Jump to content
House Price Crash Forum
Sign in to follow this  
Realistbear

Bond And Currency Market Moving Against U K

Recommended Posts

http://www.bloomberg.com/news/2011-01-18/pound-losing-to-euro-as-cameron-budget-cuts-collide-with-king-s-inflation.html

Pound Losing to Euro as Cameron Budget Cuts Collide With King's Inflation
By Paul Dobson and Lukanyo Mnyanda - Jan 18, 2011 4:06 AM GMT
No major currency is performing worse than the pound
as Prime Minister David Cameron’s budget cuts slow growth and rising inflation limits the Bank of England’s ability to spur the world’s sixth-largest economy.
Sterling has weakened against all 16 of the most-traded currencies, depreciating even more than the euro, since the start of August. The three most accurate strategists for the pound expect it to continue falling and futures traders this month were the most bearish since September.
The pound, which appreciated 8 percent against the dollar after Cameron took power in May until November, has been trapped by the government’s efforts to close a deficit that grew to 11.1 percent of gross domestic product in the last fiscal year.
Bank of England Governor Mervyn King is keeping interest rates at record lows to spark growth at the same time that inflation has remained above the government’s 3 percent limit for nine months.
“Tightening policy to rein in inflation in a weak-growth environment would be a double whammy against the pound,”
said Lee Hardman, a strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. “Rate hikes are currency supportive only if they’re consistent with stronger economic growth.”
The currency will probably fall to $1.50 by year-end,
from $1.5923 as of 12:53 p.m. in Tokyo, he said. Analysts have been cutting their forecasts for the pound versus the dollar this year, with the median of 29 estimates compiled by Bloomberg predicting sterling will end 2011 at $1.54, down from $1.59 at the end of last year.
Top Priority
Cameron made the deficit the top priority after Standard & Poor’s threatened to lower the U.K.’s AAA credit rating in May 2009.
S&P affirmed the top ranking after Chancellor of the Exchequer George Osborne presented the program of reductions in October.
The government is cutting welfare spending and public- sector jobs, while raising taxes and tuition fees.
The pound weakened 7.14 percent last year, and fell 4.04 percent from Aug. 3 through yesterday, according to Bloomberg Correlation-Weighted Currency Indexes. It depreciated 2.7 percent against the dollar the past two months, the most since the election that brought Cameron’s Conservative-Liberal Democrats coalition to power in May. Sterling rose 2.07 percent against the dollar last week, while it weakened 1.58 percent against the euro.
Futures traders increased bets this month the pound will weaken against the dollar, figures from the Washington-based Commodity Futures Trading Commission show. The difference in the number of wagers by hedge funds and other large speculators on a drop compared with those on a gain, so-called net shorts, was 14,133 on Jan. 4, the most since Sept. 7.
Bond Losses
U.K. bonds are also suffering. Gilts have lost 3.92 percent on average the past three months, exceeding losses of 2.71 percent for U.S. Treasuries and 3.08 percent for German bunds, Bank of America Merrill Lynch index data show.
Osborne said in October that eliminating most of the 156 billion-pound ($248 billion) deficit by 2015 was essential to prevent a loss of investor confidence. His plans would reduce public spending by 81 billion pounds after inflation, narrowing a deficit the government forecast at 10.1 percent of GDP this year to 2.1 percent in the 2014-15 fiscal year.
Growth is already slowing.
The U.K. economy, which expanded 0.7 percent in the three months through September, may increase 0.2 percent to 0.3 percent in the first two quarters of this year from an estimated 0.4 percent in the fourth quarter of 2010, according to the British Chambers of Commerce.
Rate Outlook
That will keep King from raising borrowing costs, leaving the U.K. with negative rates after accounting for inflation, according to JPMorgan Chase & Co.
Gilts due in 10 years yield 0.32 percentage point more than the U.K.’s inflation rate. By comparison, Treasury 10-year notes yield 1.83 percentage points more than the increase in consumer prices, compared with 0.84 percentage point for German bunds and 1.11 percentage points for Japanese government debt.
We expect the pound to continue to be an underperformer within Europe,”
