Sterling gaining strength against the mighty Dollar
It may be unthinkable that Liverpool could win the
Premier League this year. It is also
quite a surprise to see the Sterling is back to GBP 1 equals USDS 1.680, the
strongest for 5 years. Exceeding the
peaks in 2011 April and 2009 second half.
With the backdrop of US tightening their monetary policy, printing less
money, the US Dollar is expected to be relatively strong. Also, with the sticky situation in Ukraine,
one may expect financial institutions and corporates would park money in USD or
US Treasury to stay away from the Euro zone.
Struggle to find an excuse from the big picture to long GBP.
The British may have been humble. It does not feel like there has been a lot of
work done by the government in growing UK economy post Financial Crisis. For sure, the media has spent more time on the
Euro crisis and geo-tension like what is happening in Ukraine right now than UK
economy. Also, the public perception is
that politicians and regulators are doing everything they can to make the
British banks suffer and kick the financial industry in the face when it is
down on the ground. Considering the financial
service industry is about a 10th of UK gross domestic product, which
should not be helping the economy much.
Unemployment has fallen to a five-year low of 2.24
million people, 6.9% of the adult working population. Average earnings in the 3 months to February
grew 1.7% versus the same period last year.
March inflation fell to 1.6% versus last year. It is a good sign that earnings are growing
at a faster pace than inflation. Last
time we saw this was in spring 2010.
The service sector’s export sales and orders are at
record levels according to the British Chambers of Commerce. With the banking sector still crippled, the
export growth came from accountancy and IT. Manufacturing is growing consistently. The rise is driven by a range of business. Pharmaceuticals, transport equipment, food,
beverages and tobacco saw the biggest rise since September. UK industrial
output in February was 2.7% higher than last year. The Chambers also added that UK growth lives
off consumer spending which was driven by the revival in housing market and
people spending their savings.
The rosy picture of export sales and low unemployment
has certainly helped the Sterling but the strength could be technical rather
than fundamental. One can look at the
recent rally in GBP from USD 1.5039 to GBP 1 in the beginning of July as a 3
years journey to challenge the 1.665 high print in April 2011. Also, the current strength should mark
another peak in the chart. There are a
few big clouds hanging over the Sterling which may trigger hedge funds shorting
the GBP against the USD or even the EUR.
Scotland is going to have a referendum on 18 September
about independence from the rest of the United Kingdom. Whether this is realistic or not, it is a
meaningful event for the hedge fund community to take a bet on the GBP. While Scotland is asking their people whether
to stay as part of UK, David Cameron is putting Britain’s EU membership on the
table if he gets re-elected in 2015. It
is no laughing matter if UK GBP 1.5 trillion economy leaves the EU. Currently, UK’s economy is the sixth largest
in the world.
While the Sterling is strong, everything in US
Dollar looks cheaper. Beside going to
the States for holiday, one could also consider spending some dollars on US
stocks. Facebook reported GBP 383
million profits during the first quarter of 2014. Main driver is the increase in mobile
advertising revenue. Revenue was 725
higher reaching USD 1.5 bn and mobile accounted for 59% of advertising
revenue. After IPO in 2012, analysts
were concerned how Facebook could adopt from desktop to mobile and from concern
to belief meant Facebook share price went up from below USD 20 a share after
IPO in 2012 to USD 57.71 a share as of 25 April, 2014. With 1.2 billion monthly active users,
Facebook is seeing 6 billion likes a day.
eMarketer estimates that by the end of 2014, Facebook could reach GBP
2.9 billion digital display revenues versus Google GBP 2.4 billion. The dream factor is still alive in Facebook supporting
its GBP 87.4 billion market at 75 times price earnings ratio. Facebook was over USD 72 a share in March and
now it is below USD 60. Some investors
would be living in the dream for a while.
