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Sterling Will Be Strongest Major Currency In 2011

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At this point in the present global economic cycle, I defy anyone to accurately forecast the forward value of any tradeable (i.e. "hard") currency past a week or so.

Simply, there are far too many conflicting and countervailing dynamic metrics involved.

The present preoccupation of currency markets are US Dollar, Yen, Euro and Sterling.

All, are fundamentally Fiat currencies: i.e. there is little or no hard asset backing: the value of unit of currency is marginally assured by the underlying weakness or strength of the issuer's economy.

US Dollar: the US economy is in a shambolic state: the twin deficits (i.e. Budgetary and Balance of Trade), have, for years been financed by the erstwhile willingness of external wealthy nations to hold US currency as External Dollars: and US Federal Paper.

In the early 1970s, the main OPEC states hiked oil prices by X 4: and implemented a gradual shift in ownership of both extant assets (performing fields) and exploration rights. This one act tripped a global recession of scary magnitude. The US answer, was to treat with the friendly nations (e.g. Saudi Arabia) and barter skills and military assistance and hardware as well as acting as funds holder for what came to be called Petro-Dollars: which were then wholesaled into the money markets.

Fast forward: as Japan came to export eminence, a similar quid pro quo applied: Japan would buy US Federal paper, to counter the rapidly mounting US Balance of Trade Deficit. Next is was Korea's turn: and now China.

However, the Asian Tigers and many of the Arab Petro-States are extremely worried about their capital risk exposure: to the point where they have started assembling an alternative benchmark of value exchange: instead of the US Dollar, which has been the global standard for international trade since post WWII.

One large benefit to the USA of owing the World's de facto reserve currency is "Seignorage": the interest free ride the US gains from external dollars held as reserve.

This will not last much longer.

The Yen is in trouble, thanks to a flaky Japanese economy, stupid economic and fiscal policies enacted by the government and the ongoing endeavours to escape from the economic, fiscal and financial turmoil created by corruption, focus away from manufacturing exporting (And on property speculation, financial manipulation and speculation and etc).

Driven by the Eurozone fiascos, despite the attempts by the EU government and ECB at rescue packages and disaster recovery funds, the simple fact remains, that the longevity of the Euro is wholly dependent on Germany and France continuing to fund the lion's share of any initiative: and that depends on how long the German and French taxpayer is prepared to suffer themselves, to support out-of-control banana republics run by freaky politicians acting like an octopus on speed, relative to dishing out largesse from the public purse.

I would suggest not much longer.

As for the Pound and Britain: Dave and Twee Georgie talk a good game. Unfortunately, all it will take is Sovereign Risk Rates to harden, significantly, which is pretty much guaranteed and Sterling is dead in the water.

If the MPC of the B of E increase base rates (As they ought to have done two years ago), as against keeping Base Rates at a synthetically silly low, this would slightly compensate Forex investors for their large Exchange Risk Exposure (i.e potential for capital loss).

However, if the MPC do increase base rates significantly, then the house price crash will happen rapidly.

Since mortgages would be unserviceable for those already just about keeping body and soul together.

And the knock-on effects to the UK economy, catastrophic.

At the beginning of this year I published an analysis, forecasting a Sovereign Risk crisis.

Since Moody's gave clear warning they were considering downgrading Spain's credit rating (Wednesday) and Spain's sale of new fresh sovereign risk paper, today, when the yield hardened, sharply, is indicative of market sentiment.

"The Spanish treasury sold 1.8bn euros worth of 10-year bonds at an average interest rate of 5.4% - up from 4.6% in the last such auction in November.

And it was forced to pay a rate of 6% to sell 618m euros in 15-year bonds, up from 4.5% in October.

The rising cost of borrowing reflects investors' concern about the outlook for the Spanish economy and its banking sector in particular. "


If you fancy Barclays wisdom, then you could either go down in financial history as a hero: or vanish into financial oblivion.

Not a call I would make right now!


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