Pound in for a Pounding?
For the last few years there has been a lot of hand wringing about the US Dollar. "The USD is a flawed currency", "we are printing money as fast as we can", "the Fed is monetizing the debt" and "Helicopter Ben has been working overtime lately" have been some popular sentiments toward the US Dollar of late. I don't disagree with these comments, but I don't think that the USD can be viewed in a vacuum since we live in a world of fiat currencies. So the correct question is what is the best currency? My answer: "I'll be darned if I know. They are all pretty bad, with the possible exception of the NZD, maybe... And that is not a major currency." So then the next question is which is the worst. Here I have a stronger opinion. The British Pound is probably the weakest major currency at the moment. Even though the British are a relatively small country with a second-rate economy, they still exert a significant influence in financial circles. Largely, because of their past position as a reserve currency, their relative wealth and experience in finance. But that is all about to change. As mentioned in a earlier posting, the UK has the highest debt/GDP ratio in the developed world. If it wasn't for Zimbabwe, it might win that dubious honor for the entire world.
What will be the catalyst which brings down the pound? I don't know. But I believe that fundamentally, the UK is in the same position Iceland was in about 12 months ago. Technically, the chart of the Pound shows the longer term downtrend is about to exert itself after a significant rally. See for yourself.
The Point and Figure chart above clearly indicates that a potential reversal is at hand. A break below the 1.60 level would confirm.
The weekly chart shows that momentum (upper graph on chart) is turning negative. A break of 160 would likely lead to support at 1.55, with a break of that level leaving the next support at 1.36. If that level was broken, all bets would be off. But going out on a limb, 1.10 is a reasonable guess. In a crisis environment, it could even break dollar parity. With the debt load so astounding in Britain's banks, I think a crisis is likely.
This would likely start a European conflagration, where either the Swiss Franc or the Euro would be attacked after the Pound fell. Technically, the Euro looks more vulnerable, but fundamentally the Swiss also have a huge exposure to bad loans in Eastern Europe. Also, the French and the Germans still have a large capacity to support the Euro. But by no means is it a sure thing that they would feel it necessary to support their profligate neighbors. Also, certain members like Italy have already made noises about wanting to abandon the Euro due to the stringency it imposes on their economic policies. Same thing for Spain with an unemployment rate of 18.5% and GDP likely shrinking over 4% in 2009, their is a large incentive to devalue the local currency. Of course they can't, since they are committed to the Euro.
$100 Billion in counterfeit bonds
Spain struggles with common currency
As the above article points out, if they pulled out of the Euro, Spain would most likely have to default on its debt, since it is denominated in Euros. But this is what Great Britain did in the 30's and also what Argentina did only a few years ago. And in both cases, after a few bad months these economies started to stabilize. At some point, faced with watching their economies sink nearly 5% a year with unemployment at or above 20%, default will seem like a better option. The ironic part is that these two countries have relatively low debt loads, at least compared with their European neighbors. So what would this mean for the rest of Europe? At some point, it will be every country for themselves. And that will be the end of the Euro. And I believe that we are about to witness the beginning of the end with the failure of the British Pound in the months ahead, probably in the first half of 2010, but assuredly by the end of 2010.
On a final note for the Pound, the short term action may produce a bounce as the daily chart has a significant gap at the 163.5 level. Filling this gap before heading lower may serve to confound as many people as possible.
So what about the dollar then? Bob Prechter recently stated that only 3% of advisors are bullish on the USD. This was similar sentiment to the bottom of the US stock market in March. The weekly chart looks ugly, but then things always look bleakest at the bottom. I am bullish on the USD. It may be a flawed currency. But the competition may have even bigger problems.
What will be the catalyst which brings down the pound? I don't know. But I believe that fundamentally, the UK is in the same position Iceland was in about 12 months ago. Technically, the chart of the Pound shows the longer term downtrend is about to exert itself after a significant rally. See for yourself.
The Point and Figure chart above clearly indicates that a potential reversal is at hand. A break below the 1.60 level would confirm.
The weekly chart shows that momentum (upper graph on chart) is turning negative. A break of 160 would likely lead to support at 1.55, with a break of that level leaving the next support at 1.36. If that level was broken, all bets would be off. But going out on a limb, 1.10 is a reasonable guess. In a crisis environment, it could even break dollar parity. With the debt load so astounding in Britain's banks, I think a crisis is likely.
This would likely start a European conflagration, where either the Swiss Franc or the Euro would be attacked after the Pound fell. Technically, the Euro looks more vulnerable, but fundamentally the Swiss also have a huge exposure to bad loans in Eastern Europe. Also, the French and the Germans still have a large capacity to support the Euro. But by no means is it a sure thing that they would feel it necessary to support their profligate neighbors. Also, certain members like Italy have already made noises about wanting to abandon the Euro due to the stringency it imposes on their economic policies. Same thing for Spain with an unemployment rate of 18.5% and GDP likely shrinking over 4% in 2009, their is a large incentive to devalue the local currency. Of course they can't, since they are committed to the Euro.
$100 Billion in counterfeit bonds
Spain struggles with common currency
As the above article points out, if they pulled out of the Euro, Spain would most likely have to default on its debt, since it is denominated in Euros. But this is what Great Britain did in the 30's and also what Argentina did only a few years ago. And in both cases, after a few bad months these economies started to stabilize. At some point, faced with watching their economies sink nearly 5% a year with unemployment at or above 20%, default will seem like a better option. The ironic part is that these two countries have relatively low debt loads, at least compared with their European neighbors. So what would this mean for the rest of Europe? At some point, it will be every country for themselves. And that will be the end of the Euro. And I believe that we are about to witness the beginning of the end with the failure of the British Pound in the months ahead, probably in the first half of 2010, but assuredly by the end of 2010.
On a final note for the Pound, the short term action may produce a bounce as the daily chart has a significant gap at the 163.5 level. Filling this gap before heading lower may serve to confound as many people as possible.
So what about the dollar then? Bob Prechter recently stated that only 3% of advisors are bullish on the USD. This was similar sentiment to the bottom of the US stock market in March. The weekly chart looks ugly, but then things always look bleakest at the bottom. I am bullish on the USD. It may be a flawed currency. But the competition may have even bigger problems.
posted by Matt Butler at 8:38 PM
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