Halo Financial USD Report - November 2010
QE2 is over so is it buy the rumour, sell the fact?
It seems like an eternity since stories started emerging that fears of a double-dip recession in the US would require further Quantitative Easing (QE) by the US Federal Reserve. When central bankers embark on asset purchases or QE, the market’s reaction is to justifiably sell that currency since it is being debased or diluted.
QE2 or QE Lite (the Federal Reserve’s second program of asset purchases) was mentioned in virtually every business news story in the two weeks prior to last week’s announcement and in this time the US dollar fell 4% or 6.5 cents against the pound. Last week the Fed announced US$600bn of stimulus set over an 8-month period of US$75bn per month, pretty much in line with analyst’s forecasts. However as often happens, now that QE has been announced and the rumour confirmed, the US dollar has actually strengthened 3.5 cents or 2% as traders “buy the fact”.
Fundamentals in the US remain patchy. Growth is very evident, but concerns remain over whether employment and housing numbers have bottomed or are continuing lower. US October nonfarm payrolls employment data last week were significantly better than expected and signalled a possible turnaround.
The proud pound on the other hand has seen some genuine strength in its own right due to strong fundamentals.
Q3 UK GDP growth was miles stronger than forecasts for the second quarter in a row proving the UK is indeed well out of recession. CPI inflation data remains elevated suggesting further Quantitative Easing from the Bank of England is not only unlikely, but irresponsible. Ratings agency S&P upgraded the outlook for the UK from negative to stable and added their support for the government’s austerity measures. And finally UK manufacturing data has surprised to the upside, rounding off a number of convincing reasons for the pound to strengthen.
This morning the important Bank of England Inflation Report was less dovish than expected with Governor Mervyn King confirming that the prospects for inflation remained highly uncertain and consequently so did the Bank’s future economic policy.
So where to now?
The general market opinion is that the US dollar will weaken against all currencies in the future as US officials keep printing greenbacks in a clear attempt to trade their way out the slowdown whilst decreasing the value of the mountain of debt they owe overseas holders of US treasuries. I am always concerned when a market is so one-sided; the contrarian in me tends to want to bet against the herd - so beware.
USD Buyers
We have been targeting the top of the up channel at $1.63/1.64 since sterling managed to finally break above $1.60 early this month. We still hold the view that dollar buyers are wise to target levels between $1.62 to 1.64 in the short-term whilst buying on spot as the gradual move higher progresses toward $1.67. Upside potential we feel is about the same as downside risk, in other words, we may see a push of 5-cents higher to $1.65 or 5-cents lower to $1.55.
USD Sellers
Massive support (a floor) comes in at $1.58, so orders below this level require a full scale break which brings on the possibility of $1.55 or $1.53. We therefore recommend orders above $1.58 to avoid trading at $1.63/1.64 levels.
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