Thursday, Sep 17, 2009
Euro the tallest midget for now
Bloomberg: Pound to Drop to Euro Parity, Dollar to Reach 85 Yen, BNP Says
I post this not because I agree but more because it explains what the "big boys" appear to be thinking on currencies, and partly explains the dollars recent fall. BNP thinks GBP will fall again as it becomes a "funding currency" similar concept to "carry trade" as far as I can tell.
Posted by mountain goat @ 11:36 AM (1574 views) Add Comment
23 Comments
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1. flashman said...
Hans and his cowboy team put out a new report every day (big PDF's) without fail. In about 8 reports time, he will say something completely different. They all trade, so beware of book-talking
2. mountain goat said...
Flashman - looks like the cowboys are in control at the moment. Seems to be a anti-dollar mania at the moment, if there is such a thing. Personally, I am watching closely to see when this turns. I think the cowboys might find the bull's horn in an uncomfortable place soon enough.
3. flashman said...
mg: I know what you mean. There's a big problem with this talk about Sterling becoming a funding currency. In the boom years people borrowed in Japan and invested it in higher yielding zones. The amount they could borrow was almost limitless and the interest rate differentials were large. Now the amount these guys can borrow is very limited and the differentials are modest, so I think the funding currency/carry trade talk, has absolutely no credibility
4. mander said...
I am not happy. The British pound, the most valuable thing for me, does not buy me much at moment and do not want to invest it in property either.
5. drewster said...
Gordon Brown must be happy - a falling pound keeps unemployment down (ceteris paribus). Also the weak pound will send Polish plumbers home - why earn weak pounds in faraway UK when they can earn strong euros in nearby Germany?
6. icarus said...
After all, if currencies moved the way he predicted he wouldn't have to write reports.
7. uncle tom said...
I tend to agree with flashman - carry trades need big returns to make them attractive, and a difference of just a percent or so doesn't cover the risk element.
Maybe I'm missing something, but I can't see the attraction..
8. smugdog said...
Flash: you stated that you intend to purchase a property soon, because it is your family desire. Now you state that you intend to be a cash buyer. Based on the theme of this blog, in which currency do you hold your cash funds? or do you alternate frequently? Sorry if I intrude, but it would be of interest to know how a city player and potential property buyer holds his cards.
9. drewster said...
@uncle tom,
Carry trades allow you to earn a steady higher income (interest) for several years, until one day it blows up in your face. The Japanese individuals who were borrowing Yen and investing in high-yielding Aussie dollars got their fingers burned when the Yen rose sharply last year (see chart below).
If you're an investment banker or a fund manager, your end-of-year bonus depends on how much you make this year; regardless of any blow-up which may be several years away. Although the bankers' bonus structure pushes them towards such risks, they aren't the only ones. Amateur investors (the so-called Mrs Watanabe) engage in carry trades. Over several years they see no danger and they keep collecting high returns. Their brains become accustomed to this and they discount the risk. At the same time, their success in investing leads them to over-estimate their abilities. They tell themselves that they'll be able to pull their money out in time. Human nature and the wiring of our brains (we expect the future to be very similar to the past) leads to mistakes like this.
Ouch:
10. flashman said...
smugdog: I don't think you could describe me as a city player. I just work in the place. Most of my money is in sterling and sterling denominated assets. I'm sorry if that is disappointingly mundane.
11. smugdog said...
Flash: good on you for sharing, does sterling worry you (or anyone else for that matter) who is waiting for the right moment to buy a property?
12. flashman said...
I can't speak for anyone else but I have no concerns. Even if I were worried about sterling, a fall wouldn’t make much difference, in terms of a UK house purchase
13. stillthinking said...
There is a big difference between a yen carry trade and a sterling carry trade. There was persistent demand for yen due to the success of the Japanese export machine, and the BoJ was happy to see the yen devalued.
The return that seems invisible is actually there because sterling will lose value.
There is no equivalent support for sterling in a carry trade. We are not exporters and typically people have no fundamental desire to hold sterling to buy UK output. If there is a carry trade in sterling then sterling will tank basically, and the reason is the costs of borrowing in sterling are outweighed by the benefit of the depreciation of sterling denominated loans.
The UK is not in any way similar to Japan. We have a persistent trade deficit. If a carry trade starts then we will have no option but to put interest rates up.
