POUND HOLDS FIRM DESPITE BOE PROPHESYING DOOM
UK demand for gilts surged yesterday with yields for ten-year Treasuries dropping to multi-year lows amidst news from the Bank of England minutes that Mervyn King has his finger firmly on the button for quantitative means in stimulating spending, possibly for as early as next month. Despite the fact that money was dragged away from equities and into Government debt over the plans, which will involve the Bank making purchases of a variety of market assets, international demand for UK debt actually continued to wane. Investors still take the view that the risk is certainly there for the actual value of the Pound to be hugely eroded in future in response to these highly exotic and unprecedented measures. Whilst this scenario is unlikely to materialise, in a situation where prices are falling and the interest rate mechanism is either broken or not powerful to stimulate demand on its own, the use of money creation certainly represents a potentially lethal dose of medication.
Fortunately for the Pound though, despite the clear negativity of the BOE minutes yesterday in terms of deflationary risk to the UK economy, the fact that financial authorities seem to be taking the bull by the proverbial horns is still providing some good girding. This is especially the case with GBP/EUR, which, despite seeing some downside around the 1.12 mark yesterday, finished the day well up around 1.1330. As we know though, this is mostly thanks to the prevailing view amongst investors at the moment that, despite an elevated base rate, all is not well in Europe. A host of Eastern European Banks and Institutions which are mainly owned and controlled by Western Europe, plus huge bond and credit default spreads on many European countries now, indicative of collapsing GDP and crumbling fiscal health, can be thanked for this.
All in all then, yesterday was a grim day for the UK, but, set in the relative context of the global outlook, Sterling still looks nice and stable. The hotly contested ‘quantitative easing’ measures may be rather shocking and scary for the markets, but, at the end of the day, this action could well be a gamble which pays off in relation to the rest of the world once economic recovery time kicks in. It is however still worth noting that there remains some considerable risk for GBP versus the traditional funding and reserve currencies. This largely explains a falling GBP/USD yesterday which pulled off in response to a falling short-term market risk appetite and a strengthened Dollar.
Today can expect to see some major indices equity interest in the morning, which, alongside cutting of short Sterling positions, should pull the Pound up against both the Euro and the Dollar. Expect an upside of 1.14 on GBP/EUR and 1.44 on GBP/USD. UK Public borrowing figures at 930 GMT will likely halt any greater gains on these pairs though. US Unemployment claims will probably also serve to strengthen the Dollar this afternoon, bringing GBP/USD back down but supporting GBP/EUR.
Raphaels Bank CFX Team
0800 587 8722
cfx@raphael.co.uk
www.raphaelsbank.com/cfx
This newsletter is the personal view of Raphaels Bank and nothing herein should be construed as a recommendation or advice. The Bank accepts no responsibility for the correctness or otherwise of any matters contained herein.
Authorised and Regulated by the Financial Services Authority.
