Friday, 6 February 2009

Sound Pound for the weekend

The pound rallied strongly after yesterday's rate cut. This is the opposite of what normally happens, as lower rates mean that money is transferred out of a currency.

However the reason behind this is that the market assumed the bank of England would say more about quantitative easing - i.e. printing money. The Bank shied away from this, pushing the likelihood of this out by a few months.

The markets like this, printing money is a move of a very bankrupt country - see Zimbabwe, USA etc. Not the sort of thing the Pound should be associated with.

On the downside, we have deflation now, so if we were ever going to print money, now is the time. if we don't ever do it, well and good. If 'QE' happens in 6 months, when the worst of the deleveraging is over, then we will get 1970's style stagflation.

Don't be led by all the talking heads on TV and in the newspapers. Vince Cable on Newsnight was particularly bad last night, he is only feted because Osborne and Darling refuse to speak on Newsnight. QE is a bad idea but if taken is medicine for the worst of the fever, which is now. Not in a few months time....


Richard Elliot said...

I'm hoping for a continued recovery in the pound. I want my holiday money to go as far as possible!

Perhaps the next podcast could be on the future of GBP?

CityUnslicker said...

RE - Currency predictions are virtually impossible. They are so event driven that they can change too much. Spead betters make all their money out of people trying to play at FX.

Mark Wadsworth said...

CU, they are not 'virtually impossible', it is relatively easy if you have long term charts and wait for those rare opportunities, once every few years, where a currency is clearly oversold or overbought.

Obviously, most of the time I don't have a clue about which direction most currencies are headed. So what? I just don't get involved. This is about making money, not being clever. Speculators can't see into the future - but they can see the present much more clearly.

Old BE said...

we have deflation now

Do we? Really? Perhaps in certain assets that were over-valued during the bubble, but not in industrial/consumer products. Please see Ford's and Vauxhall's decision to raise prices whilst also asking for a bail-out.

"QE" is about the worst thing that could possibly happen. First hammer the savers with low rates, then bankrupt them through inflation.

Not even New Labour are that evil, are they?

Anonymous said...

Iceland's bargain half leg of lamb has gone up from £5 to £5.50. That's serious inflation for this household.

CityUnslicker said...

BE/Dearime - I don't disagree, the period of deflation is coming to an end, hence the window for QE closing. The Sterling collapse has accelerated this.

However, overall at the mo, we have wage deflation, asset deflation, input deflation. Soft commodoties aside, there is not much inflation around. Plus for the measure of inflation you have to look at comparisons to a year ago - nearly everything has come down somewhat from the bubble.

OldSouth said...

USD drop/GBP rise can also be tied to bad news here, and inevitable devaluation due to Fed/Treasury/US Congress printing and spending money like drunken sailors.

We're swimming in debt, and they just keep borrowing more on our behalf.

Savonarola said...

£'s test will come later in the year when Govt need to borrow a lot more. UK budget deficit will exceed 10% of GDP. Foreign lenders will note Govt contingent liabilities arising from owning a number of bankrupt banks. £ will tank.
Deflation for much of 2009 and then a whipsaw.

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