14. inbreda said...
msugdog - exchanging currency with a view to property purchase would be speculation. I don't think many people on this site want to be speculators - it was teh idiot over leveraged speculators that have made owning a home so damn hard. We don't want to emulate unless we have to.
15. uncle tom said...
smugdog,
There is a general principle that unless you are confident that you know better than the investment community, you should keep most of your money in the currency of the country where you intend to live.
A fundamental of investment is that risk comes at a price. The more risk an investor takes, the better the average returns (but note the word average..!).
Holding the currency of a country that you do not intend to live in carries a risk element that is not generally rewarded, so in essential terms it is not such a good investment.
Currency fluctuations have a habit of catching out even the wisest heads, so if you intend to live in the UK, focus on sterling priced assets, but not necessarily sterling itself.
16. flashman said...
stillthinking: Interest rate differentials are the driver of carry trades and at the moment we do not have sufficient differentials. A sterling carry trade would therefore, as you say, depend on sterling falling, to make money. No one who knew the currency markets would attempt such a trade. The fall of sterling is by no means certain and even if it were, participants in such a trade would experience many malicious currency squeezes to take their ill-advised investment from them. It is easy to say that sterling will fall but it is quite another thing to put a highly leveraged bet on it. Carry trades are one of the most risky and expensive trades available (even when there are the appropriate interest rate differentials). If traders want to profit from the fall of sterling they simply go short on sterling. Why would they use a convoluted and more expensive option?
17. drewster said...
@stillthinking..... "the BoJ was happy to see the yen devalued"
Isn't the UK govt (secretly) happy to see the pound devalued?
18. uncle tom said...
"Isn't the UK govt (secretly) happy to see the pound devalued?"
The only thing the UK govt wants is to find some magical way of staying in office. Nothing else matters, except arranging some lucrative cushions for them to fall on when they get kicked out..
19. drewster said...
@uncle tom said,
Lower pound = lower unemployment = labour having a hope in hell of staying in power. No?
20. uncle tom said...
Drewster,
Falling pound makes external funding even harder to roll over, IR's rise, people not happy...
Voters still like their foreign holidays - a weak pound makes them very unhappy..
It takes a long time for a more competitive trading position to feed back into employment - even if Sterling went through the floor, it wouldn't have a noticeable impact before the election.
21. stillthinking said...
I am not so sure that Labour consider further devaluation a useful policy goal, they must remember Callaghan's speech about inflation and unemployment. When we devalue, we also knock out to a certain extent foreign demand, i.e. although we gain a comparative advantage the cost is reducing overall economic activity. The yen went from 220ish to 150 in two years, but how many Dr.Martens can an unemployed Japanese factory worker buy?
Devaluation only works as an emergency tool in a flopped economy, but I don't think the loss of value sterling has absorbed recently is due to Labour policy, more that it reflects a genuine lack of desire for sterling. Our main export industry, debt, has collapsed and any pickup in the rest of the economy will a) take years b) require some foreign company to fold taking foreign demand with it c) cause UK price increases. Because we have an open economy we need a virtuous circle of money changing hands including Johnny Foreigner so any attempt to boost our own economy in isolation is spitting in the wind.
Imagine if one country sold saddles and another country bred horses. How can the saddle making country get a commercial advantage by devaluation?
I don't think sterling will fall further, sterling is what it is, but I think the other currencies will rise (same effect of course) as their engines start running again simply because we need to import much more than we export and will do for some time. Everything is up in the air at the moment because of overproduction masking real values, but overproduction won't last and when the global economy starts to look like firming up we will be revealed. But I suppose a carry trade is perhaps a risky step too far, I was thinking more move any funds away, scared monkey style, run away and think about it later.
22. Ah-so said...
"I am not so sure that Labour consider further devaluation a useful policy goal"
Devaluation is not being pursued as a policy - it is a natural consequence of the economic situation we find ourselves in. It is also part of the cure, which will help speed up our recovery. It is an option not open to the Irish, who find themselves in a worse position, yet at a trade disadvantage with the UK and USA export markets.
23. japanese uncle said...
Herea are the two significant phenomena I noticed recently. Hawkhead latest catalogue shows jumpers with exactly the same design and price as they presented last year, but the material changed from 100% cotton to 100% acrylic fiber. (this means hidden inflation is going on) Also IR for savings products clearly started to rise. Both have something to do with the falling GBP.