GBP/USD Monthly Update
Nov 4th 2008, 8:31 pm
#1
BE Enthusiast
Thread Starter
Joined: Dec 2004
Posts: 524
GBP/USD Monthly Update
As requested by a number of BE regulars here's a brief update on what's happening in the currency markets. Sorry it's so long, but any market watchers out there will know a lot has been happening!
Summary: One year’s of Volatility in a Week!
The month started with a bang as the US bail-out package failed to get through the lower House of Congress, sending the stock markets into another record breaking tail-spin. Meanwhile banks both sides of the Atlantic continued to collapse with US bank Wachovia, rescued by Citibank (later to be replaced by Wells Fargo), Bradford & Bingley and Belgium’s Fortis effectively nationalised and further carnage in Germany and Iceland, all on the same day.
The popular up-rising against the bailout package was gradually subdued by the pragmatic voice of the Senate, as it became clear that a lack of credit on Main Street was a more serious issue than how to punish Wall Street and the lower House eventually followed suit late on Friday. No doubt the escalation of global banking failures, a collapse in the US manufacturing survey and the largest monthly fall in employment since 2003, concentrating enough minds on the big picture.
• Despite the focus remaining on the US problems, the US Dollar continued to strengthen as global investors sought the safe-haven of US Treasury Bills and Bonds, sending yields tumbling. GBP/USD slipped throughout the week to trade below 1.76 again, a fall of 11 cents in a week.
• Some of this fall could be attributed to the Bradford & Bingley news and an alarming fall in August mortgage lending to a mere £143 million, compared to £3 billion the previous month and £9 billion just a year ago. Whilst the Government dithering over stamp duty was no doubt the prime suspect here, this is no comfort to any other business dependent upon house sales in the UK. The monthly service and manufacturing surveys also dropped precipitously, virtually confirming that Q3 is already doomed to show a negative GDP.
We saw ever more radical, comprehensive and co-ordinated rescue plans emerge from around the world in response to the spiralling financial crisis but the turmoil continued maintaining unprecedented levels of volatility in the stock, commodity and currency markets.
• In the UK, Brown and Darling unveiled a £500 billion rescue package designed to recapitalise the ailing banks and get the LIBOR market working again. The package was widely acclaimed for its size and content but bank shares continued to be sold and the 3 month LIBOR rate refused to fall indicating no pick up in activity. The globally co-ordinated 0.50% interest rate cut again offered hope of some respite but the markets remained firmly in panic mode. The key features of the last week’s meltdown were panic selling of equities and any other long-term investments such as the currency carry trade. Some of this capitulation can be traced to the forced unwinding of Lehman’s investments and the knock on impact on hedge funds and other investment funds who are both running out of liquidity and desperate to sell assets themselves ahead of the rest of the market. The extreme conditions have resulted in some of the thinnest markets traders have ever experienced, leading to widening spreads and massive swings in prices minute to minute. This is being felt in the currency markets every bit as much as in the stock markets.
The story here is a combination of Dollar strength and Sterling weakness. Firstly the Dollar continues to strengthen as US Dollar based funds (including US, Far East and Middle East) capitulate out of non-Dollar assets and buy the Dollars back for the fund. In previous weeks, this had been a flight into the safe haven of US Treasury Bonds but it appears that only cash will do now. London’s pre-eminence as a global financial centre means that many of the non-Dollar assets are in Sterling, creating some of its current weakness. The importance of the City to the UK economy also militates against Sterling when currency speculators look into future growth prospects.
• Also counting against the Pound was the implosion of the Icelandic banking sector which revealed a huge community of UK savers who had been chasing the higher yields on offer. No sooner had they been offered a reassuring guarantee by the UK Government, than it became clear that many Local Authorities and Charities had also placed their funds in Icelandic banks, and this time the UK Government declined to immediately cover these deposits.
• Finally, the panic out of currency carry trades saw the Yen strengthen and the Australian and New Zealand Dollars depreciate at a record pace. Sterling has also been used as the ‘higher yielder’ in this investment, hence GBP/JPY crashed over 20 Yen to 7 year lows, adding to Sterling’s overall weakness.
• We have not seen this type of move in GBP/USD since Sterling’s ignominious fall out of the ERM in 1992 and whilst that was a Sterling-specific event, and the current conditions are a global phenomenon, we can draw some lessons from that experience.
