Saturday, Feb 20, 2010
A sterling collapse could be on the cards
FT: Vulnerable sterling loses ground to fragile peers
Currency markets like things to be black or white, and the prospect that an incoming government will not have the strength to make hard fiscal decisions is likely to be punished.
This prospect will test the patience of investors and ratings agencies. Indeed the pound faces huge downside risks if agencies reassess the UK’s AAA credit rating, which would undoubtedly raise the likelihood of an aggressive UK sovereign debt sell off.
In other words, the absence of any positive adjustment to the UK fiscal position runs the real risk of a run on the pound.
Posted by devo @ 10:55 AM (1192 views) Add Comment
13 Comments
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1. mrflibble said...
As I've said before, the downside risks of holding Sterling far outweigh the upside gains.
By moving out of Sterling you run the risk of Sterling strengthening by only a small amount, by staying in you run the risk of your wealth getting hollowed out, slowly by the constant devaluation and maybe more rapidly by a run on the pound.
The UK's situation is simply not improving, and if, like most on here believe, we do now have a full blown hpc, it is hard to see the pound strengthening in this environment. The housing market isn't going to go down all by itself, it will take a lot more with it.
The hpc is the least of our worries, by the time this thing is over we could well all be wishing we were back in 2007 - the era of milk and honey. It reminds me of The Matrix, sometimes I wish I was plugged back in, as even though the make-believe world sucked, what we have now isn't exactly any better. If the real hpc had happened then we would at least have 'saved' money on housing, but as it is no money has been saved on housing and our real wealth has been decimated by the currency devaluation. Not exactly something to be cheerful about, especially when you look at what is possibly ahead of us...
2. Rooten Tooten said...
What 'upside gains' could anyone possibly have in holding their own currency?
3. hpwatcher said...
I agree with all of the above.
4. i remember the 90`s said...
I agree with no 1 as well ,But i feel in my world no one seems to agree with me its like i am talking total rubbish ,people i know just don`t understand or are too wrapped up in other things to take notice!!!!!
5. devo said...
what will be the event that finally gets people to take notice, i wonder
'the UK has lost its AAA rating' will be met with shrugs by the vast majority of us
6. tenyearstogetmymoneyback said...
devo
Mortage rates at 13%
I remember Black / White Wednesday
People were almost throwing themselves out of the windows while I felt very smug with my 11% fixed rate
(and before anyone comments it turned out to be an average deal long term)
7. jack c said...
@ i remember the 90`s - you are not talking rubbish and are not alone, just in a minority - part of the problem is that people nowadays like a dose of celebrity not reality. They have far more important things to worry about such as the final of Pop Star to Opera Star (Friday's) or whether Sharon Davies will receive another set of scathing comments from Jason and end up in the skate off yet again (Sundays) - the collapse of Sterling/major economic matters etc... are not on most peoples radar. My prediction however is that pretty soon everyone is going to get a big dose of reality and they aint going to like it.
8. drewster said...
mrfibble,
I agree that the risks of holding sterling appear to outweigh the potential benefits.
Two questions:
1) Which currencies are better placed?
2) What is the currency risk of holding sterling-denominated shares in companies which are export-oriented (e.g. AstraZeneca) or which earn a significant share of their income from overseas (e.g. Xstrata, Vodafone)? Do such shares provide a good way to hedge the risk to sterling?
9. mrflibble said...
what will be the event that finally gets people to take notice, i wonder
Not sure, but the news reporting in this country seem more pre-occupied with Afghanistan than anything else. I often wonder what would happen if we has a real brutal currency event, would it even make the 10 o'clock news?
'the UK has lost its AAA rating' will be met with shrugs by the vast majority of us
The trouble is people don't understand what is really happening. I was talking to someone the other day who had convinced himself that holding more than £50k in any account was unsafe, so is now setting about the task of splitting the money up into umpteen different accounts. As I explained, if what your fear comes true then you are looking at everyone, including millionaires and businesses being handed back £50k irrelevant of what they originally held. If we get to a point where the government cannot rescue our own savers with our own money then it won't matter, because £50k won't be worth anything. Personally I cannot see the £50k limit ever been brought into play as the government would not dare risk the capital flight aftermath.
10. rumble said...
Drewster, I have the same questions, especially the second. Asked last month-ish, someone said ftse100 would be ok.
11. tenyearstogetmymoneyback said...
drewster
The best advice I have had is "Eggs in Baskets" i.e spread things around to reduce risk.
12. mrflibble said...
@7. drewster...
1) Which currencies are better placed?
Virtually all of them at the minute, but be wary of the very strong currencies like CAD and AUD. I'd argue these look similar to Gold, i.e. very toppy. Not saying they won't get stronger, they will, but personally I would want so see some weakening before getting involved to lessen the risk. I've been favouring the US Dollar recently, but that has now gone too low for me, 1.65 and above was OK, 1.55 and lower is looking too low, but I suspect it will go lower. The Euro, well, Sterling should have made gains on it, but it hasn't, which says a lot for how the UK is being viewed at the minute. If push came to shove I'd still favour the Euro over Sterling, but I would not favour the Euro over the US Dollar. The US Dollar takes a lot of stick but with commodities being priced in Dollars, it being the No.1 reserve currency, and with the Euro proving no replacement, then love it of loath it, the Dollar will be around for a long time to come. When the Dollar gets too low sovereign wealth funds and petrodollar economies start to throw their weight behind it. Sadly nobody comes to the rescue of Sterling and the traders love to short it.
2) What is the currency risk of holding sterling-denominated shares in companies which are export-oriented (e.g. AstraZeneca) or which earn a significant share of their income from overseas (e.g. Xstrata, Vodafone)? Do such shares provide a good way to hedge the risk to sterling?
This is a good edge against Sterling going down. Most of the FTSE100 companies are global so as Sterling heads down those shares head up due to the currency re-balancing. A good advantage of shares are the dividends, with interest rates being rubbish and inflation going up then some returns are needed just to stand still. The downside risk at the minute is another global shock. When investors get nervous money flows out of shares and into other things. My personal feeing is we are not through with the global shocks just yet.
13. drewster said...
Mr fibble,
Thanks muchly for the reply.