Interest Rate Up, Sterling Down

Open thread.

Right at this minute (13:10), Sterling is lower against both USD and EUR.  Discuss!

ND 

[Personal interest:  I am long both Sterling and USD.  And, of course, heavily exposed to the UK economy in general.]

Whither the Pound Sterling - how low can it go?

This is an interesting graphic from Deutsche Bank, out today.


It shows a trade-weighted view of the major currencies.


The interesting parts are that the Chinese Yuan in the most over-valued currency in the world, no wonder so much hot money is leaving China to be invested elsewhere. However the Swiss Franc has also been top of the list forever, with no signs that will change any time soon.


Whilst the US Dollar is perfectly in the middle, the British Pound is well placed on the list, a little lower than the Euro and thus prone to generating some inflation in the economy which is what we are seeing. Bizarrely, QE happy Japan remains the world's cheapest currency and also a country of near-zero growth. The monetary economy of Japan is clearly not working or functioning properly anymore, but that appears to matter little to its wealthy denizens.


The reason I went looking for this is I was wondering what a no deal on Brexit situation will do to the pound, currently the markets are very pro-GBP as they judge we are in a low of Brexit inspired political morass. This can unwind quickly. However, it would seem to me they look at charts like the above and see there is far more upside than downside to the GBP position, especially as interest rate rises are now on the near horizon.


FX is notoriously hard to predict which is why traders make so much money...out of commissions rather than the gambling! However, even in no deal scenario it looks like the fundamentals of the UK would keep sterling at parity with the Euro or thereabouts and at no worse than around $1.15 to the £1. It would be a case of buy the dips.


We can also tell from other data that the UK is currently, under-priced, tourism is at an all time high, which is always suggestive of an undervalued currency.

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

Prospect of is already Independent Scotland already boosting the UK economy as a whole

The Pound has dropped to a low of $1.61 to the Dollar - its lowest for 3 months. it year low is at £1.57 so it is well on the way to being at this level or better with just 10 days until the Scottish referendum result.

The Scottish referendum is the gift that keeps on giving, not only may the UK soon be shot of its Socialist extremists, but also the 20% over value of the Pound (its trade weight is currently 83 against a basket of currencies, this implies a near 20% over-valuation) will come off.

This will cause imports to be more expensive and so drive inflation, but at the same time will help an export sector that has run into a wall in 2014 in the face of an over-expensive currency rate driven not by fundamentals but by the choice of the Pound as a safe haven currency.

Perhaps the loss of Scotland will permanently diminish the Pound (I doubt it really, Scotland is 8% of the economy at most) as a reserve currency. This would have good benefits for the economy with almost no downsides - those only being that larger corporate transactions would have to move to dollars or euro's, but not matter. The status of long-dated gilts will in reality underpin Sterling's utility for decades to come.

Moreover, the FTSE is harmed by the earnings of so many of its companies being in dollars which is then reflected into poor returns due to currency exchange. The move down of the Pound will improve the overall PE ratio of the FTSE. Of course a high priced FTSE will lose some lustre too in the run up to the referendum.

We can only hope this continues and the whole show is not ruined by a 'No' vote in the election on the 19th September which will return us to the status quo position and represent a significant detrimental adjustment.

CU

Wherefore the Pound now?

Now here is an excellent article. The world of forex trading is relatively alien to me. Everyone I know who does it professionally seems to work on the basis that you need a few millions to punt with and then try and take a tenth of a percent a day here and there and somehow make your self rich. It always sounded remarkably hard to me - although I am yet to meet a poor FX broker which suggests there know something I don't.

Also FX Trading lends itself well to technical analysis of charts - which is all very well and good but not one of my stronger points; my strategies in trading tend to be more focused around event driven moments.

However, as the link shows, perhaps now is one of those moments. With the AAA downgrade likely to have an impact on economic prospects, the most obvious suggestion is to say that the pound will fall further.

However, a glance at the various charts proves this to be unlikely, the fall has already bee fairly precipitous and the idea that somehow the Euro is a long-term stronger option that the Pound must be ludicrous given the contradictory strains present within the European Union.

The entire markets too are long on the Norwegian Kroner and Aussie Dollar (tipped here years ago as the place to be, of course), which will be positions unwound one day along with the Swiss Franc.

So there we go, everything in place for a contrarian bet and the pound to make a steady recovery...anyone buying this?