Sterling fell to a four-month low against the euro on yesterday as investors covered short positions in the single currency after an annual rebate to the UK from its European Union farming contribution was completed.
“Because of the EU subsidy to British farmers to be paid in sterling, there was an expectation of a massive outflow of Euros into sterling so the market was positioned accordingly,” said Valentin Marinov at Citibank.
Expectations that the pound would benefit from the volume of Euros being converted into pounds fell short of expectations and because of these various technical factors the currency exchange rate actually went the other way.
The flows pushed the euro to its strongest for 5 months by actually reversing the selling pressure seen earlier in the day on anticipation that the payment to UK farmers would require Euros to be converted into pounds. Traders who were banking on a rally were confounded by their colleagues.
The farming sector speculation has acted as a break all week to what should’ve been a much faster appreciation in the Euro’s value.
The rally in the euro lifted the single currency above its 200-day moving average at 85.86 pence. A close above that level yesterday has signaled that we might be in for a further extension of this movement.
Sterling slipped 0.5 percent to the day’s low against the dollar at $1.5694, reversing a climb to $1.5924 earlier in the day, its strongest since early August. The downward spike might act as a clue that the long term upward trend in place since May 2010 could be showing a slow reversal.
Bank of England policymaker Adam Posen quelled speculation yesterday when he said he had not decided on his vote for the next policy meeting.
The pound had suffered since Posen suggested the BoE should extend its 200 billion pound asset purchase scheme in a speech last Tuesday the first policymaker to do so since November, and putting him in opposition to Andrew Sentance, who has voted for rate hikes.
Posen’s position might provoke a three way split at their next policy meeting with Sentence voting for a hike in interest rates and no easing, Posen voting for a steady interest rate and no change to the lending rate and everyone else voting for the tried and tested ‘sit on our hands and watch’ policy.
The economy has been likened to a large weight on an elastic band, you pull and pull and then at some point it jumps up and knocks you out. The Bank of England would rather sit on their hands than get hit in the face right now.
Posen’s view was more than likely taken out of context and then pounced upon by the financial press to create a scare story, in reality his final statement yesterday sums things up “more quantitative easing would require a marked deterioration in the UK economy, which isn’t happening at the moment.”
We could easily see the pounds exchange rate recover into the longer term when the dust settles and traders start to pay more attention to solid fundamental factors, on the other hand when were traders ever rational, they are paid to panic and sadly when they do they take sovereign currency values with them.
It was reported yesterday that Japan actually sold the equivalent of $25 billion when they intervened to lower the Yens strength earlier this month. The market reaction has been relatively short lived as market forces drove the exchange rates back to similar levels within a week of the measures happening. This reinforces the arrogant view held by the majority of the markets that it is they who rule the roost and not the elected governors of free nations.
Deposits of financial institutions held at the Bank of Japan climbed by 2 trillion yen to 17.1 trillion yen on Sept 17 which led analysts to believe that Japan had intervened by that amount and left the extra funds in the market.
