Could Chaos in the Stock Markets Mean The Pound Falls to Parity With The Dollar?

Investors tend to fixate on the stock market as a way to make money. When stock markets are in chaos, they see no way out. I’m surprised that so few investors pay attention to the currency markets. After all, in terms of volume and value, the Forex dwarfs the equity markets.

But I get the feeling that’s going to change. Currency stories are all over the financial pages at the moment — and investors are starting to realise that there’s a way to play it. For the more adventurous investor, spread betting offers easy access to a once out-of-reach market. But then not everyone is into that kind of leveraged speculation.

There are safer ways to play this new-found interest in the currency market. I’ll introduce you to a colleague who’s found a conservative way to do it in a moment. But let’s just talk a bit about context first.

The Bank of England has little choice but to cut interest rates and cut them aggressively. We could even see an emergency cut ahead of the next scheduled meeting on 5th/6th November.

That’s bad news for the pound. Money chases yield. So if the UK base rate falls from the current 4.5% to, say, 2%, then sterling becomes a lot less attractive to yield chasers.

The pound was worth two dollars in August. It’s now worth not much more than 1.5.

I’ve even seen calls for year-end pound-dollar parity — one pound for one dollar. And why not? I mean already in just the last three months, the pound has fallen almost 50 cents. Why shouldn’t it fall a further 50 cents in the next two months?

When Forex trends take hold, they can run and run. And they can overshoot, just like all markets tend to overshoot. With the picture as bleak as it is for the UK economy right now, it’s got every chance of doing that.

We’ve got rapidly rising unemployment. We have a burgeoning trade deficit. The housing market will continue falling. And the whole financial crisis is drawing investors away from the UK.

"Sterling has long been particularly vulnerable because the imbalances in the UK economy — notably the dire state of households finances and the large external deficit — are just as severe as those in the US," said Julian Jessop, chief international economist at Capital Economics.

And we should remember that UK rate cuts are likely to be much more aggressive than in the US. That’s because we have more room to cut. Our base rate is at 4.5% compared to the current 1.5% in the US.

Of course, this is largely priced into the cable rate already. Even so, sentiment is against the pound. We’ve seen what sentiment has done to stock markets recently. In these extraordinary times, we could quite easily see extraordinary moves.

Pound/dollar parity is certainly a bold call. But then so, it seemed, was calling the FTSE at 3,500 just a few months ago — and it’s not far away from that level right now. And colleague, Bill Bonner’s "Dow 5,000" call suddenly looks very "on the money". [Be sure to read Bill’s Daily Reckoning today as he returns to the markets after a short break away from the news. You can read it at the end of this email...]

The last time the pound came close to parity with the dollar was in February 1985, Back then, cable touched $1.02 at one point during trading. It might not get there this time, but it could certainly have another go.

Meanwhile, as Theo Casey at The Fleet Street Letter explained in his daily email to subscribers today, the pound’s losing out to the Euro, too. The dollar may have reasserted itself as the world’s reserve currency recently, but even the trouble-stricken Euro looks like a much better bet than the pound. Today, the Euro has gained another 2% against sterling — and that’s despite the announcement that the European Central Bank is likely to cut rates next week.

"The Euro has many long-term advantages over the pound," explains Theo Casey in a piece you can read on our Fleet Street Invest homepage. "One is in trade. There is a lot of intra-economy trade within the Eurozone. Goods are bought and sold in Euros without another currency entering the equation. This makes it a lot less likely that the currency area will run up a huge trade deficit."

You can read Theo’s explanation in full and see how he’s using one conservative "currency play" to protect his readers’ wealth from a continuing devaluation of the pound — and further chaos in the stock markets. Read his latest article here.

Until tomorrow,

Frank Hemsley
For Fleet Street Daily

P.S. About the report we sent you on Saturday from Tom Bulford — "Tomorrow’s giants selling for pennies..?" was the subject of the email.

Just a little reminder...

Tom told his readers this morning: "Time is running out if you want in on this one. I really believe that 31 October is when this incredible company could reveal some major news that could send its share price soaring. That gives you just over four days to get in to take maximum advantage.

"Forget about the wider markets. Yes they are going down. But some shares are defying that - and I reckon this could be a MAJOR winner. You should at least have a look at the idea.

"If I’m right about this company, it could help you make 400% over the next year - and I reckon the big part could come early from the news that could break in four days’ time.

"Quick - have a read of my idea here. It will take you a few minutes and you’ll soon see the scale of this opportunity - and why I believe this could be the ultimate credit crunch bargain share."

(Forecasts are not a reliable indicator of future results. Your capital is at risk when you invest in shares, never risk more than you can afford to lose. Please seek independent financial advice if necessary. Fleet Street Publications Ltd. 0207 633 3600.)

Today’s selected articles:

Fleet Street Letter Investment Director, Theo Casey, explains why the pound must fall — and how you can profit, even as stock markets crash.

Professor Roundabout Gets the Girl

The Daily Reckoning — Global Depression Alert

Another flag on the Daily Reckoning mast!

The First World War: 1914-1918. The First World Depression: 2009-??

"This is going to be even worse that I thought," said our old friend, Doug Casey.

He was referring to what will most likely become the world’s first global depression.

"What happened while we were away?" was the question we had asked.

We just got back from our trip out to the ranch. What do we find? More of the same:

The Dow fell another 312 points on Friday. The index now stands at 8,379. This morning, stocks are falling again in Asia. And in Europe.

‘Dow 5,000’ is our prediction. Not that we have any inside information. But when we look at a long-term chart of the Dow, we notice that it goes up and down. It tends to go way down after it has been way up — in long, 15-20 year waves. The top of this wave washed over us in January 2000. Since then, the index has been higher... but not when you adjust it for inflation.

You can read the Daily Reckoning in full here.

P.S. If you enjoyed this article you can find out more about our free email, The Right Side by clicking here.

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Could Chaos in the Stock Markets Mean The Pound Falls to Parity With The Dollar?

When Stock Markets Are In Chaos...