IB FX View
Sterling gets its house in order
Tuesday June 9, 2009
More and more analysts and economists were guilty of shrinking away from the British pound during the last week as political unrest romped through the dorm. Today, thanks to two events the pound appears to be getting back to norm and has jumped back above $1.6230 against the dollar and is stronger against its European companion at 86.09 this morning. The return of risk appetite that was conspicuous by its absence in the aftermath of evidence of fewer job losses in the U.S. last week has today weakened the dollar as investors rethink the prospects for higher American interest rates.
Click on link for updated table throughout the day at http://www.interactivebrokers.com/en/general/education/FX-View.php?ib_entity=llc
Not enough of Prime Minister Gordon Brown’s party members are willing to conspire to oust him, which has caused the froth to fizzle on the perilous political situation. Behind a closed-door session with restless Labor Party members last night, Mr. Brown appears to have quelled disquiet over his policies and the health of the British economy. Members don’t have much choice: They must either stand behind their leader patiently or face the prospect of a national election, which right now know they would lose badly. Recent local and European election results don’t paint a pretty picture.
The Royal Institute of Chartered Surveyors reported an 11.8% quarterly growth rate in housing transactions through May, albeit at weaker prices. But the near-term trend appears to be one of an end to house price declines. The number of respondents in their monthly survey reporting lower prices rather than higher ones at 44% was the slowest pace of annual house price declines since November 2007. Other recent building society reports have pointed to a surprising rise in home values indicating that the recession might be over.
As events appear to indicate that the country is getting its house in order, the medium-term view that Britain is currently undervalued as an investment haven on account of the precipitous 2008 decline in the value of the pound is coming back to ascendancy.
The dollar is losing some of its gusto as Tuesday’s session wears on. There are a couple of reasons. First, there’s something of a radical rethink underway on the timing of any interest rate increases out of the Fed. Friday’s employment report was mistaken as a cue for an economic recovery so strong as to require an immediate reversal of the treatment. Interest rate futures and bond prices slumped worldwide and one can only imagine that fast-selling triggered more technical selling before fresh shorts took hold, all within the space of hours. Today, a sense of sanity has prevailed as investors realize that rate tightening is not on the agenda.
Several notable investment banks and market analysts are coming to make this point this morning. Amongst them, Goldman Sachs is advising clients to buy euros over dollars with a view to the euro/$ rate reaching $1.45 before it reaches $1.3720. It cites rising risk appetite harming the dollar as investors move out of the safety of dollars. As that happens, and as we’ve recently been reporting, commodity prices continue to rebound out of both natural demand as the global economies defrosts and as investors choose physical assets over dollars. Finally, they cite the continued chatter over the need or implementation of an alternative global currency to replace the dollar.
While the advice to favor euros sounds like a plan, the problems beneath the Eurozone surface continue to argue against that play. The rally in the dollar on Friday highlights the deficient nature of Europe’s recovery plan and if you listen to the comments from central bankers about the energy spent on quantitative easing, their debate hinges not on when the recovery will stick, but whether they have acted enough and for a sufficiently prolonged period. The ECB recently came into the cross hairs of German Chancellor Angela Merkel for bowing somewhat to international pressure to ease policy this way.
May’s 9.4% rally in the value of the Canadian dollar reflects confidence in the global economy but on the other hand, exporters are watching the flickering embers of any recovery rapidly extinguished as the exchange rate improves. The Aussie dollar too continues to climb and is higher at 79.71 U.S. cents today following a boost to business confidence as revealed in a National Australia Bank sentiment survey. The report covers 560 businesses and showed a 12 point jump to a minus two reading for the biggest gain in confidence in eight years. On Thursday this week May’s employment report is set to show a rise in the rate of unemployment from 5.4% to 5.7%. While some analysts believe that this may cap any gains in the Aussie dollar beyond 80 cents, one has to recognize that this is certainly a lagging indicator.
Andrew Wilkinson
Senior Market Analyst ibanalyst@interactivebrokers.com
Note: The material presented in this commentary is provided for informational purposes only and is based upon information that is considered to be reliable. However, neither Interactive Brokers LLC nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. Neither IB nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results.
This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities or other financial instruments mentioned in this material are not suitable for all investors. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue. The information contained herein does not constitute advice on the tax consequences of making any particular investment decision. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation to you of any particular securities, financial instruments or strategies. Before investing, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.
