Media Wetting Itself Over Sterling

British Pound Exchange Rate

As the media wets itself over Sterling, the current fall should be seen as a major buying opportunity.

Markets go up and down, even the media knows this!

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Sterling Squeezed In Brexit Blowback

The pound is under renewed pressure on currency markets after the EU and leading Brexiteers voiced their opposition to Theresa May's Brexit plan, and UK manufacturing growth stuttered to its lowest level since the referendum.

What Goes Down Must Go Up - Sterling at $1.30

From zero to hero? The pound’s journey back above $1.30 https://t.co/916UYrTmk8

— Fabrizio Goria (@FGoria) May 18, 2017

The Pound's Flash Crash - The Danger of Algorithms

The pound dropped as much as six per cent to $1.1841 today.

For why?

It seems that there was a case of fat fingers or idiotic trading in Asian markets that caused an algorithm to kick in and start dumping Sterling.

Algorithms are all very well, occasionally. However, to rely on them to "manage" trading is foolhardy in the extreme!

Turn the bloody things off and take responsibility for poor trading decisions!

Sterling Falls - So What?

Since June 23rd Brexit vote, pound has plunged 13.7%, from (artificial) high of $1.5018 to today's 31-year low of $1.2757. FTSE over 7,000.

— Andrew Neil (@afneil) October 4, 2016

I remember the days 31 years ago when the pound plunged new depths, yet here we all are 31 years on.

The world didn't stop spinning then, and it won't now!

Brexit Armageddon Has Not Occurred

Services PMI Strong, Biggest Jump on Record Ever https://t.co/5Q4iHhV2Dq #DespiteBrexit pic.twitter.com/ULidKiWMOv

— Euro Guido (@EuroGuido) September 5, 2016

Britain Wins Currency War

Mark Carney  (Governor of the Bank of England) yesterday said that a deteriorating outlook meant action from the Bank was likely this summer. In other words rates will be cut, and quantitative easing (helicopter money) will be applied.

It is ironic that little over a week ago Project Fear was telling all and sundry that Brexit would lead to increased rates as Sterling would fall through the floor.

Sterling has fallen, but it has now levelled out at around $1.33 and markets are gradually rising.

As I have stated before, a fall in Sterling will make British assets look cheap to international investors. More to the point, central bankers around the world would sell their grandmothers to have been given an opportunity to stage a one off devaluation of their currencies that Carney was given courtesy of Brexit.

The currency wars are upon us, and Britain has managed to achieve victory without firing a single monetary shot.

Sterling Continues To Surge

Sterling surge continues. Now +2.1% vs US$, having its best day since 15 Dec 2008, & its 5th biggest rise since the early 90s ~@ReutersJamie

— Yannis Koutsomitis (@YanniKouts) June 20, 2016

The markets have already called the result, it will be a vote to remain.

Pound Skyrockets

Good morning EMEA! This is all you need to know -> you're looking at the Pound's biggest single-day jump in 6 years pic.twitter.com/ef9AkI5bAf

— David Ingles (@DavidInglesTV) June 20, 2016

Traders will be pulling an all nighter on the 23rd, big bucks to be made on the volatility that will ensue as the votes are counted.

Property Bonanza On Brexit Win

Despite dire warnings from Project Fear, about a collapse in property prices, it transpires that international property investors are poised to “pile into” the UK snapping up office blocks, land and luxury homes if Brexit comes to fruition.

For why?

Theoretically, according to experts, sterling will fall thus making property cheap for international investors.

Guy Grainger, head of Europe, the Middle East and Asia for JLL is quoted by the Telegraph:

“This is the big irony of the leave campaign – which is anti any foreign influence. In the event of a Brexit we may see a price correction in property and a fall in sterling which opportunistic international investors will view as a chance to pile in.” 

A recent report from the Royal Institute of Chartered Surveyors also showed that 80% of their members believed that the fear of an unknown future has held back investment flows. This, combined with high property values in the UK, has created pent up demand ready to react to a price correction.

In other words it is the uncertainty that is currently negatively impacting the economy, not the possibility of Brexit.

Cameron Doesn't Understand Economics

In a speech at a car plant today, Prime Minister David Cameron will point out that some Brexit advocates have acknowledged that it will entail a short-term economic shock, and argue as per Open Europe:

“Let’s just remember what a shock really means. 

