A week ago today, City analysts Hargreaves Lansdowne released the results of a survey they’d done among currency dealers about Sterling’s value outlook for 2011. The forecasts ranged from €1.05 to €1.35, but the majority plumped for a figure over €1.25. This morning (12.30pn BST) it’s at €1.10.4. Not much guidance there, really.
Investors (if you can call the market-movers that any more) are a weird lot. I honestly think that if Italy sank into the Mediterranean tomorrow, followed by Germany spontaneously exploding, the Pound would still fall against the euro. Simply because, yesterday and today, the Greek Parliament passed two laws guaranteeing them enough money until September (laws opposed by 73% of the electorate there) Sterling slid yet again against a currency which, as I’ve been saying for years, might as well be an attraction at Disneyland for all the use it is.
The stock answer given is – by for example thisismoney – ‘This is because of the interest rate gap that has emerged between the UK and European Union. The main European Central Bank refinancing rate is at 1.25% versus the record low 0.5% maintained for more than two years by the Bank of England.’ In the world we inhabit, this makes sense: but on a more rational plane it would be, of course, completely daft: it is the sort of buying strategy that leads one to get into the Zimbabwean Dollar. When the planet was sane, one went into a currency because its economic outlook seemed good. Now it’s become yet another sector where everything is once removed from what really matters.
I can see the rationale: staying ahead of the wave makes mass-trade, lightening-fast broking hugely profitable for those who know what they’re doing. The problem is that they’re doing it for a narrow client base of the very rich, or institutions working for over 55s who were either smart or lucky about the investment pot with which they wound up. The last thing they’re thinking about is the socio-economic downside of what they’re up to….or the likes of us, who just want a level playing field.
Because of the near-derivative nature of currency gambling nowadays, for the smaller investor it becomes crucially important to know what the game is at any point in time. I don’t mean ‘let’s go look for a conspiracy theory about the ECB secretly selling bonds to China which it can then sell to the US’. I mean, what are the criteria being used by those with real power in the sector?
For example, returning to the first paragraph above, I used to think that, come next Spring, Sterling would be over €1.30. But to be honest, in January I thought the euro would be lavatory tissue by now. I was right for a while – but then wrong. The reason is, I took my eye off the game, and when I looked back the players had switched from ice hockey to Gaelic football. The key issue now is to decide what the game is going to be.
The short-term game for traders now is, as thisismoney asserts, that the Pound’s slide is about the interest rates on offer. I think that a good 20% of it also reflects deep pessimism about Britain’s future, but let’s set those normal people aside, and come back to them later. First, the ECB’s game is to use the euro’s investment rate to stop a run on it. The EU’s central bank is also papering the walls with euros, another way of achieving a falsely ‘healthy’ price level. Monsieur Trichet is going to find this increasingly difficult after the next bailout – and impossible after the next one after that, because all his money is going to be spent buying yet more junk and/or supporting member central banks within the eurozone. Ergo, more collapses + an end to the ECB’s quiet ‘QE’ = falling euro. In theory.
Second, Sir Mervyn King at the Bank of England’s game is to cling to Zirp with two overriding aims: to stop his banking system collapsing under a shipload of bad derivative bets and toxic loans; and to ensure that, this time next year, most British homeowners are still in their homes while feeling confident enough to consume. Merv’s problem in all this is that a cheap Pound is ratcheting up inflation, his MPC colleagues are beginning to turn against Zirp, and the UK consumer isn’t showing any confidence at all. Ergo, higher rates + euro meltdown = relative Sterling strength. In theory.
But have I got the games right? What if Trichet’s plan is part of a wicked plot by the Franco-German axis of greed to waste all the taxpayers’ money bailing out peripheral members, and hasten that end by raising rates still more? After which there’ll be a subtle name change from European Union to FrankDeutsches Reich? What if King is playing another sport entirely, called making the EU uncompetitive, and then getting out of it to start afresh with a cheap Pound? That is, let’s face it, the crucial advantage we still have over the eurozone.
Both of those theories have a pleasingly loopy appeal, but very little basis in fact. But you never know.
However, a more significant and evidenced trend is apparent in US/Fed currency actions at the minute. Despite what looks like his innocence of sex charges, Dominic Strauss-Kahn has been surgically removed from events: Geithner now has his gal Christine in the IMF driving seat; and Geithner pulled out all the stops to threaten Armageddon if the Greeks threw off their yoke. This is because US foreign policy towards Europe is to stop the contagion destroying Wall St, while sticking very close to the two nations so obviously running the show….and ensuring no nasty socialists get elected. The last thing the US Fed wants is a panic on the euro that causes a rush towards the Dollar: that would up the real value of America’s debt, and make it even more uncompetitive in world markets. And the quickest way to make the euro look strong is to bomb Sterling….which given the UK is a tiny competitor today, is risk-free
Take a look at this ADVFN chart of Sterling movements from yesterday. Look what happens at 10 am EST, when the NYSE opened:
Humpty-Dumpty had a great fall.
Now go to that ADVFN page again today: exactly the same thing has happened – at 10.00 am, on the button.
The volumes traded were average to slightly above, so whoever sold Pounds in the US did so bigtime. A number of observers suggest the pound is having difficulty distinguishing itself from the eurozone/Greece fiasco. Others say this is justified, given investor concerns about the vulnerability of UK banks to EU sovereign debt contagion. The huge flaws in this argument are (a) if we’re indistinguishable, why aren’t we going up with the euro? And (b) UK exposure to Greek default is relatively minor.
No, that looks to me like a very steep wall on the chart above: too steep to reflect unmassaged market sentiment alone. Somebody ‘directionalised’ (the new buzz term for manipulated) Sterling in New York yesterday – and again this morning. It doesn’t surprise me, by the way: my guess is that the American elite in general – and Geithner in particular – see us increasingly as a marginalised basket-case. The only thing ‘special’ about our relationship with the US from here on is that the White House and its acolytes will be giving special attention to talking about it – while running discreetly away from it.
But back to the money: is your brain starting to hurt yet? Me too. As I keep on saying, you have to decide what the game is.
Here’s a final explanation which is more straightforward and might just be close to the truth: not only the US Establishment, but also most currency traders, think the UK is finished.
“Public Sector borrowing came in around £7.7 billion in May,” one told me yesterday, “yet again, much higher than the £5.0 billion we were expecting. The Coalition doesn’t have a firm grip on the situation there”.
“Sterling had a bit of a rally recently, after Trichet dropped any mention of further rate rises,” another trader told The Slog, “But then Mervyn King delivered a poor inflation report, and cut the growth forecasts fοr the next two years bigtime. So you have low rates and a flatlining economy. It’s not exactly a come-on, is it?”
What’s interesting in these two comments is that both rates and outlook were putting investors off.
Well, you pays your money and you makes your choice. Personally, I’m thinking about the Yuan at the moment. But what these factors partly show is that, with geopolitics, hedge funds, the Fed, Fort Knox, Trichet, the Chinese and Uncle Tom Cobbleigh playing games at the moment, it’s best to discern the identity of the game before jumping in.
More specifically, the actions of the Americans, and the view of traders, in relation to Sterling suggest very clearly indeed that Camerlot haven’t a clue what they’re doing, or what they’re dealing with.