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Interest Rates Not Playing Out Like We Expected

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I for one wholeheartedly expected rising US interest rates to put pressure on the UK rates.

It simply isn't happening, the weak dollar has messed it all up.

Could we face the doomsday scenario of the UK being able to hold rates low now and prop up prices...?

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I for one wholeheartedly expected rising US interest rates to put pressure on the UK rates.

It simply isn't happening, the weak dollar has messed it all up.

Could we face the doomsday scenario of the UK being able to hold rates low now and prop up prices...?

All the time sterling is the strongest currency in the world there is no need to raise the rates--in Gordon's mind at least. What is keeping sterling high? HPI and MEW. What will end HPI and MEW? IR and recession. Both will go hand in hand. Gordon cannot raise rates or recession will follow. IMO, the currency markets will rumble the Miracle Economy later this summer and sterling will start to falter forcing Gordon to hike a few months after inflation goes beyond 2.5% CPI (even allowing for fictional basket of goods).

Don't forget, Gordon's political future hangs on nothing being seen to go wrong in the Miracle Economy. IR may be his Achilles heel.

Japan may force Gordon's hand once the carry trade rumbles through the economy--all that cheap credit from Japan will suddenly cost more whether Gordon's bank raises the rates or not.

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All the time sterling is the strongest currency in the world there is no need to raise the rates--in Gordon's mind at least. What is keeping sterling high? HPI and MEW. What will end HPI and MEW? IR and recession. Both will go hand in hand. Gordon cannot raise rates or recession will follow. IMO, the currency markets will rumble the Miracle Economy later this summer and sterling will start to falter forcing Gordon to hike a few months after inflation goes beyond 2.5% CPI (even allowing for fictional basket of goods).

But the thing is this is true in most of the other major currency zones too, other than the Euro which has it's rates well below ours.

Japan may force Gordon's hand once the carry trade rumbles through the economy--all that cheap credit from Japan will suddenly cost more whether Gordon's bank raises the rates or not.

Are you implying that Japanese rates will have a direct bearing on UK mortgage rates? If so can you explain how this works?

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But the thing is this is true in most of the other major currency zones too, other than the Euro which has it's rates well below ours.

Are you implying that Japanese rates will have a direct bearing on UK mortgage rates? If so can you explain how this works?

The Japs have been flooding the world with cheap money for several years. Because of internal problems they have had to reduce interest rates to virtually zero which the world banks have mopped up to loan to housebuyers and MEWers at correspondingly low rates.

Now that Japan is pulling out of stagflation and seeing some growth and inflation together they need to raise rates to make sure the reviving economy does not overheat and create another bubble in assets as it did before.

A hike in Japan of just .25% as aniticipated will be passed down to the borrowers around the world, including the UK. However, it is highly unlikely that the .25% origination will be passed onto the consumert without several mark-ups as it goes from the BoJ to the Jap Commercial banks to the UK clearing banks onto the high street banks to the ultimate consumer. Thus, the BoE may prove to be irrelevant once Japan begins to dictate the direction of rates.

This is known as the "Yen carry trade" and there are quite a few articles on the net about it's potential to trigger a crash not just in houses but in asset prices accross the board.

http://www.iht.com/articles/2006/02/22/bloomberg/sxpesek.php

Commentary: If the cheap yen vanishes, will carry-trade bettors panic?

By William Pesek Jr. Bloomberg News

WEDNESDAY, FEBRUARY 22, 2006

Surprisingly strong economic growth in Japan is raising many eyebrows, not least those at the central bank, which is anxious to scrap its policy of zero interest rates.
There can be little doubt that 5.5 percent growth between October and December pushed the Bank of Japan further in that direction. Oddly, there are few signs that global markets are bracing for higher debt yields in Japan.
Why? Japanese rates have been negligible for so long that investors take them for granted. This, after all, is the economy that cried wolf too many times. The reason investors are not ecstatic about Japan's recovery is the sense that we've been here before - many times.
Yet Japan's latest growth figures should make believers of some of the biggest skeptics. Not only did exports bolster the economy in the fourth quarter, so did personal spending - a sign that optimism is spreading to households around the nation.
Rest assured that the Bank of Japan is noticing and that it will soon begin pulling liquidity out of the economy. Once that process begins, there is no telling how aggressive the central bank will be and what effect it will have on bond yields.
Japan's rate outlook matters to global markets for two reasons. One, yields in the biggest government debt market will head steadily higher for the first time in more than a decade. Two, that may mean the end of the so-called yen-carry trade.
"All liquidity starts in Japan, the world's largest creditor country," said Jesper Koll, chief economist for Japan at Merrill Lynch. "When rates go up here, rates go up everywhere."
What makes the carry trade so worrisome is that nobody really knows how big it is. The Bank of Japan has no credible intelligence on how many hedge funds, investors and companies have borrowed cheaply in yen at ultra-low interest rates, only to reinvest the funds in higher-yielding assets elsewhere.
Nor are the Bank for International Settlements, the Federal Reserve or the International Monetary Fund likely to know how much leverage this most popular of trades has enabled banks to build up. Ditto for regulators overseeing the dealings of portfolio mangers worldwide.
During the past decade, the yen-carry trade has become a staple. A popular form of the strategy exploits the gap between U.S. and Japanese yields. Anyone borrowing for next to nothing in yen and parking the funds in U.S. Treasuries received a twofold payoff: a yield difference of three or more percentage points, and the dollar's rise versus the yen. The latter trend bolsters profits by the time the funds are converted back to yen.
As the Bank of Japan raises rates and more investors buy into Japan's revival, though, the yen is sure to appreciate, much to the chagrin of carry-trade aficionados. Realization that the trade is moving against investors could disrupt global markets.
Speculators might suddenly close positions that are becoming more expensive: dumping Treasuries,
gold,
Shanghai real estate, shares in Google or whatever else they used yen borrowings to bet on. The chain reaction would accelerate once the mainstream media jumped on the story.
If all this sounds far-fetched, think back to late 1998, which offers an example of the damage a panic among carry-traders can do.
In October of that year, Russia's debt default and the implosion of Long-Term Capital Management shocked global markets. The yen, which had been weakening for years, surged 20 percent in less than two months.
Suddenly, just about anyone who had borrowed cheaply in yen rushed for the exits. That prompted frantic conference calls among officials in Washington, Tokyo and Frankfurt. Just how big was the yen-carry trade? How much leverage was involved? What could policy makers do, if anything, to regain control?
The wild days of 1998 have been largely forgotten. And as Japan slid back into recession and deflation, the yen-carry trade returned to favor. Today, as then, officials have little data to rely on in assessing the risks that all this poses.
Clearly, the global financial system is in better shape than it was in 1998. For the first time in a decade, economies in the United States, Europe and Japan are growing in tandem. There is the added benefit of strong growth in India, China and most of East Asia.
A boom in the number of hedge funds globally has not destabilized the international financial system as critics have expected - at least not yet. The world economy's resilience amid terrorist threats and record oil prices also provides some comfort.
Even so, investors may not be taking the risk of rising Japanese bond yields seriously enough. Once the process begins, world markets may be surprised by how quickly Japanese rates shoot higher, taking the yen - and all those who borrowed in it - along for the ride.
It is a serious threat and most people are blissfully unaware of what is about to come down.
Edited by Realistbear

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  • 302 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%



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