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 Brexit Bounce

Following today's High Court ruling stating the MPs must trigger Article 50, both Sterling and the FTSE have bounced.

All very well and jolly in the short term, maybe. However, this suckers' bounce ignores the fact that this ruling has muddied the waters and created more uncertainty over Brexit.

Markets hate uncertainty!

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 Will Not Be a Black Swan Event

The central banks and chancelleries of the world stand ready to steady the ship in the event of a Brexit.

There is nothing to fear, the hype and scaremongering is akin to Y2K which was a damp squib.

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.

A Mountain of Debt

Brown's Bankrupt Britain has a nasty habit these days of breaking records, not the good ones but the bad ones relating to the size of debt.

Sure enough, as is becoming the norm, another record has been broken. In October the UK Government had to borrow £11.4BN. This is the worst monthly figure since records began in 1946.

Tax receipts fell by £4.1BN, compared with October 2008, and spending increased by £4.5BN.

The total public sector net debt now stands at a staggering £829.7BN (59% of GDP).

Certainly the figures are not good, most certainly if the government does not come up with a credible plan to show how it will rein in the debt external and internal confidence in the UK will evaporate; the situation will become far worse, as Sterling will collapse and high achievers/businesses will uproot and leave the country.

However, the ability of the current government to set up a credible plan is limited by a number of factors:

1 Time, an election has to be held by May 2010.

2 Gordon Brown will need to play to the gallery of public opinion in order to try to win the election, any plan that sets out tax rises and spending cuts will not be aviable to fight an election on (in Gordon Brown's eyes).

3 Gordon Brown doesn't have a credible plan.

The End of Sterling?

Jim Rogers, who co-founded the Quantum fund with George Soros, has told Bloomberg:

"I would urge you to sell any sterling you might have. It's finished. I hate to say it, but I would not put any money in the UK".

In the short term Sterling will undoubtedly fall further (and many people who short it will make fortunes out of its demise). Indeed Sterling today fell below $1.40 to its lowest point in over seven years, because of concerns about the banking crisis and debt levels.

However, currencies strengths are relative. No other developed country will escape the recession. The Euro will, in the not too distant future collapse as the folly of the "inflexible" high interest rate policy of the ECB is laid bare. The Dollar will also fall as America's economy worsens.

Sterling will rise again.

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.

Sterling Falls

The Pound continued to fall this morning, below $1.55 in early trade, as traders take account of Britain's parlous financial state.

However, those who believe that a country's machismo can best be displayed by a strong currency are seriously misguided. A falling pound, under the current circumstances, will be of great benefit to Britain's exporters.

That said, the Bank of England has a duty to cut interest rates swiftly and aggressively in order to lessen the effects of the recession.

The longer the Bank dithers, the worse it will become.

Careless Talk Costs Cents

Alistair Darling is learning the lessons that previous Labour Chancellors have learned, namely that careless talk costs the pound dear.

Sterling continued on its downward path today, falling to a 12 year low (88.2) against the Bank of England trade weighted index of currencies and to its lowest against the dollar ($1.7669) since April 2006.

The fall has been attributed, not unsurprisingly, to Darling's outburst over the weekend over the state of the economy.

The fact that he is now barely on speaking terms with his old "friend" Gordon Brown have given the markets little comfort, as divisions over policy and presentation between number 10 and number 11 mean that the economy will suffer.

Until Brown and Darling decide what the real story is, and what to do about it, the economy will continue to decline.

Speculators Target Sterling

Speculators are targeting Sterling, in the belief that the Bank of England does not have enough money to head off the continuing credit crunch, and that it will be forced to cut interest rates.

Bloomberg notes that the UK's Financial Services Compensation Scheme has £4.4M to protect deposits, compared with $49BN in a similar fund in the US.

It will be interesting to see how the Chancellor's plans to offer a £100,000 guarantee to all savers will be financed. The banks will most assuredly target their customers for any "perceived" increase in their cost base arising from the implementation of this scheme.

Interest Rates Set To Rise

Yesterday's shock rise in inflation to 3.1% has sent a warning signal to the financial markets that interest rates are sure to rise, in order to try to tame the inflationary tiger.

The rise in inflation forced Mervyn King, Governor of The Bank of England, to write a letter of explanation to Gordon Brown, as its rate was more than 1% higher than the 2% target.

This was the first such letter in almost 10 years.

Mr King blamed the sustained rise in inflation partly on sharp increases in food, electricity and gas prices over the past year, but also on businesses discovering a greater degree of pricing power as the economy continued to grow.

Sterling broke the $2 barrier, for the first time since 1992, in anticipation of the rise in interest rates.

However, before savers rush to celebrate in anticipation of seeing their meagre returns on savings rise; they should be aware that banks are very happy to pass on interest rate rises to borrowers, but are remarkably recalcitrant when passing on benefits to savers.