Friday 7 October 2016

Crisis hit Pound to hit parity with Euro €

On ND's advice I am trying some different header titles.

There was a flash crash in the pound earlier today in Asisa, these things can happen when over 90 of trade is done by robots who are tracking news and every small event that may impact the markets (even this website gets hundreds of bot hits per day, likely for this reason).

Market sentiment in the days of algorithmic trading is a tough beast, as the Pound gets hammered and all sorts of nonsense is spoken about hard Brexit (as if there was another choice - again, remoaner fantasising) and how bad that will be. As such, I won;t be surprised to see the Pound hit parity for a while with the Euro and even the dollar may touch less than $1.20 for a few days.

The thing is, with a huge current account deficit and a desperate need to increase exports and FDI, then a falling pound is just what we need. OK, so a bit miffed about holiday money, but there you goes; also that is the ONLY downside I can yet see to Brexit so far. Everything else is good news, even the falling pound is just what we need at a macro-level.

Brexit is turning out just like 1992. The UK fell out of the ERM, the Government was humiliated, the recession was still working its way out of the system, everyone felt the country was going to the dogs. Fast forward a few years and it was the start of one of the longest economic booms in our history


Anonymous said...

So your theory is that history will repeat itself when everyone knows it doesn't. It ignores exchange rates relative to main markets, or economic cycles, or the economic capacity to deliver the new forms of growth to new markets.

As an aside, here is the governments skeleton argument for leaving the EU. No mention of boom.

And as another aside and for balance, we may actually now get some form of export led growth. With so many immigrants, we now have citizens who can speak other languages other than English.

It's a funny old world

Demetrius said...

The curse of currency valuations is when notions of "good" or "bad" are attached to what should be ordinary pricing mechanisms. In particular politics and the chest beaters crying protect the value of our currency at all costs. The costs sometimes can be very heavy if not obvious and a currency is mispriced for a long period. In the past "protecting" sterling did for the British Mittelstand and later crashed the economy. And do you want full scale capital controls and Whitehall decisions on where this or that work can be done?

Anonymous said...

A lower pound is obviously good for exports, but it also means higher prices for equipment needed by SMEs, such as lathes, computers, video cameras, and hand tools.

Such equipment cannot be replaced by British-made equivalents in the short term.

Don Cox

Steven_L said...

I reckon we'll see that the trade deficit is actually quite structural and that a lower fx rate doesn't really dent it all that much.

The words 'sterling crisis' have been mentioned here a lot over the years. I don't know exactly what constitutes one. A 35% fall like after Lehman Bros? No-one really uttered the words then. But parity with USD and the Euro will be major psychological tipping points in the minds of the public. A strong, pro-EU, labour opposition would be giving the tories hell right now.

Foreign investors are already shunning UK property, presumably fearing fx losses. at what point do they shun UK bonds and is there enough UK demand to fill the void? Can the BofE really monetise against the backdrop of GBP falling below parity to the EUR or even the USD?

If, when it is apparent the devaluation hasn't closed the trade gap, perhaps this is when our chickens come home to roost.

Greece - check
Portugal - check
Spain - check
Ireland - check
UK - ???

What are the unhedged foreign liabilities of UK domiciled banks? and how much is hedged with Deutschebank? Does anyone know?

Steven_L said...

And where is ND ticking down the exchange rate with his graphics?

CityUnslicker said...

Anon - and where is the doom? A s Mr Cox says, there are some issues with buying some equipment but in the medium term that opens the prospect of activating a domestic supply that until now was economically impossible.

There is a reason EVERY major economy in the world has chased its currency down for the past few years - look at China, still doing it now, Japan and the US still printing....

SL - not quite right, plenty of foreign investors seeing value and long-term stability.

Anonymous said...

CU, simply cheering that history will repeat is as flawed reasoning as the doom-mongers'. We don't know. Article 50 hasn't been triggered, we've no idea what the negotiations will throw up, we've no idea how we'll be treated.

It's nothing like 1992. The world has changed, the mechanisms and forces of why we came out are different, and the responses from the EU will be different. As will the responses from other economic powers.

We can hope for the best, but simply assuming it...

We've a great opportunity ahead, but it's also a path filled with risks and sharks. From sour EU members, to economic heavyweights wanting to bully us. And given Hinkley combined both and we caved in pretty quickly, I'm hoping we grow a much tougher spine over the next few months.

If we don't, we'll squander that opportunity.

Electro-Kevin said...

