BLBG: Pound Rises Against Dollar as Traders Judge Losses as Excessive
By Lukanyo Mnyanda
Nov. 17 (Bloomberg) -- The pound advanced the most in almost two weeks against the dollar as investors judged its decline to a six-year low was excessive.
The U.K. currency also gained a second day versus the euro as a technical indicator some traders use to forecast changes in price direction indicated it may rebound. The pound had the biggest gain of the 16 most actively traded currencies against the dollar. It lost 25 percent this year as the economy headed toward a recession.
``There's a sense that declines in the past week were overdone,'' said Stephen Gallo, head of market analysis in London at Schneider Foreign Exchange, which counts FTSE-listed companies and wealthy individuals among its clients. ``Near term, the selling was overdone and it has rebounded a bit.''
The pound rose as much as 1.8 percent, the biggest gain since Nov. 4, and was at $1.4965 as of 1:58 p.m. in London, from $1.4740 last week. It slipped below $1.50 for the first time since June 2002 on Nov. 12. Against the euro, the pound was at 84.55 pence, from 85.41 pence. The pound may trade between $1.45 and $1.53 in the next three weeks, Gallo predicted.
The pound's 14-day relative-strength index versus its U.S. counterpart was at 28.76, the fifth consecutive day it's been below the 30 threshold. The RSI was at 32.12 against the euro, from 28.86 on Nov. 14.
Britain's currency declined earlier as the Confederation of British Industry said the economy will shrink 1.7 percent in 2009 and Rightmove Plc said the average asking price for a home in Britain fell this month by the most since records began six years ago. Rightmove, the nation's most-used property Web site, said the average asking price for a home declined 7.1 percent.
`Pound Suffering'
``The economy is suffering, and with it the pound,'' said Neil Jones, head of European hedge-fund sales in London at Mizuho Capital Markets. ``The pound will underperform in the months ahead.''
Investors should keep selling the currency, which may drop to 91 pence per euro in the next six weeks, Jones said. That's more bearish than the median forecast of 24 analysts and strategists surveyed by Bloomberg News, who predict the currency will rebound to 80 pence by year-end.
U.K. two-year government bonds rose, with the yield difference, or spread, with 10-year notes widening to the most since 1993 as investors favored shorter-dated bonds, which are more sensitive to the interest-rate outlook.
The yield on the U.K. two-year gilt dropped seven basis points to 2.12 percent. The 4.75 percent security rose 0.10, or 1 pound per 1,000 pound ($1,492) face amount, to 104. The 10-year yield rose 4 basis points 4.11 percent. Yields move inversely to bond prices.
Yield Spread
The difference in yield between the two year note and the 10-year gilt widened 10 basis points to 199 basis points, the most since Feb. 1993. The two-year notes yielded 33 basis points more than the 10-year gilt on June 16.
The Bank of England, which trimmed its main rate 1.5 percent this month, will probably cut the rate another half point to 2.5 percent Dec. 4, according 31 economists in a Bloomberg survey. Central bank Governor Mervyn King said Nov. 12 policy makers are prepared to reduce rates as much as needed to prevent a recession from fueling deflationary pressures.
``The prevailing economic environment will ensure that any dips will attract buyers,'' said Sean Maloney, a fixed-income strategist at Nomura International Plc in London. ``But a lot of the bad news has been priced in already.''
The pound will drop 13 percent against the dollar and 8 percent versus the euro by early 2009, JPMorgan & Chase Co. said. It will ``trough'' at $1.28, a level not seen since 1985, and sink to a record low of 92 pence per euro early next year, JPMorgan's London-based Paul Meggyesi wrote in a research note dated Nov. 14.
The U.K. sold 1.3 billion pounds of bonds maturing in 2055 today at an average yield of 4.35 percent. Demand for the 4.25 percent securities exceeded the amount offered 1.86 times, compared with 1.49 times when they were last sold on June 3.
To contact the reporter on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net