said John Normand, London-based head of currency strategy at JPMorgan. Bank of England policy makers “act as if they have a stronger emphasis on growth,” he said. “If that’s the case, they are not going to be raising interest rates even though inflation stays above target. Sterling is a currency with a negative real interest rate.”
While the Bank of England’s main rate has been a record low 0.5 percent since March 2009, a central bank report on Dec. 16 showed Britons’ inflation expectations surged to the highest level in more than two years.
Faster Inflation
Analysts predict U.K. inflation will surpass other developed nations this year. Consumer price growth will reach 3.10 percent, according to the median estimate of 15 forecasts compiled by Bloomberg. Gains will reach 1.70 percent in the U.S., 2.10 percent in Canada and 1.60 percent in Germany and France, surveys show.
The pound weakened against the euro since August even as leaders from the common-currency region grappled with a debt crisis that forced Greece and Ireland to seek financial aid. Ministers met yesterday in Brussels to discuss ways to strengthen their rescue fund for debt-stricken states.
A report today will show the U.K. inflation rate increased to 3.4 percent in December, the fastest pace since May, from 3.3 percent the previous month, according to the median estimate of 31 analysts surveyed by Bloomberg.
Relative Yields
Pound bulls are enticed by high relative yields, which are likely to keep moving in the U.K.’s favor as the Federal Reserve prints cash to finance purchases of $600 billion of Treasuries.
Two-year gilts yield 0.77 percentage point more than Treasuries of similar maturity, near the most since January 2009, from almost no difference in April.
The Bank of England is unlikely to risk its inflation- fighting credibility, said Paul Robinson, London-based head of European foreign-exchange strategy at Barclays Plc’s investment- banking unit.
“The Fed is going to carry on talking dovish whereas the Bank of England is going to be forced into tightening policy,” said Robinson, a former economist at the U.K. central bank who predicts sterling may advance to $1.82 by year-end. “At the end of the day the inflation target is not a growth target.”
The implied yield on three-month short sterling futures contracts expiring in September has climbed 29 basis points since Dec. 31 to 1.34 percent, signaling investors are adding to bets that borrowing costs will rise.
‘Borrowing a Burden’
About two-thirds of outstanding mortgages are tied to the Bank of England’s main rate, according to a Dec. 17 Bank of England report.
“Many unsecured borrowers, particularly mortgagors with limited equity, are already finding current borrowing a burden,” the central bank said in its Financial Stability Report.
The opposition Labour Party won a special election in a northwest English parliamentary district last week and Cameron’s Conservative Party lost support in the area.
“We tend to look at any form of BOE policy firming as an untimely headwind for the U.K. economy,” said Stephen Gallo, the head of market analysis at Schneider Foreign Exchange in London.
“It’s not a good situation to be owning the currency when the central bank is behind the curve on inflation.
Recession Risk
Schneider, the third-most accurate forecaster for the pound against the dollar in the six quarters ended Dec. 31, as measured by Bloomberg data, has the most bearish outlook for 2011. The firm says sterling will weaken to $1.35 by year-end.
San Francisco-based Wells Fargo & Co., the most-accurate forecaster of the pound against the dollar, predicts it will depreciate to $1.53, and No. 2 Vadilal Enterprises Ltd. in India sees it dropping to $1.50.
The U.K. economy faces a 20 percent chance of slipping into another recession as rising unemployment and faster inflation weigh on growth, the Centre for Economics and Business Research said Jan. 14. The London-based research group had earlier said there was a 10 percent chance of GDP shrinking. The unemployment rate was 7.9 percent in the three months through October.
Mark Farrington, who oversees $6.2 billion as head of currencies at Macro Currency Group, a unit of Principal Global Investors Europe Ltd. in London, said while a
Bank of England rate increase may initially prove positive for sterling, any gains would be short-lived.
“It would deliver a shock to the household sector,” he said. “It’s possible sterling could have an initial surge, but after the initial shock the direction of the pound would probably be lower, at least against the dollar. We’re leaving sterling alone at the moment.”

