Pound Looking Foolish
Today's Financial News - Posted September 12, 2008
After six years of the British Pound beating the U.S. Dollar “centsless”, the roles will soon be reversed. The weak dollar is expected to recover and get its revenge against the pound.
by Krista Das
Baltimore — (TFN): In November of last year the British pound saw its peak at $2.11 compared to the U.S. dollar. Since then its been all downhill for the pound.
Joining us today is currency trading expert and editor of World Currency Options Alert Jack Crooks to explain how to use this framework to predict changes in long-term currency trends.
Jack, welcome to the show.
What is the big picture driver of the British pound?
Jack Crooks: Well really this whole idea that we’ve been hearing for a long time now is the credit crunch is really the big driver of the pound. The reason that is is because the British pound of all the major currencies in the world, currency countries in the world that compete against the dollar is the most exposed to leveraging in the global economy and financial services.
For example, jobs in the city of London that were really pumped up during the hay day of credit being just generated all over the world, high paying jobs in the city were boosting up the GDP of Britain tremendously. Credit being spread throughout the country allowed the consumers to run up very, very big debts. In fact, their housing market ran up even a lot faster than the U.S. housing market ran up.
So you have a situation where the housing market’s breaking, financial services are going in reverse ‘cause of this deleveraging around the globe. So they’re getting squeezed on a lot of different ends here and they’re also having this squeeze on the manufacturing side of the fence because of the decline and demand in the global economy in general.
You could start to see these factors start to shape up back in July and November last year just looking at the charts. The British pound started the rally. It looked like a fake rally to us based on some of the technical indicators we were seeing. The sentiment stuff first that we do I refer to as sentiment stuff, but it validated the ongoing macro-economic problems that were shaping up.
Krista Das: So you’re saying that sentiment didn’t support the pound as prices peaked.
Jack Crooks: That’s exactly right. It was a trade we really like ‘cause we look at sentiment and how we define sentiment is very easy. We look at open interest numbers that are listed on the Chicago Currency Futures and when they peak usually you see a peak and a movement of open interest. That means number of open contracts outstanding in the futures. When something starts to go up in price they generally follow.
What happened with the pound was the pound continued to rally for a couple months, but yet open interest started to decline. That was an indication that some of the bigger traders were starting to lighten up on the pound expecting a peak very, very soon.
As I said, the macro indicators supported that and it’s something that you can easily do if you look at the open interest charts, go back historically and see that. It’s a simple indicator we always use.
Krista Das: Do you think that the British pound is now going to see a long-term bear market against the U.S. dollar?
Jack Crooks: We absolutely do. We think all those factors that I just laid out are going to push the U.K. economy into a very vicious recession. At the moment the Bank of England has maintained very high interest rates. So in effect they’re killing their economy.
The reason they’re doing that is because they’re concerned about inflation. But once inflation starts to break and we’re seeing the decline in commodities prices, we think the Bank of England’s going to cut rates dramatically and that’s going to really just suck the wind out of the pound.
We could see the pound coming back to its 2002 levels, back to 1.40, 1.50 against the dollar. When you consider from 2.11 that’s a very, very big move.
Krista Das: Based on the framework that you just explained you’re saying that we should short the pound against the dollar long-term.
Jack Crooks: Absolutely. Its been pretty much straight down since it broke in November. So we may be see some type of correction, but if you can play this trade in a long-term basis without too much leverage and let these fundamentals continue to eat away at the U.K. economy, we think this really is an excellent trade set-up.
Krista Das: Jack, exciting information. Thanks for coming on the show today.
If you would like to learn more about trading currencies, check out Jack’s research service, World Currency Options Alert by clicking on this screen or go directly to Today’s Financial News.com.
That’s all for today’s show. Thank you for watching. Until next time, here’s to great profits from smart investing.
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Posted by Krista Das · Filed Under Featured Video, International Investing, Podcast, Videos
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