MARKET OBSESSED BY PROSPECT OF £1=€1
Sterling was steady against the Dollar as others moved ahead. UK economic data conspired to encourage the bears. McDonald’s is “a safer investment” than gilts. The US government deficit has risen sharply as a result of bail-outs. There are reasons to be optimistic about Sterling/Dollar.
The Pound’s three-cent swoop from $1.50 on Monday and Tuesday was worrying at the time but the following two days’ rally took it back up to peak at $1.51. A correction to $1.48 on Friday was followed by a weekend recovery and Sterling was trading at $1.50 when London opened this morning, unchanged on the week.
As the week progressed, investors and the media became steadily more transfixed by the spectacle of the Pound heading towards parity with the Euro. The possibility of that outcome affected every other Sterling exchange rate, even where it was not strictly relevant. Having seen the Pound fall by a substantial margin in the last 18 months investors seemed inclined to push for the obvious £1=€1 objective, if for no better reason than that of Mallory for wanting to climb Everest.
The UK economic data conspired to keep the bears supplied with ammunition. The RICS agreed with the government that house prices were still moving lower; it recorded the lowest number of November sales since the beginning of its data series 30 years ago. Rightmove told a similar story on Sunday night, conceding that its index of offered prices was some way adrift of what was actually being realised by vendors. UK industrial production fell by 1.7 per cent in October, down by 5.2 per cent from a year earlier. Both components of the producer price index went down between October and November with manufacturers’ costs 3.3 per cent lower on the month. There were no cheers to be heard though. The CBI’s industrial trends survey, which asks manufacturers how business is going, matched October’s 28 year low.
For Sterling the deepest cut of all was the media’s discovery that McDonald’s is a safer bet than the UK government. Credit default swap market prices revealed a cost of 1.2 per cent to insure five year gilts. Cover for five year bonds issued by the burger joint cost just 0.77 per cent.
For the US Dollar there was a slightly less rude awakening. Although it lost little or nothing to the Pound it cut six Euro cents and three Yen. It could be that investors are modifying their attitude to the haven-currency-of-choice. It could also be that they are falling in with the immense size of the bail-out packages being lobbed out to all and sundry. The $50 billion that Bernard Madoff (with the money) has purloined in 50 years pales into insignificance against the $402 billion deficit recorded by Washington in the first two months of this financial year. The total deficit for the whole of the previous 12 months was just (just!) $482 billion. Investors are starting to wonder where the money is coming from.
Nor were those same investors impressed when the Senate kicked out the bill to inject $14 billion into Detroit motor manufacturers. It’s a flea-bite; why are they fretting so? Until only recently the market saw any new US cash hand-out as a calming influence, an inducement to embrace risk and therefore bad for the US Dollar. That attitude now seems to be morphing into a realisation that failing US businesses are bad for the buck.
That the Pound can make progress against the US Dollar, even as it loses ground to the Euro, is reason for optimism. For some time we have advocated hedging at least half of any requirement to buy Dollars. There are now grounds to reconsider that strategy. The Pound has been hammered for five months because it has been the softest target. Investors are increasingly beginning to wonder if it has gone too far. US treasuries remain – and will probably always remain – a more attractive vehicle to investors than UK gilts. The market is much bigger and liquidity is assured. But that does not mean investors’ appetite for US treasuries is infinite, especially if the supply is infinite.
Buyers of the Dollar who need certainty should, as ever, cover their whole amount immaterial of the current exchange rate. For those with a taste for risk, look for a Sterling/Euro base that will spark a turnaround in Sterling/Dollar. Place a stop order, in case it all goes haywire, and look for better levels early in the new year. That’s today’s hostage to fortune.
For more information and expert guidance on the currency markets, call Moneycorp today.
Laura McLoughlin – Laura.McLoughlin@moneycorp.com
Regional Manager – Florida
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