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Pound May Well Bounce Back After Northern Rock. By Nicholas Hastings.
LONDON (Dow Jones)--Sterling's sharp slide on news of Northern
Rock's nationalization may be entirely justified.
But any decline is unlikely to last long.
As David Simmonds, head of foreign exchange at Royal Bank of Scotland, said: "Expected sterling losses on news that Northern Rock is about to be nationalized will
offer better levels to sell euro/sterling."
Not only should U.K. retail sales later this week raise optimism about the state of the U.K. economy and the latest monetary policy committee minutes show that the
Bank of England remains reluctant to cut interest rates again, but a resumption of interest in carry trades should also lend the U.K. currency support.
Although news that the U.K. government had given up trying to find a private-sector buyer for the stricken Northern Rock didn't come as a major surprise, the
announcement helped to focus market attention on the continued fallout from the U.S. subprime crisis in the U.K. financial market sector in general.
Many U.K. bank stocks are already under heavy pressure as investors worry about the possible consequences of a split in the monoline insurance companies that could
expose further large losses.
Earlier Tuesday, Barclays reported GBP1.6 billion of writedowns associated with the crisis.
"British banks are known for their collateralized debt obligation exposure, explaining why financial stocks have been under pressure and hence the pound," said Ian
Stannard, a senior currency strategist with BNP Paribas in London.
Mitul Kotecha, head of global foreign exchange strategy with Calyon Credit Agricole in London, warns that more negative news could be on its way.
"Over the next two weeks, the release of U.K. bank results will prove to be interesting reading," he said.
"In terms of market implications, the news is unlikely to be taken well by the pound but it should have little influence on interest rate markets in the U.K.," Kotecha
added.
Certainly, optimism over the U.K. economy is likely to improve.
A survey by Rightmove Monday showed that house prices rose by 3.2% during February, a sharp reversal of the 0.8% decline in prices seen during January.
As economists at ABN-Amro point out, the data is at odds with figures from other house price indexes, including the Royal Institute of Surveyors, Halifax, Nationwide
and Hometrack, which continue to suggest a softening in the housing market.
Rightmove itself acknowledged that estate agents have reported tightening lending criteria, which will hardly encourage further price rises.
Nevertheless, data on U.K. retail sales due Thursday should help the optimists given that retail sales are forecast to show a 0.3% rise last month, nearly completely
reversing the 0.4% decline experienced in December.
At the same time, economists are expecting the latest Monetary Policy Committee minutes due for release Wednesday to show that the Bank of England remains hawkish over
inflation, despite its decision to cut interest rates by 25 basis points to 5.25% earlier this month.
Economists at UBS, pointing to inflation concerns highlighted in the last inflation report from the bank despite the presence of doves on the MPC, reckon expectations
for further monetary easing could well be disappointed.
And sterling could well be placed to benefit from just such a hardening of rate expectations.
Over the last week, global risk appetite has shown a distinct improvement that has supported the return of carry trades, in which high-yielding currencies such as the
pound are likely to find themselves being bought once again in favor of lower-yielding ones.
Early Tuesday in Europe, the pound was showing its resilience, rising to $1.9529 by 0840 GMT from $1.9497 late Monday in New York, according to EBS.
The euro, however, was up at GBP0.7543 from GBP0.7510.
The dollar is down at Y107.82 from Y108.20 on fears of an early rate hike in China, after Chinese inflation rose to an 11-year high, and on continued interest in carry
trade that has helped to push the euro up to Y158.86 from Y158.40.
The euro is also up at $1.4733 from $1.4644.
But any decline is unlikely to last long.
As David Simmonds, head of foreign exchange at Royal Bank of Scotland, said: "Expected sterling losses on news that Northern Rock is about to be nationalized will
offer better levels to sell euro/sterling."
Not only should U.K. retail sales later this week raise optimism about the state of the U.K. economy and the latest monetary policy committee minutes show that the
Bank of England remains reluctant to cut interest rates again, but a resumption of interest in carry trades should also lend the U.K. currency support.
Although news that the U.K. government had given up trying to find a private-sector buyer for the stricken Northern Rock didn't come as a major surprise, the
announcement helped to focus market attention on the continued fallout from the U.S. subprime crisis in the U.K. financial market sector in general.
Many U.K. bank stocks are already under heavy pressure as investors worry about the possible consequences of a split in the monoline insurance companies that could
expose further large losses.
Earlier Tuesday, Barclays reported GBP1.6 billion of writedowns associated with the crisis.
"British banks are known for their collateralized debt obligation exposure, explaining why financial stocks have been under pressure and hence the pound," said Ian
Stannard, a senior currency strategist with BNP Paribas in London.
Mitul Kotecha, head of global foreign exchange strategy with Calyon Credit Agricole in London, warns that more negative news could be on its way.
"Over the next two weeks, the release of U.K. bank results will prove to be interesting reading," he said.
"In terms of market implications, the news is unlikely to be taken well by the pound but it should have little influence on interest rate markets in the U.K.," Kotecha
added.
Certainly, optimism over the U.K. economy is likely to improve.
A survey by Rightmove Monday showed that house prices rose by 3.2% during February, a sharp reversal of the 0.8% decline in prices seen during January.
As economists at ABN-Amro point out, the data is at odds with figures from other house price indexes, including the Royal Institute of Surveyors, Halifax, Nationwide
and Hometrack, which continue to suggest a softening in the housing market.
Rightmove itself acknowledged that estate agents have reported tightening lending criteria, which will hardly encourage further price rises.
Nevertheless, data on U.K. retail sales due Thursday should help the optimists given that retail sales are forecast to show a 0.3% rise last month, nearly completely
reversing the 0.4% decline experienced in December.
At the same time, economists are expecting the latest Monetary Policy Committee minutes due for release Wednesday to show that the Bank of England remains hawkish over
inflation, despite its decision to cut interest rates by 25 basis points to 5.25% earlier this month.
Economists at UBS, pointing to inflation concerns highlighted in the last inflation report from the bank despite the presence of doves on the MPC, reckon expectations
for further monetary easing could well be disappointed.
And sterling could well be placed to benefit from just such a hardening of rate expectations.
Over the last week, global risk appetite has shown a distinct improvement that has supported the return of carry trades, in which high-yielding currencies such as the
pound are likely to find themselves being bought once again in favor of lower-yielding ones.
Early Tuesday in Europe, the pound was showing its resilience, rising to $1.9529 by 0840 GMT from $1.9497 late Monday in New York, according to EBS.
The euro, however, was up at GBP0.7543 from GBP0.7510.
The dollar is down at Y107.82 from Y108.20 on fears of an early rate hike in China, after Chinese inflation rose to an 11-year high, and on continued interest in carry
trade that has helped to push the euro up to Y158.86 from Y158.40.
The euro is also up at $1.4733 from $1.4644.
19 February | 
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