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One of the fascinations for market watchers, is looking at a price ahead of an `important` piece of news, and the subsequent price action following publication, that is, how much of the real number is already `in the price`. The anticipation of certain statistics is one thing, but on a more macro level, there are times when certain assumptions gradually creep into market thinking, and it is always useful to review these. Cable has been one of the best performers on the world currency stage recently; the major reasons for this include dollar weakness, improving UK growth prospects as the recovery from recession continues, and massive corporate demand (Verizon). If dollar weakness ceases (see below) and corporate demand on the same scale vanishes (a gimme) then we are left with market expectations for growth that will prove difficult to exceed. Add to this a deteriorating trade balance – brought on partly because of the increased value of the pound, and the popularist stance of a sterling negative, left leaning Labour party; in my book, this leads me to think that there is perhaps more downside potential than upside in cable, and rallies will look attractive to sell into.
Regarding the dollar, it is still the balance of probability that the debt ceiling talks will be resolved at some stage without doing too much damage to the US economy. I think the market has maybe become too bearish on the adverse effects of the stoppage, and could be more surprised by better numbers than worse. Also, stimulus will end – recent developments have meant that the schedule for tapering has been shifted well into 2014, so the effect of any robust economic numbers could have a double whammy for the dollar. So on balance, I think the dollar has the potential to strengthen more on good numbers than it has to weaken on bad.
Finally, the Euro. The world and her husband are of the view that the problems for the Euro are fading fast, and that growth is on the up – investment into `undervalued European stock markets` has been a noticeable feature of the demand for the single currency over the last six months. Add to this bullish picture the support of the `whatever it takes` authorities, and I think you are looking at a lot of assumed positives, some of which will be difficult to sustain. I don`t think it will take too much disappointment for the market to turn against the Euro, and for that reason it is the downside where I see momentum as more likely.
All of this is just a `time out` to review what type of news may have been built into current pricing. Many will disagree about the value judgements expressed, but whatever happens, it is always worth taking a step back to look at market assumptions, so that one is not surprised when positive news is sometimes not accompanied by positive price action. It also generally pays to be on the side of potential greater momentum; much easier to get out of a bad position when you are on the side of the minority !!