• The first is that such illiquid and volatile markets may not respect the traditional support and resistance levels in the short-term. We felt that the 1.70 – 1.74 area which had proved to be both the cap (resistance) in the post ERM years until 2003 and strong support on the dip in 2005/06, would come into play again during this time, but the ferocity of the past week’s move has punched a crater in that expected platform. Whether this proves to be another trap-door for GBP/USD remains to be seen but we note that, as in all markets, although these are far from normal conditions, this previous pivot point for GBP/USD, 1.70, is perceived as such an important level; it may yet prove to have some validity.
• However, the piercing of this level last week cannot be ignored as a signal and we stress that as risk managers, first and foremost, we must urge extreme caution for our Dollar buyers.
• The G7 meeting although not producing any fresh initiatives, demonstrated unity amongst the major economic nations and appears to have calmed the markets to a degree this morning. The EU meeting in Paris also made the right noises and a package similar to the UK version looks likely to emerge.
• The UK package has been bolstered again with 2 major UK banks effectively nationalised. Tier 1 capital has been increased, bank heads have stepped down and bonuses and dividends suspended, as part of the Brown/Darling scheme, again to general acclaim. Details are still being released but so far the 2 bank’s shares are down, the other banks are up and the FTSE is up strongly.
Going forward most industry analysts expect continued volatility despite the election of Obama. No surprises there!
Whilst FX isn't the most thrilling of subjects, the sooner you begin to think about your money transfers, the more likely are to make your money go as far as you do.
Best Regards
Mark Bodega
Director - HiFX
Summary: One year’s of Volatility in a Week!
The month started with a bang as the US bail-out package failed to get through the lower House of Congress, sending the stock markets into another record breaking tail-spin. Meanwhile banks both sides of the Atlantic continued to collapse with US bank Wachovia, rescued by Citibank (later to be replaced by Wells Fargo), Bradford & Bingley and Belgium’s Fortis effectively nationalised and further carnage in Germany and Iceland, all on the same day.
The popular up-rising against the bailout package was gradually subdued by the pragmatic voice of the Senate, as it became clear that a lack of credit on Main Street was a more serious issue than how to punish Wall Street and the lower House eventually followed suit late on Friday. No doubt the escalation of global banking failures, a collapse in the US manufacturing survey and the largest monthly fall in employment since 2003, concentrating enough minds on the big picture.
• Despite the focus remaining on the US problems, the US Dollar continued to strengthen as global investors sought the safe-haven of US Treasury Bills and Bonds, sending yields tumbling. GBP/USD slipped throughout the week to trade below 1.76 again, a fall of 11 cents in a week.
• Some of this fall could be attributed to the Bradford & Bingley news and an alarming fall in August mortgage lending to a mere £143 million, compared to £3 billion the previous month and £9 billion just a year ago. Whilst the Government dithering over stamp duty was no doubt the prime suspect here, this is no comfort to any other business dependent upon house sales in the UK. The monthly service and manufacturing surveys also dropped precipitously, virtually confirming that Q3 is already doomed to show a negative GDP.
We saw ever more radical, comprehensive and co-ordinated rescue plans emerge from around the world in response to the spiralling financial crisis but the turmoil continued maintaining unprecedented levels of volatility in the stock, commodity and currency markets.
• In the UK, Brown and Darling unveiled a £500 billion rescue package designed to recapitalise the ailing banks and get the LIBOR market working again. The package was widely acclaimed for its size and content but bank shares continued to be sold and the 3 month LIBOR rate refused to fall indicating no pick up in activity. The globally co-ordinated 0.50% interest rate cut again offered hope of some respite but the markets remained firmly in panic mode. The key features of the last week’s meltdown were panic selling of equities and any other long-term investments such as the currency carry trade. Some of this capitulation can be traced to the forced unwinding of Lehman’s investments and the knock on impact on hedge funds and other investment funds who are both running out of liquidity and desperate to sell assets themselves ahead of the rest of the market. The extreme conditions have resulted in some of the thinnest markets traders have ever experienced, leading to widening spreads and massive swings in prices minute to minute. This is being felt in the currency markets every bit as much as in the stock markets.
