03-02-2008: June British Pound: Ties to the American Economy Holding It Back
Tony Blair got up before the House of Commons many times in a determined effort to get Great Britain to join the European Common Union and replace the Pound with the Euro. The rest of the government there didn't go for it, nor did people in Great Britain. They did in Ireland, however. Britain would have had to subject itself to rulings from the European Central Bank and most felt this would weaken the Pound. Today it appears England is acting more like America in regards to monetary policy and this "tether" as some call it is preventing the Pound from participating in an anti-U.S. Dollar rally. Almost any foreign currency you trade is on a profitable upswing as the Dollar Index hits new lows. But the Pound is not one of them.
While the Euro makes new highs against the U.S. Dollar, and Pound has slipped back from earlier highs, back across the $2.00 mark. The Dollar is getting crushed by former "carry" currencies (currencies associated with low interest rates which were sold against currencies associated with high interest rates.) The Japanese Yen and the Swiss Franc were formerly carry currencies, but now they appear to be changing places with the U.S. Dollar. Benanke's lower interest rate policy in the face of rampant inflation has assured a weaker U.S. Dollar. Soon the bottom may drop out of the Dollar as the U.S. Treasury printing presses roar into overtime and Japanese and Chinese investors take such a hit on their Dollar investments that they may be forced to gradually pull the plug on loans to the U.S. Repatriating their currencies too fast could hurt them as well by decreasing the value of Dollar-denominated assets, but at some point stoplosses must be honored.
Bernanke, Paulsen, and others have stated they see no evidence of a large repatriation of foreign currencies happening yet. But we prefer to take a line from Tiger Woods, namely "10% of fame and fortune is what you have already done. 90% of it is what you are going to do next." This idea has been applied to presidential candidates who have little or no experience... the latter being in the "10%." The rest is "change."
We would point out that a look at the forward contracts of most major currencies suggests they are relative flat and that investors aren't sure what will happen next. But U.S. Dollar Index forward futures are a clue that some expect a rebound in the Dollar. At the last close, December was about $1.00 higher than March.
June British Pound:
June British Pound:
Real GDP in Britain was up 3.1% in 2007. Consumer prices were up 2.2% in January from a year ago. The unemployment rate was 5.2% in December, the lowest since 1975. The last interest rate increase by the Bank of England was from 5.25% to 5.50% in May. Many expect another increase will be on the way. However, the Bank of England Minutes revealed unanimous support in Britain for a rate cut. Even after this was learned, the Pound continued to rocket higher on a U.K. report stating that retail sales rose at a 5.6% year-to-year rate in the latest comparison. But the closeness of British and American economies regarding housing, employment, and monetary policy versus inflation quickly dampened enthusiasm. The Bank of England projects read GDP to grow at 2.4% in 2008. Housing prices and UK lending softening are continuing leading some analysts to suggest the Pound may fall back further. Many fear U.S. financial contagion will spread to England. A U.K. hedge fund was forced to liquidate assets due to mortgage debt. Peloton Partners caused global nervousness. In recent trading, the U.S. Dollar received some relief against the U.K. Pound, the Australian Dollar and the Brazilian Real but the Euro has risen to a record high against the Dollar for a fourth consecutive session. The Swiss Franc and Yen also made great gains against the Dollar, as these were formerly "carry trade" currencies, which now may be changing places with the U.S. Dollar becoming the "carry trade." Fed Funds futures have already priced in another 75 basis-point rate cut by the Fed in March. If that happens, the Fed will shortly run out of bullets to stave off recession. In America, American Internation Group (AIG) posted a fourth quarter loss of $5.29 billion, hitherto unanticipated by markets and indicating the subprime lending crisis isn't over yet as much is unknown. Inflation is getting so bad in America that consumer spending is reported as significantlyi up while in fact people aren't buying any more than they were before. It's just more expensive. Even with inflation, consumer spending is anticipated to slow. This is despite a 0.4% rise in overall prices in one month. Jobless claims are increasing in America in the latest reports. Some say a "tether" between the U.S. and U.K. economies has prevented Britain from sharing in a market-wide anti-U.S. Dollar rally. Fed Chairman Bernanke recently made a very discouraging speech on monetary policy in Europe. Britain is sending a trade delegation to India to try to beef up trade relations and business opportunities there. British companies are continuing to try to internationalize operations with the help of such delegations.
