British Pound Sterling has suffered more from the financial crisis and
recession than any other major currency. From its high point of just over
2.1100 in November 2007 to its Friday close at 1.3812 the Sterling has lost 35%
of its worth against the US Dollar. It has sustained similar losses against the
Yen, 51%, the Euro 44%, and the Swiss Franc 36%.
comparison the Euro has declined only 19% against the Dollar, 32.1% versus the
Japanese Yen, and 11% against the Swiss Franc; the Australian Dollar has lost
33% against the US dollar, and 46% against the Yen; the Canadian Dollar has
fallen 26% against the American Dollar and 43% against the Yen but gained 9%
against the Euro; and the Swiss Franc has dropped 20% against the US Dollar
and 27% against the Yen while gaining the above 11% against the
Euro. With the exception of the Yen crosses which were the beneficiary of the
funding based carry trade and whose destruction in a welter of deleveraging,
repatriation and capital flight is a story apart from the general market, the
Sterling has forfeited more value than any other industrial world currency.
immediate economic and interest rate prospects can account for a large part of
the market disenchantment with the Pound. But there are also secondary
concerns, the British sovereign debt outlook, the health of the banking system,
the pending election and even the trading history of the Pound, which although
not as quantifiable as interest rates or GDP add considerably to a Sterling
trader's worries. Unfortunately for the British public and the government
not one major criterion is positive for the Pound.
Bank of England (BOE) has been more forthcoming about the condition of the
economy and more aggressive in reducing rates to meet circumstances than its
counterpart across the channel, the European Central Bank (ECB). But it has
lagged far behind the American Federal Reserve. Though the current BOE 1.5%
repo rate may be an historic low across more years of existence than any other
central bank, it is very likely that rates will move even lower in the
immediate future. The BOE does not have the anti-inflation mandate of the
ECB or the institutional credibility of the Bundesbank. Mervyn King the BOE
Governor may warn the market of the dangers of ultra low rates but in the end
he will take the bank down the same path as the US Federal Reserve. Aside
from other considerations the British economy will have suffered from the
National Product in the United Kingdom plunged 1.5% in the last three months of
2008. It was the largest economic contraction since 1980. The British
housing market has experienced a credit fueled real estate boom like the US and
is mired in oversupply, falling prices and bankrupt mortgage lenders.
Unemployment is at 6.1% the highest since 1997, claims jumped 77,900 in
December and consumer spending and confidence are sinking. Industrial and
manufacturing outputs were down 6.9% and 7.4% respectively on the year in
British banking system is not as diverse as that of the United States and is
centered on a few large institutions. The Royal Bank of Scotland is one
of those key institutions and the government now has a 70% stake in ownership.
While wholesale nationalization of the banking sector is not contemplated nor
spoken of by the government, as more banks come to depend on government rescue
funds the result is a nationalized industry, in fact if not in
declaration. Financial services accounts for a large part of the British
economy. A government controlled banking industry will be neither as profitable
nor as expansionist when the recession finally ends as it would have been under
private stewardship. The difference for the British economy will be fewer
jobs in a less productive financial sector for years to come.
and Poorâ€™s reaffirmed the British AAA rating on January 13th but the longer
term prospects are still questionable. The government has assumed many of the
liquidity problems of the banking system. In so doing the government has vastly
expanded its debt and risk burdens. If markets continue to fall analysts
and the rating agencies will posit more bank recapitalizations and more private
sector debt on the government books. Spain, Portugal and Greece have
already had their ratings reduced and they have the benefit of belonging to the
united European currency. In the newly stringent rating agencies, concern
for British debt rations will weigh far more heavily than consideration for
government funding costs or British chagrin.
Brown's Labour Party is trailing badly in the polls. The deciding factor in the
US election may have been the state of the US economy and the financial market
blowup in September and October. Prior to that intensification of the
financial crisis the two candidates, Barack Obama and John McCain, were
essentially tied. The lesson will not have been lost on Mr. Brown.
Nothing determines an election in a democracy like the state of the domestic
economy. Market suspicion has to be that the Brown government will do whatever
it can to prop up the economy before the election, including lower rates,
massive fiscal stimulus spending, and quantitative easing when rates have
reached a nadir. Nothing that will help the Labour cause and the economy will
support the Pound. Every measure can be justified by the need to rescue the
economy from recession or worse. If the Pound is sacrificed in the attempt so
trading historians will remember George Soros and the European Exchange Rate
Mechanism (ERM). In the fall of 1992 Mr. Soros bet that the Conservative
Government of John Major would be unable to maintain the Pound within the
trading band of the ERM. The currency markets believed Mr. Soros and joined in
the most famous currency raid in history. The Sterling was forced out of the
ERM and the Conservative Administrationâ€™s reputation for fiscal competence was
shattered. Today there is no ERM and no central bank trying to hold back the
weight of the currency markets. But currency traders still hunt in packs and
they are stalking the Pound Sterling.
IMPORTANT NOTICE: These comments are for information
purposes only. Past results are not necessarily indicative of future results.
FX Solutions, LLCï¿½ believes that customers should be
aware of the risks associated with over-the-counter, spot Forex. Forex trading
is highly speculative in nature which can mean currency prices may become
extremely volatile. Forex trading is highly leveraged, since low margin
deposits normally are required, an extremely high degree of leverage is
obtainable in foreign exchange trading. A relatively small market movement will
have a proportionately larger impact on the funds you have deposited. You may
sustain a total loss of your funds. Since the possibility of losing your entire
cash balance does exist, speculation in the Forex market should only be
conducted with risk capital you can afford to lose which will not dramatically
impact your lifestyle.
To the best of our ability, FX Solutions believes
the information contained herein is accurate and true. We reserve the right to
make corrections and/or update the material when deemed necessary. Therefore,
FX Solutions assumes no responsibility for errors, inaccuracies or omissions in
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