The story here is a combination of Dollar strength and Sterling weakness. Firstly the Dollar continues to strengthen as US Dollar based funds (including US, Far East and Middle East) capitulate out of non-Dollar assets and buy the Dollars back for the fund. In previous weeks, this had been a flight into the safe haven of US Treasury Bonds but it appears that only cash will do now. London’s pre-eminence as a global financial centre means that many of the non-Dollar assets are in Sterling, creating some of its current weakness. The importance of the City to the UK economy also militates against Sterling when currency speculators look into future growth prospects.
• Also counting against the Pound was the implosion of the Icelandic banking sector which revealed a huge community of UK savers who had been chasing the higher yields on offer. No sooner had they been offered a reassuring guarantee by the UK Government, than it became clear that many Local Authorities and Charities had also placed their funds in Icelandic banks, and this time the UK Government declined to immediately cover these deposits.
• Finally, the panic out of currency carry trades saw the Yen strengthen and the Australian and New Zealand Dollars depreciate at a record pace. Sterling has also been used as the ‘higher yielder’ in this investment, hence GBP/JPY crashed over 20 Yen to 7 year lows, adding to Sterling’s overall weakness.
• We have not seen this type of move in GBP/USD since Sterling’s ignominious fall out of the ERM in 1992 and whilst that was a Sterling-specific event, and the current conditions are a global phenomenon, we can draw some lessons from that experience.
• The first is that such illiquid and volatile markets may not respect the traditional support and resistance levels in the short-term. We felt that the 1.70 – 1.74 area which had proved to be both the cap (resistance) in the post ERM years until 2003 and strong support on the dip in 2005/06, would come into play again during this time, but the ferocity of the past week’s move has punched a crater in that expected platform. Whether this proves to be another trap-door for GBP/USD remains to be seen but we note that, as in all markets, although these are far from normal conditions, this previous pivot point for GBP/USD, 1.70, is perceived as such an important level; it may yet prove to have some validity.
• However, the piercing of this level last week cannot be ignored as a signal and we stress that as risk managers, first and foremost, we must urge extreme caution for our Dollar buyers.
• The G7 meeting although not producing any fresh initiatives, demonstrated unity amongst the major economic nations and appears to have calmed the markets to a degree this morning. The EU meeting in Paris also made the right noises and a package similar to the UK version looks likely to emerge.
• The UK package has been bolstered again with 2 major UK banks effectively nationalised. Tier 1 capital has been increased, bank heads have stepped down and bonuses and dividends suspended, as part of the Brown/Darling scheme, again to general acclaim. Details are still being released but so far the 2 bank’s shares are down, the other banks are up and the FTSE is up strongly.
Going forward most industry analysts expect continued volatility despite the election of Obama. No surprises there!
Whilst FX isn't the most thrilling of subjects, the sooner you begin to think about your money transfers, the more likely are to make your money go as far as you do.
Best Regards
Mark Bodega
Director - HiFX
Nov 26th 2008, 9:36 am
#2
BE Enthusiast
Joined: Oct 2006
Location: Oakland
Posts: 664
Re: GBP/USD Monthly Update
Thanks Mark, interesting analysis, more of these please! Let's hope the 1.7 rate returns soon.
My wife and I both work for US companies. When we moved to Scotland last winter we had our UK salaries set based on our US salaries when we left. At the time the rate was 2:1, so that's how the salaries were set. Now we're earning 25% less in dollar terms, and a sizeable chunk of our expenses are in USD (student loans, help with mother in law's mortgage.)
The savings that we have managed to put aside whilst working in the UK are supposed to be towards a down-payment for a house when we move back to the US next year. So it has been very frustrating to watch the pound slide so fast and so far.
So I have a question. What would be a typical spread that you charge against the mid-market rate for a GBP to USD spot transfer of around £30,000?
My wife and I both work for US companies. When we moved to Scotland last winter we had our UK salaries set based on our US salaries when we left. At the time the rate was 2:1, so that's how the salaries were set. Now we're earning 25% less in dollar terms, and a sizeable chunk of our expenses are in USD (student loans, help with mother in law's mortgage.)
The savings that we have managed to put aside whilst working in the UK are supposed to be towards a down-payment for a house when we move back to the US next year. So it has been very frustrating to watch the pound slide so fast and so far.
So I have a question. What would be a typical spread that you charge against the mid-market rate for a GBP to USD spot transfer of around £30,000?
