Oversold pound offers buying opportunities
RATINGS agencies might have got a bad press during the financial crisis but yesterday’s volatile moves in sterling-US dollar indicate that they still command plenty of attention from the markets.
David Riley, Fitch’s co-head of global sovereign ratings, told Reuters Television early yesterday morning that Britain’s coveted triple-A rating is more at risk than that of any of the four other big economies with a top rating (the US, France and Germany). His comments sent sterling plunging nearly 1 per cent against the greenback in Asian trading.
Market commentators have long been arguing that Britain’s high budget deficit, which is forecast to reach 13 per cent this year, will be bearish for the pound. So far markets have shrugged off the likelihood of a downgrade by one of the three major ratings agencies, but should the debt situation get so bad that the UK loses its rating, then this would weaken sterling seriously. Was this the start of a worrying move?
Maybe not. Analysts attributed the sharp move against the dollar down to the thin trading that is typical of early mornings well ahead of the London open. Such a strong slump through the old resistance level of $1.6640 – which the pound successfully tested and broke through on Monday – would have taken out stops placed just below and big players, who know where these stops will be, accentuated the move further.
In fact, sterling-dollar has been steadily moving higher over the past week and buyers swooped on the pullback in the value of the pound to take out cheaper long positions. While there are still plenty of factors that will continue to depress the pound – yesterday’s widening trade deficit being a case in point – the currency has been so persistently weak that analysts are starting to call it oversold in the near-term.
BNP Paribas’ strategists recommend long positions in the near-term to take advantage of the current break higher, but remain cautious over the medium term. Sterling will still struggle against the commodity currencies but its best performance will be against the buck, with $1.70 on the cards for the end of 2009.
Sterling also sank by a similar amount against the euro on the Fitch report, but neither move is necessarily that significant. Saxo Bank’s John Hardy says: “Today’s Bank of England Quarterly Inflation report will provide a more important fundamental spark to the situation as the market has consistently moved very strongly on every new signal from the central bank. Our longer-term view is that euro-sterling remains overvalued.”
Whatever the longer-term impact the economic situation will have on sterling, it is clear that there is still plenty of appetite by traders to buy into the pound at slightly cheaper levels of around $1.66.