IMHO, Schneider are about right but short term £ will rise vs. the $ delaying my house purchase plans for longer than I would have liked. The market expects King to get off his vigilance track and actually take action, or to be seen to be taking action, based on his remit to fight inflation which is a problem here. The thoughts of a higher yield will be a buy on the rumour sell on the news deal as the effects will, as the above article suggests, prove to be short lived as a HPC of gigantic proportions will be triggered.

We are in a Catch-22 so we may as well go with it and let the chips fall where they may, that is, let the houses drop. The key will be having a credible rebuilding plan that DOES NOT rely on HPI for our future prosperity.

Bottom line: I am still long on the $ in the Cable stakes but its going to be a longer wait.

Edited by Realistbear

Share this post


Link to post
Share on other sites

Pound has risen strongly in the past few days RB.

I think that a wise head here would seek to protect the pound. The US are printing dollars like mad, and sooner or later that inflation in China that results from that printing, is going to cause the Chinese to float their currency. At that point the US have to suffer the inflation instead, or reverse their policy.

The UK has a similar choice to make. Will we print to pay back our obligations, or will we close the deficit quickly like we should, or perhaps just default on the debt? I think that avoiding printing has to be a priority, faith in the currency is what I would seek to protect.

That decision for the UK looks close at hand, as does the Chinese decision about floating.

I see that in the Eurozone, Ireland have taken matters into their own hands regarding printing. My guess is that others will do the same and Germany will leave the Eurozone asap.

Share this post


Link to post
Share on other sites

Pound has risen strongly in the past few days RB.

I think that a wise head here would seek to protect the pound. The US are printing dollars like mad, and sooner or later that inflation in China that results from that printing, is going to cause the Chinese to float their currency. At that point the US have to suffer the inflation instead, or reverse their policy.

The UK has a similar choice to make. Will we print to pay back our obligations, or will we close the deficit quickly like we should, or perhaps just default on the debt? I think that avoiding printing has to be a priority, faith in the currency is what I would seek to protect.

That decision for the UK looks close at hand, as does the Chinese decision about floating.

I see that in the Eurozone, Ireland have taken matters into their own hands regarding printing. My guess is that others will do the same and Germany will leave the Eurozone asap.

Agree on the Euro. We are all in it together and the UK are riding high currency and bond wise because Dave had a plan the IMF thought would work. With inflation in the UK now out of control as confirmed by todays numbers, IR will rise or the credit ratings agencies will downgrade us. With as much risk in our economy as there is the IR must rise to offset. That mean ST spike in £ and LT disaster as the Bloomberg article suggests.

Share this post


Link to post
Share on other sites

Pound has risen strongly in the past few days RB.

I think that a wise head here would seek to protect the pound. The US are printing dollars like mad, and sooner or later that inflation in China that results from that printing, is going to cause the Chinese to float their currency. At that point the US have to suffer the inflation instead, or reverse their policy.

The UK has a similar choice to make. Will we print to pay back our obligations, or will we close the deficit quickly like we should, or perhaps just default on the debt? I think that avoiding printing has to be a priority, faith in the currency is what I would seek to protect.

That decision for the UK looks close at hand, as does the Chinese decision about floating.

I see that in the Eurozone, Ireland have taken matters into their own hands regarding printing. My guess is that others will do the same and Germany will leave the Eurozone asap.

have I missed something?

Share this post


Link to post
Share on other sites

Cherry picked your highlights, haven't you RB? :P

Relative Yields

Pound bulls are enticed by high relative yields, which are likely to keep moving in the U.K.’s favor as the Federal Reserve prints cash to finance purchases of $600 billion of Treasuries. Two-year gilts yield 0.77 percentage point more than Treasuries of similar maturity, near the most since January 2009, from almost no difference in April.

