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Global Economy

Daily Forex Commentary
By Jack Crooks

Key News

The amount of money owed by UK consumers has broken through the Ł1 trillion barrier for the first time, the Bank of England confirmed. (BBC)

Key reports due Thursday (WSJ): 8:30am Initial Jobless Claims. For July 24 Wk. Consensus: +1K. Previous: -11K. 8:30am 2Q Employment Cost Index. Consensus: +0.9%. Previous: +1.1%. 10am June Help Wanted Index. Previous: 39. 10am DJ-BTM Business Barometer. For July 17 Wk. Previous: -0.3%.

Quotable: "The asylum of wealth is a gilded cage, sumptuous in its décor, but stupefying it its vacuity." - Edith Wharton

FX Trading: There was plenty of potential dollar-moving data due out on Thursday. Wednesday’s soft Philly Fed report and durable goods didn’t seem to impair the dollar in any way. Self-reinforcing trends are an amazing thing to behold. Is now the time to be dipping your toe into the water to feel for a correction in this dollar move higher? Maybe.

The pound was being hit hard Thursday morning on news that UK consumers are beginning to emulate their former colony in their ability to take on massive amounts of credit. Well, so what? Economists, gurus and assorted media talking heads have been forecasting the demise of the US consumer because of his debt load for at least 25 years now it seems. To borrow a phrase attributed to PT Barnum, “You can never go broke betting against the talking heads betting against the US consumer.” Will the concern and bets against the UK consumer be any different?

Would it be fair to say that consumer debt in the UK has contributed to its relative economic out-performance among the rest of the European countries? I think so. This debt has led to a sharp rise in UK home prices. According to the Bank of England, about 80% of UK personal debt is in the form of loans secured against homes.

We know home prices in the UK are soaring. We now know why: UK borrowers taking advantage of relatively low interest rates. There is nothing new here. If the US Fed wasn’t concerned about the debt levels among US consumers - or at least not concerned enough to apparently slow the pending tightening cycle - why should we think the Bank of England will be any different. I suspect it won’t.

If there is a point here, it is this: the Bank of England (BOE) meets next week. News of rising UK consumer debt won’t hamper the bank from hiking rates. If we continue to buy the dollar on the belief that the improving rate differential is a key driver, then we should probably be warming up to the pound.

So, if we are going to test the waters for a dollar correction soon, I think the pound might be a decent candidate for an intermediate-term move if the BOE sees it as I think they will. But one should not have tried to catch the falling knife on Thursday morning. Let’s wait for some stemming of the blood flow before we step in.

Jack Crooks has actively traded in global equity, fixed income, commodity, and currency markets for more than 20 years. He is President of Black Swan Capital, a currency advisory firm - BlackSwanTrading.com.

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Jul 30, 2004

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