- It means pressure on the pound sterling. 

- It means jobs being lost. 

- It means mortgage rates might rise. 

- It means businesses closing. 

- It means hardworking people losing their livelihoods. ”

In my humble opinion the above scenario is highly unlikely.

Sterling may temporarily "wobble", but that wobble will be short term and cause no damage to the economy. Interest rates will not rise, because we are close to zero inflation. Consequently, mortgages will not rise.

Regarding businesses closing and jobs being lost, that is happening now. I would also refer people to the recent EU youth unemployment statistics, the EU is not a job friendly institution!

Hence Cameron's scaremongering is simply wrong!

The Oncoming Storm

As Britain continues to be battered by storms, it and other countries should be aware of the oncoming financial storm approaching from the East.

The crisis in emerging markets has spread to Eastern Europe. The Russian central bank has vowed “unlimited” intervention to defend the rouble after it fell to a record low against a basket of currencies.

Russia’s central bank governor, Elvira Nabiullina, said she would not allow a disorderly rouble slide or risk widespread damage to the financial system. She is quoted by the Telegraph:

“We are not planning to quit intervention.” 

A macho defence of one's currency is all very well in the short term, however in the medium to long term it will achieve nothing (as Britain's disastrous flirtation with the ERM in the 1990's showed). At some stage Russia will be forced to allow the rouble to float, or else face a recession caused by an excessively tight monetary policy.

Turkey’s “shock and awe” doubling of interest rates on Tuesday has failed to restore confidence in the lira, it too will have to allow the lira to go where the markets wish.

 

Suffice to say Russia, given its rigid mindset and macho self belief, will not in the near future allow the rouble to float. Instead it will continue to tighten monetary policy, and will impose capital controls to prevent currency flight.

 

This in turn will prompt other countries in East Europe to do the same, resulting in a general stagnation of the world economy as the flow of free moving capital dries up and people's confidence in the banking system is eroded.

 

The Collapse of The Rial - A Warning To The Eurozone

Iran's rial is collapsing, following an "innovation" last week by the Iranian government to supply importers with dollars via an "exchange centre".

Unsurprisingly, people have scrambled to exchange rials for dollars.

Reuters reports that the rial fell by at least 9% today:

"The rial was trading at about 37,500 to the dollar, down from around 34,200 at the close of business on Monday, a foreign exchange trader in Tehran told Reuters. Other Tehran traders said the rial had dropped even further, to 38,000 or 40,000."

The Iranian industry minister, demonstrating a typical politician's lack of understanding of how markets work, said that he hoped security services would root out speculators whom he blamed for the drop.

It would be ironic if the downfall of the Iranian government was brought about, not directly by sanctions or war, but by their lack of understanding of how markets work; ie their own hand.

The bureaucrats of the Eurozone should take note, markets are driven by fear and greed; ill advised attempts to control and manipulate them always end in tears!

China Loosens Currency Controls

The People's Bank of China (PBOC) has announced that it is loosening currency controls over the Yuan. As from today, the Yuan can fluctuate up to 1% (the previous limit being 0.5%) in trading against the US dollar from a fixed price set by the central bank.

The move will please the USA, which has been banging on about the Yuan being "undervalued" for years. Ironically, the Yuan finished weaker against the Dollar at the end of today's trading.

Here is the full text:

"The People’s Bank of China Announcement [2012 No.4] 

Along with the development of China’s foreign exchange market, the pricing and risk management capabilities of market participants are gradually strengthening. In order to meet market demands, promote price discovery, enhance the flexibility of RMB exchange rate in both directions, further improve the managed floating RMB exchange rate regime based on market supply and demand with reference to a basket of currencies, the People’s Bank of China has decided to enlarge the floating band of RMB’s trading prices against the US dollar and is hereby making a public announcement as follows:


Effective from April 16, 2012 onwards, the floating band of RMB’s trading prices against the US dollar in the inter-bank spot foreign exchange market is enlarged from 0.5 percent to 1 percent, i.e., on each business day, the trading prices of the RMB against the US dollar in the inter-bank spot foreign exchange market will fluctuate within a band of ±1 percent around the central parity released on the same day by the China Foreign Exchange Trade System. 

