Euro-dollar parity!

There's a thing, eh?

You'll see it described as "pound collapses" - but against the EUR, Sterling is where it was back in 2013, and higher than has been across most of 2017-2021.  OK, not as high as the blip in 2015, but still ... "despite Brexit" ... 

Nope: this is about the USD.  Always the safe haven.  Never underestimate ... etc etc.

OK - now back to all your favourite Ukraine themes. 

ND

Shorting Germany?

Anon, BTL previous post - "any investment suggestions?" ... 

Well we can't and don't do financial advice or recommendations on this blog, so DYODD etc.

But here's something from Capx which is a clear enough recommendation from somebody else: buy dollars and Italy, sell Germany! 

Blast from the past: 2010

The rationale is basically that the Germans are about to cop the bill for the Mediterranean economies.  Hmmm - that's a bit like nuclear fusion, people have been predicting it for a long time.  But maybe now's the hour.  You can also chuck into the pot Germany at long last being called out / caught out as being the mainstay of the Russian economy (both as importer of stuff and exporter of tech), which may not be allowed to last much longer.  What other game do they have to play that could be equally lucrative?  Well, China, of course as regards the tech exports - but the USA won't let 'em have a free run at that, even if they've (the Germans) been surreptitiously sleeving, not to say laundering for Russia these 8 years.

Personally I went 'buy USD' when the whole current thing kicked off which I date to Feb 2021 (when I first reported far-east gas prices going through the roof here) - a general rule of mine over the decades.  He who underestimates the latent strength of the USA is often doomed to a big disappointment.  Saved me in the late '00's when I shorted GBP @ 2.10 in '07 (hat-tip CU, I might add: I can even tell you which pub we were in).  We tracked its glidepath down on the blog, all through the financial crisis.

Gold hasn't been quite as effective this time around.

How much further down can £ go?  Well 1.05 (1982) is the all-time low (That's what it says when I looked it up just now.  From memory, it actually went a bit lower that year).  The psychological floor represented by 1.00 is apparently quite sturdy.  That's not a prediction, by the way.

ND

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.

UK Leads in Race to the Bottom?

It's often said that countries are pursuing self-defeating beggar-thy-neighbour policies as regards currency: an unseemly race of competitive devaluation.   Hard to remember - though I just about do - that for Harold 'pound-in-your-pocket' Wilson it spelled disgrace; and that for his Chancellor (Callaghan), well, he Had To Go.

I was always rather impressed by the quiet, unemotional way in which Brown/Darling allowed Sterling to fall steadily and indeed rather dramatically from $2.0 in July '08 to $1.4 by March '09 in the wake of the giga-crisis: we used to run a sidebar graphic recording this, month on month.  It might have been the cleverest thing they did. 

Anyhow, to read the headlines just recently you might have imagined it was the Japanese who were most concerned to devalue.  But in the race to the bottom, taking the last three months it's sterling in the the lead!  Again, all rather quiet and unemotional - it just isn't political news anymore.  Helps that oil has fallen even faster, of course ...

We're down against the Yuan, too, over this period, though not by much: and the dollar has pushed down a bit lately.  Watch out below.  

ND

Can we make money if the polls are right?

There is a website which I peruse regularly called politicalbetting.com. The folk there seem to make a nice turn on betting on all sorts of elections. A very insightful bunch they all are and I wish them well.

The challenge though is that going to a bookie to place a bet is not a fair game. The bookie can refuse large bets and indeed, refuse to take the bets. As such I think to make an decent money a lot of money has to be sunk into the game a long way ahead of time.

Where investment is unlimited is in the equity and and forex markets. Here you can invest what you like in split seconds and trade out seconds later too.

The recent polls point to a very hung Parliament. In fact, Election Forecast appears to have it that no Government will  be formed at all. The Tories on 280 and Labour on 260 mean the SNP can prevent any Government being formed.

My take on this is thus:

- The Pound will weaken 2-3% on this news as it emerges at the end of next week. The Pound has been rising the past month, so for once I can't see that Government instability it priced in. 

- Similarly the UK markets, up at all time highs when the chances are a very left wing socialist coalition will get into power or alternatively that no Government will be formed.

