Category: Pound Sterling

The British Pound Sterling seems to be as every much as sick as the US Dollar.

And why not? It seems that our British cousins have their own subprime mortgage crisis, raising credit card debt delinquencies, slow down in the economy, and troubled housing market to deal with.

After trading as recently as November 2007 at 2.1000 the Pound headed south and closed on Friday, January 11, 2008 at 1.9570. That’s a pretty dramatic reversal, especially during a time period when the US Dollar has been so weak.

It seems that over the past few years the British have been as credit crazy, perhaps even more so, than their American cousins. Now that lenders want to be repaid by borrowers who do not, and in some cases, never did have the ability to repay, the cousin’s currencies are sick together as financial markets on both side of the Atlantic sink under the weight of massive losses and writedowns by financial institutions.

Selling every rally in Pounds has been a profitable play over the past few months. I expect that as long as the credit crisis is overhanging the financial markets, which will likely be for at least all of 2008, the Pound will continue in a downtrend.

However, the Pound is especially volatile, so trading Pounds is not for the faint of heart. The long term trend may be down but the daily price action has a lot of sudden reversals and whipsaw action that can make one question ones position.

In the study of forex movements over time you often see a high correlation between currency movements and interest rate differentials.

As an example, if British Pounds are paying 6% on deposits and US dollars are paying 5%, with all other things being equal, investment funds would flow into the currency paying higher interest rates and that currency would strengthen relative to the other currency.

In the example given above we would therefore expect that the British Pound Sterling would gain in value against the US Dollar.

Of course, this is a rather simplistic view as for one thing the “other things” are never equal. At times it is even difficult to know exactly what the “other things” may be.

There are times when markets seem to ignore fundamentials completely and trade in a highly technical manner.

However, in making a judgement about the possibility of a market maintaining a long term trend one can not ignore interest rate differentials . A review of forex price movement charts will often show that a currency paying a relative high rate of interest will in fact trend higher against currencies paying lower interest rates.  

That is one important reason why forex traders pay so much attention when central bankers of a major currency nation have their interest rate policy meetings. Occasionally the central bankers will surprise the forex market with an unexpected change in the level of interest rates and spark a fast change of price levels.

James B. Rogers, Jr. is a very interesting guy. Educated at Yale (1964) and Oxford (1966), he was the Co-founder of The Quantum Fund, with George Soros.

Jim Rogers kind of stumbled into Wall Street and investment as a career. He states that when he went to work on Wall Street at the invitation of a friend he didn’t know the difference between a stock or a bond.

In 1970, he joined Arnhold & S. Bleichroeder, where he met George Soros. Later that year, Rogers and Soros founded the Quantum Fund. During the following 10 years the fund gained 4200% while the S&P advanced about 47%.

The Quantum Fund was a brillant idea, one of the first truly international funds, and its success made Soros and Rogers extremely wealthy men.

In 1980, Rogers decided to “retire”. Since then, he has been a guest professor of finance at the Columbia University Graduate School of Business.

Rogers has lead a most interesting life since his retirement as a forex and commodity trader and fund manager.

Rogers and his friend Paige Parker made a historic, three-year journey around the world, which began Jan. 1, 1999 and ended Jan. 5, 2002. They visited 116 countries and covered more than 245,000 kilometers during their travels. The epic journey was called “The Millennium Adventure”.

Rogers remains an astute observer of the investment world and of trends and current events. His writings and forecasts are often right on the money and should be respected by anyone who has an interest in forex trading and commodities.

A lot can be learned by studying the forex trading techniques of those traders who have made their fortunes from trading. George Soros is such a man.

Soros earned the title “the man who broke the Bank of England” for his short sell of British Pound Sterling in 1992. Soros make it to the big time with that trade, earning in excess of one billion dollars.

Soros had researched the British Pound and thought that it was at least 25% over valued. He correctly forecast that the Bank of England would not be able to successfully defend the Pound as market participants, including himself, began to heavily sell Pounds.

Soros has always been more of a long term fundamental analysis type of trader as opposed to taking short term technical trades. His short sell of Pounds proved to be a brilliant trade based upon the fundamentals.

George Soros had the guts, smarts, and discipline to follow through on his research. He placed considerable assets on the line to sell Pounds once he was convinced that his research was correct.

To read about the background of George Soros in more detail go to Commodites Futures Trader. It is an interesting read.