The fall was all the more telling given the general mauling the dollar took last week against a whole host of currencies. Before Friday’s pullback the Dollar hit a 26 year low against Sterling.
Traders were wary of holding ‘risky’ currencies as part of the carry trade which involves borrowing from a low interest rate currency like the Yen and investing in high yielding currencies like the Pound. The unwinding of this carry trade could have repercussions for the global economy as it is often used to finance international deals.
The Dollar was hit by the announcement that China may spread its currency reserves beyond the Greenback to currencies such as the Euro. On Thursday Fed chairman Ben Bernanke spooked the markets by saying that the US economy would ‘noticeably slow’ in the coming months, but at the same time refused to signal that a rate cut was imminent. Institutional traders ignored these signals and moved to price in another rate cut very soon. Fed futures now imply a 94% chance of a rate cut by December, up from 60% just one week ago.
Former Fed chairman Alan Greenspan was on record as saying that the Dollars slide against the Euro was over and that the selling pressure will now come from Asian currencies. Indeed ‘Dollar bashing’ has now reached record levels with the Dollar index (a measure of the dollar against 6 major currencies) now just off a record low of 75.077. Research from Bespoke investments shows that this Dollar bear market is now the longest (2316 days) and most extreme (down 37%) on record.
The 4th largest bank in the US, Wachovia corp., announced it was going to write down $1.1 Billion due to credit losses. This and Cisco’s earnings ‘miss’ were enough to cause equity markets to tumble towards the end of the week. Even the tech kings such as Google, Apple and RIM (Blackberry) were brought down from their stellar orbit.
In the UK the FTSE and Sterling were hit hard on the news that the UK's budget deficit is running at a record 6.9 Billion. Although this was thought unlikely to influence MPC policy after a no change verdict on rates last week, it did depress the markets when coupled with the rumours about Barclays.
The main financial institutions exposed to the credit crunch have come out and revealed their losses. However, Barclays are yet to reveal the full extend of their losses despite being one of the most exposed companies. Barclays rejected rumours that it was about to write off $10bn, but with the shares down 9% on the day at one stage, it is apparent that not everyone believes them.
Next week is again data heavy. The US bond markets are closed on Monday for Veterans Day, but the stock market is open. The week starts with important data for sterling and the FTSE with PPI, CPI and RICS house price balance data on Monday and Tuesday. There is no let up on Wednesday with the release of average earnings data and the BOE inflation report on. Consumer spending is the life blood of the US economy so Wednesday’s retail sales data will have a heavy impact on the market.
With the amount of data next week and so much uncertainty in the markets, about the only thing that is likely at this point is further volatility. So far this year there have been 12 days with a 2% up or down close on the FTSE, which is more than the previous three years combined.
Therefore a volatility trade might be the better option for next week. With an up or down trade you pick a high and a low value for the index to hit. If it touches either you win. An up or down trade on the FTSE 100 with the triggers set to 6100 and 6500 returns 13% over 10 days.
- THE END -
Pound Sterling Plunges Against the Yen
