British Pound Woes Similar to U.S. Dollar
U.S. dollar weakness and its impact on our commodity markets has been much discussed over the past year, but another currency that’s also weak, and could weaken further, is the British pound. I recommend strategies for shorting the currency futures, using options.
The British economy has had serious housing and banking problems and is facing a credit crunch, mirroring problems in the U.S. I think their troubles are about five months behind ours here in the states and therefore, I think just as the U.S. Federal Reserve has done, the Bank of England will need to keep lowering interest rates to cope with a slowing economy. That will push the British pound down further.
Last week, the Bank of England cut its growth forecast. This week, the pound fell to its lowest level in a month against the U.S. dollar following the release of the BOE’s February 7 meeting minutes, which showed officials voted 8-1 to lower its main interest rate a quarter-percentage point, to 5.25 percent. The BOE had reduced its main rate for the second time in three months. Also this week, BOE policy maker Kate Barker made comments suggesting more rate cuts could be coming, stating said the risk of an economic slowdown is greater than that of growing inflation.
Similar to the situation in the U.S., more interest rate cuts are likely to weaken the nation’s currency. Market participants are speculating the BOE will cut its benchmark rate by at least three-quarters of a point by year-end. I would consider buying British pound June 195 puts at 375 points, or about $2,343 ($6.25 per point in pound options), not including commission costs. They expire on June 6, 2008, and my target is for the pound to drop to $1.88 by then. You can also consider buying September 192 puts at 475 points, or about $2,968 not including commission costs. These expire September 5, 2008 and my target on the pound by September is $1.85. I would recommend using limit orders, as the bid/offers on the pound can be very wide. March CME British pound futures were last trading around $1.9548, and June was trading at $1.9448.
Phillip Streible is a Senior Market Strategist with Lind Plus. He can be reached at 800-803-8037 or via email at pstreible@lind-waldock.com.
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