Investors in two minds about the pound

In this week’s Moneycorp Dollar update:
Guarded optimism from the Bank of England balances concern about UK government borrowing. US employers report a striking improvement in the jobs situation.

Sterling started last Monday at $1.6550 and passed through that level another four times before the weekend. Investors were no more certain which way to take it than they had been the previous week. They had a look at $1.6350 and $1.6750 but could not make up their minds which looked better. When London opened this morning the pound was trading at its lows.

Sterling began the week as it had ended the previous one; under the microscope. Investors were more relaxed regarding the default of Dubai World and the exposure of UK banks to the firm. However, they were still sensitive about government debt, which is expected to reach 80% of Britain’s economic output before long. Investment bank Morgan Stanley fanned the flames with a research paper. It said ‘In an extreme situation a fiscal crisis could lead to… severe pound weakness and a sell-off in UK government bonds. The Bank of England may feel forced to hike rates to shore up confidence in monetary policy and stabilize the currency, threatening the fragile economy.’ Nobody could accuse Morgan Stanley of pulling its punches.

On the positive side, there were some chinks of light from the Bank of England. Monetary Policy Committee member Adam Posen said in a speech that the UK economy has probably passed its lowest point. His colleague Spence Dale, who is also the Bank’s chief economist, went down a similar track the following day. He told an audience in Essex that ‘the economy appears to have turned’ and ‘we are likely to be moving into a period of renewed expansion.’

For much of the week the economic data coming out of the United States was disappointing. The purchasing managers’ indices (PMIs), compiled from surveys of businesses across the country, operate on a scale of 0-100 where 50 represents the neutral point between falling and rising activity. The PMIs for the manufacturing and services sectors have been rising in recent months, adding to the image of recovery. Last week the figures for November both went down by a couple of points. The manufacturing index dropped to 53.6 while the services sector measure fell back below the boom/bust divide to 48.7.

It was a very different story on Friday with what is probably the most important economic statistic to investors; US non-farm payrolls. The tally of US jobs created or lost each month is seen as a critical pointer to how the US economy – and therefore the world economy – is doing. Analysts expected the November figure to continue the trend of the previous two years of job destruction, this time to the tune of around -120,000 jobs. When a figure of -11,000 appeared on their screens traders stared in disbelief, thinking it must be a typo. It was not, and to put icing on the US economy’s cake the October number was revised upwards from -190,000 to -111,000. That worked out at 188,000 more jobs than investors had been expecting. For once, a good US economic statistic was good for the US dollar and it finished the week on a high note.

So another week of good-news-bad-news from both sides of the Atlantic left investors no wiser than they had been at the outset. We remain stuck with a pound/dollar relationship that cannot make up its mind what to do and, therefore, does nothing. We also therefore remain saddled with a neutral risk management strategy. Buyers of the dollar should hedge half their requirement with a forward purchase. Those with a short time horizon who do not want to cover their whole exposure should protect themselves with a stop order.

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 rates. Alternatively go to the Moneycorp Website where you can open a free, no obligation Trading Facility.


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