Friday, 14 June 2013

The Bank of England Doing a Sterling Job?


The Bank of England Doing a Sterling Job?

Despite the seemingly singular focus of financial markets on the Fed and "Will They, Won't They (start withdrawing Quantitiative Easing in September)", I have been somewhat surprised by the turnaround in the Greenback over the last few weeks.

US Dollar Index - A Failed Breakout, 
Now Heading Back To 1-year Lows

Source: Bloomberg

The chart above would seem to suggest that the US has lost a lot of fans of late, backed up by the fall in US Treasury bond prices over the last month or so:

US 20+ Year Treasury Bond ETF Has Slumped

Source: Timetotrade

But before we get carried away bewailing the end of government bonds and a rising trend in bond yields, let's not forget that this is only a relatively short-term trend, and that it is not yet evident that bond yields are in a steadily rising trend (pointing to steadily falling bond prices given their inverse relationship).

UK Gilt Yields Still Very Low By Historical Standards

Source: Bloomberg

I have been pleasantly surprised by the better stream of economic newsflow coming out of the UK: unemployment continues to decline slowly but steadily, the recent monthly CIPS survey of services activity pointed to a stronger level of services activity than had been widely expected - according to Markit, the May figures highlighted a "sharper rise in activity as new business grows at fastest pace for over three years". 

UK Services Activity Growing Quickly

Source: Markit, ONS

So, What's The Trade?

I think the following is likely to be true:

1. the Fed WILL NOT start tapering or withdrawing monetary stimulus of any sort in September, or even at all over the rest of this year. The US economic data just is not strong enough to warrant it - the key ISM manufacturing survey for May points to contraction in US industrial activity (a 48.6 reading, below the 50 break-even level). 

2. The UK economy will continue to slowly improve, despite the best efforts of the UK government to torpedo economic momentum with their austerity policies. The Bank of England is key here in continuing to support the economy, the vital housing sector remains relatively buoyant - helping boost consumer confidence - and you might even start to get some results from the boost to business lending coming through sometime soon. 

3. The rising trend in trade-weighted Sterling looks likely then to continue, so long as this more positive economic trend in the Albion continues...

Trade-Weighted Sterling On The March Upwards Within Long-Term Range

Source: Bank of England

All in all, Cable (Buy Sterling, Sell US Dollar) looks good to me at this point, as it seems to have broken above the threshold of a double bottom formation on the chart below, suggesting further potential gains ahead:

GBP/USD Heading Back towards $1.60+?

Source: IG Group

Bon weekend to all, fingers crossed for a good trading week from Monday!


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