Why Buy the GBP?
On May 16,
we presented the chart below and said: "The Bank of England may well intervene in the market to slow down the appreciation of Sterling but market forces will speak the final verdict as usual."
One month later the GBPUSD had indeed appreciated to 1.6904 or 5% before a severe correction set in.
Let us first examine
The long-term picture
Most will remember the collapse of the GBP against the USD in 1992 on which occasion Mr. Soros hit the front page and became famous for making an enormous amount of money by betting against the GBP.
It was a typical battle of a central bank vs. the market which was, of course, won by the market.
This lesson shows that central banks may have their say in the short- or medium-term but will always lose against market forces in the long-term when the facts of life dictate the unfolding events.
While the GBP recovered from this massive sell-off over a period of six years, making back half the amount lost, it went through another decline thereafter, ceding all it had gained.
The GBP started rising again at the beginning of 2002 but what is depicted here as GBP-strength is on the other side the weakness of the USD against all major currencies. It is the fate of the USD which will determine how far the GBP can rise and whether it will take out the massive resistance around 1.70.
The medium-term picture
"Medium-term, we can make out an up-trend that started at the beginning of 2002 and does not show many signs of exaggeration yet.", we wrote in May with the GBP at 1.60.
At 1.69, as we now know, we did have this "exaggeration" which was followed by a massive sell-off which took the GBP down to 1.5606 for a loss of 7.6%. While this correction was severe and exceeded what we thought would happen, it stopped comfortably above the previous low of 1.5457 and confirmed thus the up-trend.
The counter movement was swift and surprised most investors and traders who were forced to cover their GBP-short positions.
Short- and medium-term, fear and greed dictate human action while the facts of life determine the long-term picture.
The sell-off of last August represents in its extent probably nothing but the blank fear of traders being caught in a trap or simply being forced to liquidate when they were left with insufficient margin. Such situations obviously offer the best opportunities for those who still have the freedom of action.
The middle-line in the above chart should now be taken as the real support and the next real test will be around 1.70, where strong resistance will have to be overcome. Whether this support will be taken out quickly is not so much a matter of the GBP but the currency against which you buy the GBP - namely the US-dollar which is bound to weaken further over a lengthy period of time.
The short-term picture
While the rally which lifted the GBPUSD rate quickly from 1.56 to 1.66 or 6% may need a pause as it invites profit-taking, we think that we shall have a test of the previous high of 1.6904 in the not too distant future.
Day-traders obviously act on other rules and daily fluctuations do follow other criteria and are usually unpredictable.
The little arrow in the chart reveals a possibility of how some traders may deal with the situation. We, for our part, would simply hold on to long positions while those who like to place stop-loss orders should do so around 1.65.
Investing in currency/currency hedging: an important aspect for the performance of a portfolio Anyone investing in foreign securities needs to consider the currency risk involved.
When we buy gold for an European, we do so in the futures market as we do not want to convert a strong EUR for a weak USD.
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The following recommendations were valid at the time of writing, viz. at
Peter Zihlmann
www.pzim.com
investment@pzim.com
October 2, 2003
Disclosure: The author has not been paid to write this article, nor has he
received any other inducement to do so. The author is a shareholder in the
company and will benefit from any increase in the company's share price.
Disclaimer: The author's objective in writing this article is to invoke an
interest on the part of potential investors in this stock to the point where
they are encouraged to conduct their own further diligent research. Neither
the information, nor the opinions expressed should be construed as a
solicitation to buy or sell this stock. Investors are recommended to obtain
the advice of a qualified investment advisor before entering into any transactions
in the stock.
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