Sterling goes nowhere over holiday period

In this week’s Moneycorp Dollar update:
Quiet and illiquid markets dampen activity and exaggerate exchange rate movements. Third quarter economic performance disappoints.

From $1.61 on the Monday before Christmas the pound faded to $1.59 and dipped to $1.5850 the following week. The turn of the year brought a four-cent rally and it opened in London this morning at $1.6150, half a cent better on the fortnight.

As anticipated, two shortened weeks and two major holidays made for an inactive and illiquid foreign exchange market. Market-makers, investors and traders did only what was absolutely necessary. Corporates and other market-users got involved only when they had to. Any sizeable orders that did go through had a disproportionately great impact, causing exchange rates occasionally to jump or slump for no visible reason.

There was less than the usual reaction to economic data. A disappointing revision to figures for the third quarter of ’09, confirming that Britain’s economy had shrunk for an 18th month, prompted some selling of the pound. However, the damage was nowhere near as great as it might have been if the announcement had come two weeks earlier or later. Nor did the minutes of the Bank of England’s Monetary Policy Committee have much impact. Their content was exactly as investors had been expecting. It was much the same with Nationwide’s report of a further rise for house prices in December; vaguely helpful but nothing to get excited about on new year’s eve.

There was disappointment also on the other side of the Atlantic. The United States’ economic performance in the third quarter was better than Britain’s but not as positive as the market had been expecting. Durable goods orders and new home sales also fell short of forecast. But it was not all dreary news. Existing home sales rose by 7.4% in November and two house price indices – the Housing Price Index and Case/Shiller’s metropolitan index – were higher on the month. Two measures of consumer confidence that came out over the holiday fortnight cancelled out each other. The Conference Board reported a two-point improvement to 52.9 while Michigan university saw a one-point fall to 72.5.

The new year will undoubtedly bring new tests for sterling. Dangling over it are still the budget deficit, the risk of a downgrade in Britain’s credit rating and of course the general election. Investors seem happy at the moment to give sterling the benefit of the doubt, in anticipation of a change of government and a change of fiscal policy. Nevertheless, the doubt is still there. The preferred risk management strategy therefore remains unchanged for the time being. Buyers of the dollar should stick to a hedged position, locking into a rate for half the money they will need.

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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