Anon 11.38 - No-one of worth has suggested that we send legal migrants home. The situation of taking in unvetted criminals and illegals is unacceptable to the British public and for years we warned there would be consequences to uncontrolled immigration, thankfully it came in the form of a very civil revolt - Brexit.

I have a feeling - for all her words of deep understanding for *my* people (at last) - Mrs May intends to put forward the offer a second referendum after a period of economic turbulance and scary news towards the activation of Art 50.

Nobody (least of all me) thought Brexit was going to be easy. Remaining is fraught with dangers too. The people were right to vote Out. They are not the ones benefitting from fancy cuisine and German cars.

Electro-Kevin said...
This comment has been removed by the author.
Electro-Kevin said...

"They are not the ones benefitting from fancy cuisine and German cars."

That may have sounded a bit random but was overspill from another debate I was having. Remainers seem to be saying a lot, "You've spoiled things for yourselves. You won't be able to buy German cars and who's going to be left to cook the curries and Thai food you like."

A) I can't possibly afford a German car. Nor any car under five years old for that matter

B) Restaurants are either too loud or unaffordable already, except for a very special treat.

Not complaining. Just don't know what the fuss is all about.

(In the main my money's gone on kid's education and servicing a mortgage which is far higher than it should be because of overcrowding.)

Laban Tall said...

Anon 2.22 - "We've a great opportunity ahead, but it's also a path filled with risks and sharks. From sour EU members, to economic heavyweights wanting to bully us. And given Hinkley combined both and we caved in pretty quickly, I'm hoping we grow a much tougher spine over the next few months. If we don't, we'll squander that opportunity."

May's stirring words to conference certainly weren't congruent with the Hinkley fiasco.

You have to hope there's some kind of plan. Rudd at energy's not exactly a shining exemplar of a glorious future. I had no idea her brother was Roland, but it all makes a kind of sense.

Anonymous said...

Rudd at energy's not exactly a shining exemplar of a glorious future.

Successful leaders surround themselves with people brighter than themselves. The weak with acolytes. There will be trouble ahead as UKIP have discovered.

Nick Drew said...

And where is ND ticking down the exchange rate with his graphics?

I have been bloody busy doing EUR-denominated business sur le continent! Of course. (while I still can ..?!..)

Export-led! Follow me and over the top, boys. Charge!

Raedwald said...

Feeling smug - I xferred a big chunk of £ to € jut before 23rd June, when it was 1.32.

The trick now is to buy all the UK kit I need at current stock vals in € before the UK stock prices rise, at 1.10 or better

And 3% - 4% inflation or more on the CPI would suit me well as my sterling pension is CPI linked ...

So not bovvered, really.

andrew said...

What really terrifies me is that for the first time since 1939,
over the next 5 years or so we need a competent government.

So, game over.

The best thing that can happen is that all that cheap shiny stuff we like keeps getting cheaper so no-one notices how much poorer they are.

Putting a wider view on things, if we had stayed in the EU - or soft brexit (sounds like a cheese), we would be shielded by the mass/inertia of the EU and relying on the competency of the EU.

So, game over, but a bit later.

On the upside, once the game is over, you start a new one
Exploding Kittens anyone?

Anonymous said...

A couple of weeks ago, Carney and the Bank of England's MPC reduced interest rates still further, from an already dangerously-low level. They also announced a programme of further QE, or money printing. Neither of these moves was wise or necessary.

Watering the currency reduces the value of all existing sterling.

Lowering the rate of interest reduces the yield on the pound, and hence has led to a slide, and indeed a momentary collapse, in the exchange rate of sterling.

All of this could easily have been foreseen and forestalled. Interest rates will have to go up again, once the US Fed has led the way on the American dollar. QE will have to be stopped, and the initials should stand in future for Quiet Exit from that type of monetary incontinence.

In short, no more clipping of the coinage, and a sensible rate of return.

Electro-Kevin said...

Nick 11.17 - Full respect, Nick. I'm behind you. Unfortunately - ahem - waaay behind but trust I'm with you in spirit at least. ;-)

Best of luck.

david morris said...

Surely a weaker GBP v USD means higher prices in the UK for all petroleum based products ? Is the economy that far down the road that it's not bovvered about this ?

Anonymous said...

I'd like to echo EK's praise of Nick here. There are those that do, and those that can't. As someone who did, it's not easy and we've just made it harder for ourselves - albeit via popular demand/referendum.

We're in for a shock and tinkering with the exchange rate only buys you a little time before matters such as inflation / balance of payments catches up with you.

And who do we have as the general planning the strategy? Bloody Fox.

Is May is serious, he is the first to go.

Graeme said...

At what point will Carney raise interest rates to defend the pound?