Indeed the US economy has been displaying the same old negative aspects as usual. The housing market in particular continues to deliver fewer sales and lower prices. New Home Sales hit a 12 year low in November. High oil prices and weak sentiment in the manufacturing sector have further dented confidence in the Dollar. An unusually poor showing in the important monthly change in Non-farm Payrolls last Friday did not cause as much havoc as might have been expected, mainly because the services sector Purchasing Managers’ Index was stronger than forecast.
As badly as the Dollar has done, Sterling has performed worse. It may be an exaggeration to describe the recent run of UK economic data as a catalogue of disaster but you have to look very hard to find even a glimmer of light at the end of the tunnel. The whole picture points to lower Sterling interest rates and that outlook undermines the Pound. Inflationary pressures are easing. The current account deficit is widening. Just before Christmas the newspapers were awash with doom and gloom.
Most significantly, the minutes showed that the Monetary Policy Committee was unanimous in its decision to cut rates at its December meeting. MPC unanimity is not unheard-of but a 9-0 vote for lower rates led the market to believe further easing is in the pipeline, even though the MPC believed that it was easing policy “pre-emptively”. This week’s MPC meeting is not expected to deliver a fresh rate cut but all eyes will be on the February decision.
If, as the Mommas and the Poppas claimed, ” the darkest hour is just before dawn” Sterling should be in for a spot of recovery. It sure looks dark and there is certainly scope to argue that the UK economy is performing no worse than that of the States. Unfortunately the warning bells are ringing on both sides of the Atlantic. A trading day is now judged to be a good one for the Pound if it doesn’t lose ground to the Dollar. It is not impossible to imagine Cable climbing back above $2 but it is a lot easier to picture a retracement to the lows of March last year, somewhere around $1.92.
Buyers of the Dollar should cover their exposure, selling Sterling forward to match expected payment dates. An element of opportunity cost risk is implicit in this strategy since any unexpected Sterling rally will be of no benefit once the position is covered. Even so, the downside risk feels a lot more real than the vague possibility of a miracle deliverance for the Pound.