The spread between the RMB/USD selling and buying prices offered by the foreign exchange-designated banks to their customers shall not exceed 2 percent of the central parity, instead of 1 percent, while other provisions in the Circular of the PBC on Relevant Issues Managing the Trading Prices in the Inter-bank Foreign Exchange Market and Quoted Exchange Rates of Exchange-Designated Banks(PBC Document No.[2010]325) remain valid.

In view of the domestic and international economic and financial conditions, the People’s Bank of China will continue to fulfill its mandates in relation to the RMB exchange rate, keeping RMB exchange rate basically stable at an adaptive and equilibrium level based on market supply and demand with reference to a basket of currencies to preserve stability of the Chinese economy and financial markets."

The fact that it is a rarity that the PBOC issues statements in English demonstrates that this move is targeted at foreign markets.

Chinese Whispers II

AFP report that the Chinese ratings agency (Dagong Global Credit Rating Co. Ltd.) has stated that, because the USA had allowed the Dollar to weaken, the USA is in effect defaulting on its debts.

In November last year Dagong reduced its rating on the US to A+ from AA, citing a deteriorating intent and ability to repay debt.

The Chinese are far from happy with the weakening of the Dollar, as they hold over $1Trillion in Dollar denominated debt.

This issue will cause considerable friction between the US and China.

Outlook - Stormy G20 Predicted

The atmosphere at the forthcoming G20 summit in Seoul later this week is likely to be somewhat heated, following on from pre summit soundbites issued by the Chinese and then Barack Obama over the recent move by the US Federal reserve to print $600BN (Quantitative Easing 2).

China, and some other countries, are not happy that this tactic pushes the Dollar lower, thus making their exports to the US more expensive and the lessening the value of their Dollar based investments.

Barack Obama responded, during a press conference in India, by saying that QE2 would bring about higher US growth rates which would be "good for the world as a whole". The US is also of the view that the Chinese Yuan is undervalued, and are pressing the Chinese to let it float higher.

The G20 will see an intensification of this "spat", as various countries begin to draw battle lines over possible future "currency wars".

China Gives Markets a Boost

China's announcement that it is to end its two year peg of the Yuan against the Dollar, and effectively to allow a managed rise in the value of the Yuan, has given world stock markets a much needed boost.

Any rise in the Yuan will be gradual, as the Chinese will manage its rise carefully. However, markets have taken the announcement as a sign that China is confident about its economy.

Trade Gap Widens

Despite the fact that the Pound has fallen in value, relative to other currencies, Britain's trade gap with the rest of the world unexpectedly widened during January to £7.987BN.

City "experts" had expected a deficit of £7BN.

The unexpected news served to push Sterling lower, which in theory should actually help exports.

It seems, so the story goes, that the poor weather in January was to blame for the deterioration. However, were that to really be the case then imports would have been affected as well. The fact that the gap widened, means that imports were not so seriously affected affected by the weather as exports.

Nature Abhors a Vacuum

Unsurprisingly the current political turmoil his hitting the economy. The pound slid 1% against the dollar to $1.6022, a one-week low, while the pound hit a two-week low against the euro of 1.1277 euros.

Nature abhors a vacuum, and until the political situation is brought into some semblance of control KPI's such as the exchange rate will be savaged by the markets.

On a brighter note, well done to Alistair Darling for clinging on to his job as Chancellor.

As to whether is this is a sign of his strength, or the Prime Minister's weakness, is another matter.

Exports Unresponsive

Despite the fall in the value of Sterling, statistics (if they can be relied upon) show that Britain's trade deficit grew from £7.6BN in October to £8.3BN in November.

In theory a falling pound should stimulate exports, and curtail imports.

One small piece of positive news is that shoppers from the Continent are flocking to London to snap up bargains.

Richard Brown, the chief executive of Eurostar, is quoted in The Times:

"We are an international business, and while the pound is weak, that means that London is much cheaper for people coming from France and Belgium, so we have seen 15 per cent and more growth in visitors coming to London, a lot of them using our shops and buying stuff here in London."

Let us trust that the bargains that they are purchasing are British, and not foreign imports.