell the dollar, questioning the sustainability of its “reserve” status and fretting about the possible dangers of all the relief and recovery bail-out programmes.
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. Those of an optimistic bent may consider under-hedging now that a rebound is under way. Use a stop order to protect the downside in case of unexpected alarms.
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