215.0I R 2/29
I IMM - Jun-08 British Pound, 62.5Kpd, $/pd Cm.=0.05 Lim.= 4.3
I
I
I
210.0I_________________________________________________________________________
I
I
I X
I X
205.0I___________________________________X_____________________________________
I XO
I XO
I X XO
I XO XO
200.0I_______________________________XOX_XO____________________________________
I XOXOXO
I XOXOXO
I X XOXO O
I XOXO OX X
195.0I___________________________X_XOX____OXOX_________________________________
I X XOXO OXOX
I XOXOX O O
I XOXOX
I XO OX
190.0I_________________________X__O____________________________________________
I X X
I XOX X X
I XOXOX X XOX X
I XOXOXO XOXOX X
185.0I___XOXOXO__________XOXOX_X_______________________________________________
I XOXOXO XOXO X
I XOXO O XOX O
I XO O XOX
I X O X XOX
180.0I___X____O__XO______XO____________________________________________________
I X X O XO X
I XOX O XO X
I XOX O XO X
I XOX O XOX X X
175.0I_XOX____O__XOXOX_XOX_____________________________________________________
I XOX OX XOXOXOXOX
I XOX OXOXO OXOXOX
I XO OXOX OXOXOX
I X O O OXOXO
170.0I_X____________OXO________________________________________________________
IOX O
IO
I
I
165.0I_________________________________________________________________________
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I
I
160.0I_________________________________________________________________________
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I
I
155.0I----I----I----I----I----I----I----I----I----I----I----I----I----I----I---
1111 11 1
5579123457789012212457990011236689991122
1222022111202200200122021202020210121202
2178322812010748246761720752918906782976
Our computer says a non-conventional reactive interpretation of point-and-figure chart signals works best for British Pound. Therefore, the above signal is taken as a buy signal.
We are headed toward a cyclical high and a seasonal up period.
Our best-performing internal program is " Thrust." It is giving a buy signal.
Results of "Thrust" for British Pound (blue lines = successful trades, red, unsuccessful): (Always in the market.)
Our third system has just triggered a buy signal. (Note, disregard the year date on the chart. Our regular readers know this is not a Y2K-compliant system, but it still works.)
The point value is $625. Initial margin on a single contract is $1,485. Use of options is not advised.
Scale trade sellers are entering the market in this price range for the long term.
In the chart below, the yellow line is the futures price, read on the right axis. All other colors are read on the left axis. Red is small speculators. Green is large speculators. Blue is commercials. Large speculators with the best track record are getting increasingly-short except for last week's blip.
The average volatility shown below suggests that the current uptrend remains intact from a previous volatility low point.
Because of the way options are currently priced from data provided by the Exchange (which is often stale), there are no profitable options for a bullish scenario for the British Pound that we could find anywhere, scanning across the entire range of available options. There are plenty of profitable opportunities for a bearish scenario, but that is not our conclusion as to the inevitable direction. Therefore, we strongly advise you not to trade British Pound options at all.
Here's an intraday chart for the previous day ( 2/29 ).
Risk Versus Opportunity Report
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BPM8 June British Pound
High Price: 203
Current Price: 197
Low Price: 194
Risk: 0.030
Opportunity: 0.060
(O/R) Ratio = 2.000
Level Table:
| Factors | Weighted Points |
|---|---|
| Parabolic Chart | + 1 |
| Nirvana Chart | + 1 |
| News | - 1 |
| Point & Figure | + 1 |
| Cyclicals | + 1 |
| Seasonals | + 1 |
| Internal System 1 | + 1 |
| Internal System 2 | 0 |
| Third System | - 1 |
| Commitment of Traders | - 1 |
| Historic Range | - 1 |
| Range/Volatility | + 1 |
| Level Table | + 1 |
| Other Factors | + 1 |
| Total | + 5 |
Place 10 June British Pound on a Buy Watch with stoploss @ -.2.82 below the get-in point.________________________________________________________________________________________________________C.T.