The markets tend to look at past performance and the UK has not had Government formation problems for some time. I am not suggesting there will be a crash, but a couple of hundred points off the FTSE and a small decline in the Pound throws up some interesting potential.

I am on a long dollar/ short pound ETF for starters. Just thinking about which sector will do the worst, likely energy utilities and banks I would imagine?

Anyone interested in following this strategy?

Greenpeace FX Losses: It's So Easy, Isn't It?

So Greenpeace have contrived to lose €3.8m in currency speculation !  To quote the great man, one must have a heart of stone to read it without laughing.

But it's easily done, isn't it ?  We're short cable, so that means, errr, we're long, errr ... what was it again?

"to be really clear about what happened, the staff member who lost their job didn’t gamble on stock markets or speculate on currency. ... What went wrong was that someone without proper authority signed contracts to exchange currency. And that ended up losing money because the value of the Euro fell. It’s like choosing a fixed rate mortgage rather than a variable rate mortgage to avoid risky fluctuations - but this time we would have been better off with a variable rate. The staff member didn’t have the authority to make such a big decision" - (Marie from Greenpeace, writing at CiF)

So: speculating, then.  I know it's a nasty word, "Marie from Greenpeace", but there it is.  First the Co-op Bank, then this.  Capitalism, eh?  Short, long, delta, forward curve, mark-to-market ... so many difficult things to learn.   Still, with a budget of €300m ...and if you need some expert banking advice I believe Fred Goodwin is still at a loose end.

"Donors will rightly be surprised and disappointed ... we welcome your comments or questions."   But not so much as to let you post them on our website, you understand.

Yes, we understand.

ND
 

Where is Cash king?

Following on from yesterday's post about Gold and Precious metals being in the doldrums and comments to the effect that many readers are in cash, I thought, but what cash? Above is the exchange trade weighted data from the BIS.

After all if you are in any one currency you run the risk of runs on that currency and are exposed to exchange rate fluctuations. However since 2007 the world has been an up and down place and I can't imagine too many FX traders have been nailing it in markets where technicals are losing to politicians time after time.

The chart above shows the various key currencies and their real movements over the past 5 years. As you can see one of the worst fallers is the UK pound, which was hugely over-valued in 2007. So bad luck to all those holding pounds.

More tricky is to see where one should be today, although Japan may look like a buying opportunity due to its QE craziness this would be a high risk strategy. Similarly, the euro is underweight but of course there maybe problems here. Singapore was the place to be for the last few years but now appears toppy. Perheps surprisingly the US dollar is also a good candidate at the moment with the Norwegian Kroner.

The UK pound, having been re-rated downwards and suffering another mini-dip last year, is not likely to push on again so this year won't be its worst year in terms of relative depreciation - however, for safety it is still beaten by the USD.

Sterling, Silver

On Monday CU offered us a contrarian punt on Sterling, so here's a different view.  I don't much like the look of any of the major currencies right now, what with talk of competitive devaluation and every currency-bloc having its own compelling tale of woe. I took to billing in EUR again 6 months ago, which has served me well, but now I find myself unable to judge.  Is it all hopelessly relativistic ?  I am no macro-economist.

But there is always bullion to consider as a possible reference-point for paper money.  Readers will know I am a long-term holder of gold (strictly physical) which has been a one-way bet for several years now.  There have been some lurid commentaries on the precioussss just recently but I am unmoved: and quite by chance (Moody's having inexplicably failed to tip me off) I decided at the end of last week that we had reached a bottom.  So I went long silver, which I haven't held for ages now, and is by far the more volatile of the two traditional PMs: but I expect to be at my desk for a bit now, and able to watch the screen.

So if the post-Moody pound is to weaken against the dollar, I shall be even more glad of the decision.  Then again, CU may be right and Sterling may bounce, which would take some of the shine off it.  

As always, just MHO, DYODD etc etc.

ND

Update: and now there's this - 

"Sterling is winning the currency wars, having overtaken the yen as the world's worst-performing major currency this year, although economists suggested the pound's biggest falls could be behind it"

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?