Sterling slides into 2010.

The Pound declined throughout December, trading from a high of 1.66 and finishing the month just above 1.60. Whereas the Pound spent most of the year benefiting from risk appetite in the market, the Dollar ended the year stronger as traders became bullish on the US economy.

Why? With the US out of recession and non farm payroll figures showing a huge decline in the rate of US job losses, it would seem more likely that the Fed would consider an interest rate hike sooner rather than later.

The US economy showed strong manufacturing and retail indices, positive consumer confidence and better than expected existing home sales.

Well that was 2009… 2010 could yet see Dollar weakness again as doubts surfaced in early January with the latest nonfarm payroll figures showing 85,000 job losses in the US, when some analysts had even forecast job creation.

As the Prime Minister came under pressure so did the Pound. Although Gordon Brown fought off a small revolt in his ranks, Sterling bulls will still want to see a decisive victory in the UK’s general election to be held before June this year. Even just the possibility of a hung parliament could send the Pound lower as neither party would have a majority to push through the legislation needed to combat the UK’s ailing recovery.

January 26th will prove crucial to Sterling. Preliminary GDP figures will show if the UK did indeed come out of recession in the fourth quarter of 2009. If so, we could see a Sterling rally; if not, traders are certain to sell the Pound, sending it much lower than current levels.

EUR/USD

Having traded as high as 1.51 at the beginning of December, the Euro declined toward the end of 2009, finding support at 1.42. Credit downgrades for Greece and the budget deficits of Ireland, Spain and Italy caused continued sell offs.

The Euro zone has offered some very unimpressive data compared to the United States. The Euro, however, has returned to trade above 1.44 after the US’s poor non farm payroll figures.

For more information contact info@britishhomesgroup.com or Telephone (407) 396-9914

Sterling at six year low

- Is a 20 year low on the cards?
- Dollar still the favourite for defensive investors

Sterling lost 11 cents in the first four days of the week, touching below $1.46 on Thursday. Consolidation over the weekend allowed it to open in London this morning at $1.47, close to its lowest level for six years.

It was another week of general investor nervousness for all the same old reasons. If the mood was not of unremitting gloom then the bright spots were very few and far between. Even Beijing’s announcement of a $580 billion stimulus package fell into the bad news box for many investors; China’s economy must be in a parlous situation to require such a boost. Following the IMF’s lead a couple of weeks ago the OECD added its weight to forecasts that developed economies will remain in recession until at least the middle of next year.

The weekend’s G20 meeting in Washington attracted more advance optimism among the tabloids than it did among investors. As Britain’s Observer newspaper put it afterwards, the meeting was “…never, in a single afternoon, going to solve a crisis that has been a generation in the making.” If anything, it made investors more nervous about the banking sector’s recovery prospects: The word “stimulate” cropped up three times while “regulation” appeared 11 times.

There was no let-up in the downward pressure on Sterling. Weak financial institutions, falling interest rates, an ailing real estate market and mounting job losses all fuelled the perception that in a world of economic dogs, Britain is the undisputed pack leader. Wednesday’s quarterly Inflation Report from the Bank of England gave every indication that falling inflation would mean yet more interest rate cuts by the MPC. It was another concrete lifebelt for the sinking Pound.

Nor were the recent economic data of any consolation. The RICS, the government and Rightmove all reported further house price falls. Rightmove also admitted that its subscriber base was dropping at the rate of 300 estate agents every month; more than twice as quickly as the 7 per cent yearly fall in asking prices.

As has become the norm, bad news for the global economy was good news for the US Dollar. Investor nervousness was more than enough to offset what would otherwise certainly have been Dollar-negative developments. Treasury Secretary Hank Paulson announced that the much-trumpeted Troubled Asset Relief Program would no longer be taking on board the troubled assets originally envisaged. Instead buying up dodgy mortgage-backed assets it would in future be used to recapitalise the banks directly. The market was utterly unconvinced that this change of tack was a positive development.

Nor was there unrestrained jubilation at the news US retail sales suffered their biggest ever monthly fall in October. But never mind, the market’s love affair with “safe” US treasury assets remains undimmed. Some big-time US investment banks look for the Dollar to continue its advance against the Pound as far as $1.28 – 10 cents down from current levels. Technically it is hard to argue with the projection but some equally clever and well-connected researchers told us not so long ago that we would see oil above $200 a barrel before Christmas.

Sterling’s fall against the Dollar looks over-extended but that does not mean it cannot go further. Tedious though it may be to offer the same advice again and again, the prudent risk management strategy for most buyers of the Dollar is to hedge the exposure, buying half the requirement forward. Anyone needing price certainty has no alternative but to buy the lot. Although there is every chance we will see Sterling higher than this in the new year that is of no consolation to investors with business to do in the meantime.

For more information and expert guidance on the currency markets, call Moneycorp today.

Laura McLoughlin – Laura.McLoughlin@moneycorp.com
Regional Manager – Florida

Moneycorp Inc
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Orlando
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