Sterling gets it in the neck as policy-makers fumble
The British pound fell sharply following the release of the Quarterly Inflation Report, which indicated that under its current course, inflation would be 0.5% by the end of 2010. Economists expect that first quarter economic contraction will be 4% this year. Governor Mervyn King is pretty much tongue-tied as he explains that the economy needs something to replace monetary policy relaxation before rates fall to zero, since the effectiveness of cutting rates is diminishing. A recent turnaround in the fortunes of the pound was padded recently by hopes that the two-year view might show inflation closer to its floor rather than undershooting it.
Click on link for updated table throughout the week at HYPERLINK "http://www.interactivebrokers.com/en/general/education/FX-View.php?ib_entity=llc" http://www.interactivebrokers.com/en/general/education/FX-View.php?ib_entity=llc
The pound lost ground against both the dollar to $1.4339 and against the euro, which bought 90 pennies for the first time in a week, before the pound found its feet. The difference in reaction by the British pound contrasts to that of the dollar in light of Treasury Secretary’s now infamous outline on a vehicle for handling toxic banking assets. The current inability of governments to effectively solve the intricate and constantly evolving economic morass is worrisome.
While President Obama’s Monday night national address elevated the message from Secretary Geithner on Tuesday, by Wednesday some commentators had begun to speculate that the incoming administration was already over. Well, we don’t envy them their task.
Mr. Geithner’s plan reminds us of just one cog in a finely made Swiss watch. In isolation and to the naked eye the cog is meaningless until it meshes seamlessly with all the other hundreds of parts that make up the timepiece. While his plans may have merit, Wall Street shot them down, disappointed that he hasn’t fixed their problems.
Proving awkward elsewhere around the globe, British unemployment rose to its highest since July 1999 today, which also undermined the pound. Mr. King admitted in rather transparent terms that other monetary measures must drive the money supply in order to revive lending. With the Bank admitting that growth prospects were tilted “heavily to the downside” one wonders how high unemployment might rise to. The Asian-inspired crisis in 1999 was a mere drop in the ocean compared to today and by the Bank’s own admission, they simply don’t know how to deal with it. Crumbs of comfort for the American government, but hardly inspiring from anyone’s perspective.
China noted that imports plunged by 43% in January compared to a year earlier. Investors keep banding about the theory that if the Chinese government refuses to buy U.S. government debt – then rates will go sky high. But have those investors considered that without the creation of a yawning budget deficit to replace private demand, there will be no growth. Without growth the army of Chinese workers accustomed to providing goods for the rest of the world, will swell the ranks of the unemployed? The world is intricately linked and we can’t forget that much.
The Australian dollar responded negatively to news of more consumer pessimism, which has seen more pessimists than optimists for exactly one year now. The Aussie unit rallied mid-morning though in the U.S. to 65.47 against the dollar and even flexed its muscles against the Japanese yen.
News that Canada’s trade deficit rang up its first negative showing in thirty years underlines the lack of commodity demand. The loonie traded at $1.2466 against its neighbor, slightly weaker on the day.
Traders appear reluctant to push the dollar higher against the euro despite the fact that events took rather a bad turn for the worse during the past 24 hours. At $1.2907, the euro is just beginning to figure this out as it heads appropriately towards an intra day low at $1.2850. The dollar didn’t benefit enormously from the equity selling pressure yesterday, but it looks and feels like those November 21 lows are there to be tested in the first quarter. That ought to mean a resumption in the dollar’s rally to above $1.2300.
Andrew Wilkinson
Senior Market Analyst
ibanalyst@interactivebrokers.com
The material presented in this commentary is provided for informational purposes only and is based upon information that is considered 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.