The Bank of England is unlikely to risk its inflation- fighting credibility, said Paul Robinson, London-based head of European foreign-exchange strategy at Barclays Plc’s investment- banking unit.

“The Fed is going to carry on talking dovish whereas the Bank of England is going to be forced into tightening policy,” said Robinson, a former economist at the U.K. central bank who predicts sterling may advance to $1.82 by year-end. “At the end of the day the inflation target is not a growth target.”

The implied yield on three-month short sterling futures contracts expiring in September has climbed 29 basis points since Dec. 31 to 1.34 percent, signaling investors are adding to bets that borrowing costs will rise.

Any reasons you didn't highlight that prediction? :P

I think the news out today invalidates a lot of what that article is saying. It appears to argue that the BoE will not raise rates soon, whereas I would argue the pressures on the BoE will become too strong to resist.

Share this post


Link to post
Share on other sites

Cherry picked your highlights, haven't you RB? :P

Any reasons you didn't highlight that prediction? :P

I think the news out today invalidates a lot of what that article is saying. It appears to argue that the BoE will not raise rates soon, whereas I would argue the pressures on the BoE will become too strong to resist.

And I would argue that what the BoE decides the base rate is, is irrelevant. The yields on Gilts are the interest rates that matter.

Share this post


Link to post
Share on other sites

And I would argue that what the BoE decides the base rate is, is irrelevant. The yields on Gilts are the interest rates that matter.

I would agree, but assume the direction of BoE rates would feed through to the rest of the market.

Share this post


Link to post
Share on other sites

Cherry picked your highlights, haven't you RB? :P

Any reasons you didn't highlight that prediction? :P

I think the news out today invalidates a lot of what that article is saying. It appears to argue that the BoE will not raise rates soon, whereas I would argue the pressures on the BoE will become too strong to resist.

Cherry picked the highlights? :lol::lol::lol:

That sounds a bit like underlining the important bits!

A wise man once said:

"A man who draws attention to everything draws attention to nothing." Fah Kwon

Bottom line--the article appears to have been written with this morning news in mind--ST boost for Sterling but longer term undermining of the economy. IR will have to rise or the bond market will do it for the BoE.

Edited by Realistbear

Share this post


Link to post
Share on other sites

Cherry picked the highlights? :lol::lol::lol:

That sounds a bit like underlining the important bits!

A wise man once said:

"A man who draws attention to everything draws attention to nothing." Fah Kwon

So basically the £ will be plus or minus twenty percent from where it is now? The fact they disagree so much shows how much guesswork and utter ****** is peddled by these 'experts'. Inevitably with so many guessers, one of them will pull off the stopped clock trick

Me, using the adage that economics is like the weather, i.e. there's an 80% chance today will be the same as yesterday, will plump for $1.60 at year end

Share this post


Link to post
Share on other sites

So basically the £ will be plus or minus twenty percent from where it is now? The fact they disagree so much shows how much guesswork and utter ****** is peddled by these 'experts'. Inevitably with so many guessers, one of them will pull off the stopped clock trick

Me, using the adage that economics is like the weather, i.e. there's an 80% chance today will be the same as yesterday, will plump for $1.60 at year end

The future prospects for Sterling are inextricably woven into the future of house prices.

Merv's "vigilance" is based on the sum of all his fears: a massive drop in the value of homes and the damage that will do to our bond market and ability to get frrom under our massive debt problems and lack of growth.

Share this post


Link to post
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...
Sign in to follow this  

  • Recently Browsing   0 members

    No registered users viewing this page.

  • 311 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



×
×
  • Create New...

Important Information

We have placed cookies on your device to help make this website better. You can adjust your cookie settings, otherwise we'll assume you're okay to continue.