4th October - When is Short Sterling a sell?
10 October 2012
TECHNICALS:
DAILY SEP13 CHART
The market is pushing up again. Is that a continuation Triangle? Possibly.
A break above and close above 99.53 will cement the bulls’ excitement in anticipation of a new bull push.
DAILY CHART
But this shows how the far months have been lagging the near months since Jun 2011.
The bear trend in the spread sep 2013-Sep 2015 is well established even though both markets are still going up.
Look to sell that spread on a fresh breakdown through the recent lows between 35 and 40.
FUNDAMENTALS:
Over the last 12 months, Short Sterling has tried to sell off on several occasions. But each time the market has recovered and re-tested the highs. Late 2011 the economy was slowing but presumed to remain free of recession, but the release of Q4 2011 GDP showed the economy contracted during that quarter and again in Q1 2012 and indeed in Q2 2012 revealing a rare double-dip recession had occurred.
So traders were tentatively trying to time the beginnings of a long slow bear market during 2011, based on the expectation that the economy, although cooling, would continue to grow with activity ultimately strengthening. The bears were forced to recognise that any thought of a bear market; long, slow or otherwise was utterly premature.
The Bank subsequently responded to the fresh evidence of weakness by extending their asset purchase program, helping Short Sterling recently retest the highs. But in reality, how much higher can the market go? The Bank has shown little inclination to reduce rates further.
But the economy remains weak and speculation continues that the Bank may have to expand it’s asset purchase program further still, as in the US.
Where does that leave Short Sterling?
We judge the market has very limited upside potential even though economic activity remains fragile, albeit with tentative signs of improvement.
The problem for Short Sterling is the market already reflects the current level of Bank rate which as said the Bank is unwilling to reduce further so the up side looks capped.
What then, of the downside?
With the economy still in recession and politicians and policy-makers desperately searching for a “green shoot” of growth, higher rates look off the agenda for a considerable period of time.
The UK economy is struggling against two very powerful negative forces.
The Euro zone remains in a mess. The Sovereign debt crisis isn’t even close to being resolved. The ECB has bought the leaders of the Bloc some time by announcing an open ended bond buying program, but that doesn’t address the underlying problem.
This matters to the UK since the Euro zone is the UK’s largest trading partner.
The other negative working against the economy is the government’s own -imposed austerity drive. When the coalition government came to power both the deficit to GDP and the debt to GDP ratios were running at dangerously high levels. The government prescribed spending cuts and tax hikes.
But for an economy built up by the previous Labour administration on public spending and public sector jobs, the medicine has rocked the economy to its foundations. Yet there was no alternative, just look at Spain, Ireland, Portugal and Greece.
So where is Short Sterling going; short/medium term we judge it remains in a large trading range. Much longer term the next move is down, but don’t dream of trading off that yet..
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