Surprise Rally for the Dollar

In this week’s update:
Moneycorp US Dollar update 10 August 2009

SURPRISE RALLY FOR THE DOLLAR
Smaller than expected US job losses sent the dollar up instead of down. The UK economic data were generally good but the pound came to grief after the MPC announcement.

Setting off north from $1.67 the pound quickly extended its gains at the beginning of the week. On Monday and Tuesday it made half-hearted attempts to crack the $1.70 barrier. On Wednesday it made a more serious effort that reached nearly half a cent higher. By Thursday morning sterling was back below $1.70 andit tumbled another two cents in the afternoon after the Monetary Policy Committee’s announcement. Friday saw it lower still and it opened in London this morning at $1.6650.

Last week was a game of two halves for sterling. For three days it could seemingly do no wrong and during the remaining two days it could do nothing right.

From the word go it received help from a succession of upbeat economic data. On Monday the Purchasing Managers’ Index for manufacturing delivered a positive surprise by coming in above the 50-level that separates contraction and growth. At 50.8 it only just made the cut but it was comfortably ahead of the opposition in Euroland and the United States. After two months above 50 the services sector PMI was less of a surprise. Even so, the point and a half improvement to 53.2 went down well with investors. Help was also forthcoming from the Halifax house price index, which went up by 1.1% in July, and June’shalf per cent increase in industrial production.

That was the good bit. On Thursday there was a serious setback. Investors had been geared up for the Monetary Policy Committee to make some sort of statement about its Asset Purchase Facility, the quantitative easing that has so far seen the Bank of England spent £125 billion on buying bonds.

Investors’ main question had been whether the Bank would go on to spend the £25 billion remaining in its war chest or call a pause to the programme. Most were not mentally prepared for the MPC’s decision to extend the programme to £175 billion. More importantly, they were unnerved by the Bank’s pessimism about the economy. To read in the Bank’s statement that the recession is “deeper than previously thought” was a bit of a shock.

The story for the dollar was exactly the reverse of that for sterling. For four days it behaved exactly as investors have come to expect, reacting positively to bad news and doing badly when US or global economic data were positive. Improvements in the US PMIs for manufacturing and the services sector were directly unhelpful, as were a strong +3.6% increase for pending home sales and an acceptable +0.4% rise in factory orders.

The highlight of the dollar’s week was always going to be Friday’s US   employment report. The change in Non-farm Payrolls is arguably the most important monthly statistic in the world at the moment. Analysts estimated there had been a net loss of around 325,000 jobs and that is the sort of number investorswere expecting. More than that, they assumed, and the dollar would go up. A smaller number would send it lower. That is how things have worked for the last couple of moths or so. The payrolls figure they actually got showed the loss of 247,000 jobs in June, far better than expected. And the dollar went up, as it would have done in “normal” times, instead of down.

So is this a new dynamic or simply an egregious example of market unpredictability? With the experience of just one event it is too early to tell but it does look as if the dollar is in for some more kindly treatment in the immediate future. The important question is how this development will affect theoutlook for sterling against the dollar. It does not look promising down here below $1.67 and there is a realistic possibility that we could see $1.63 again before long. Buyers of the dollar should consider increasing their hedge to 75% of their requirement.

For more information and expert guidance on the currency markets, call Moneycorp today on +44 (0)20 7589 3000, don’t forget to mention International Horizons to secure the best rate. Alternatively go to the Moneycorp website where you can open a free, no obligation Trading Facility.

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