Gold remains in favour with investors, pound and dollar under pressure

The US dollar continued its steady decline against most other world currencies since the break of 1.4450 against the single currency two weeks ago. In our view the 1.50 level seems to be a very attractive target for investors in the medium term. This pressure on the US dollar will certainly not fade in an environment where the three-month interest deposit rates are lower than those of Switzerland, Japan or the eurozone.

Gold is in favour with investors, the highest close this year reached $1,006.50 on February 20, 2009 and $1,033 per ounce the year before. China plans to buy gold sold by the International Monetary Fund as cited by two unnamed government sources. China plans to buy if the price is right and the return is relatively high, said a source quoted by a news agency. China announced this year that it had brought its own gold reserves to 1,054 tonnes against the 400 tonnes it had the last time an update was issued on its reserves in 2003.

Last Friday, the IMF formally approved the sale of 403.3 tonnes of gold, or one eighth of its reserves to Central Banks or the gold market. These sales will be conducted under the new agreement among Central Banks, which limits gold sales to 400 tonnes per year and 2,000 tonnes over a period of five years from the end of September. They are among the measures introduced by the IMF to diversify its revenue sources and increase to $17 billion by 2014 to lower borrowing cost for poor countries.

The pound is the target of investors, after touching $ 1.7043 earlier in the year on August 5, 2009 and 0.8400 the lowest against the euro on June 22, 2009. The pound has plummeted to above 0.9000 against the euro and 1.6400 against the US dollar. The decline of the pound is due to economic imbalances put to light by the credit crisis, says the Bank of England in an article in its Quarterly Bulletin released on Monday.

For the Bank of England, imbalances such as the changing economic outlook of the United Kingdom, the risky nature of UK assets to investors and the need to create wealth which is less dependent on consumer spending, have played a role in the fall of sterling in the last two years.

Some factors behind this decline are likely to disappear, but others could remain, said the Bank of England. Since the mid-1990s, says the report, the United Kingdom has posted budget deficits averaging two per cent of gross domestic product, a situation that could last until the deficit has been financed by British financial assets purchased by foreign investors.

However, the article by the Bank of England stresses that the financial crisis may have led foreign investors to reconsider their policy of buying assets in sterling and thereby their ability to finance the British trade deficit. "Consequently, the real exchange rate of sterling viable over the long term, that is, the rate consistent with a balance between demand and aggregate supply and a position on net external assets sustainable (...) may have declined," the report says.

Although the pound regained some ground since the beginning of the year, it has lost nearly 20 per cent in weighted data since August 2007. In the fourth quarter of 2008 alone, the pound lost 25 per cent of its value, the largest quarterly decline since the end of the system of fixed exchange rate of Bretton Woods in the early 1970s.

Upcoming FX Key events

The G20 meets in Pittsburgh today and tomorrow. In G10, the Fed and Norges Bank are expected to keep rates unchanged. We look for the FOMC to signal in next week's statement that it will taper off its agency MBS and agency debt purchase programmes in a similar way to the recent changes to its treasury purchase programme. Key US data include existing home sales (today), durable goods, Michigan consumer sentiment and new home sales (tomorrow). In the euro area, we get German IFO today.

FX Technical Key points

• EUR/USD is bullish, target 1.5000, key reversal point 1.4450
• USD/JPY bearish, target 87.10, key reversal point 94.50
• GBP/USD is neutral, watch 1.6000 and 1.7050
• USD/CHF is bearish, target 1.0150, key reversal point 1.0550
• AUD/USD is bullish, target 0.9000, key reversal point 0.8550
• NZDUSD is bullish, target 0.7550, key reversal point 0.6950.

Mr Longchamp is head of trading at RTFX Ltd.

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