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£ Sterling

Posted by jdavis on October 31, 2016

What's been happening to the £ and what is to come?

I said time and time again BREXIT means little or nothing to markets and investing.

Sure, the £ fell after the referendum. But it had risen in the weeks before. That's what markets do.

The Pound has been falling for years.

The £ fell again, after The Bank Of England - entirely to save their faces and politically - cut the meagre Base Rate from 0.5% to 0.25%. 

There was no reason to do this, economically.

There was little benefit to global finance in holding the £ Sterling before the cut.  There was even less after the cut.  

The UK has long had the LARGEST TWIN DEFICITS IN THE DEVELOPED WORLD.   These are hugely negative for a currency.

Deficit 1: Borrowings as a percentage of GDP.

Deficit 2: Net of Imports v Exports as a persentage of GDP

Now that the media, Remain politicians, the Bank of England, Uncle Tom Cobley et al have had their fun telling everyone how BREXIT crashed the Pound (it didn't) and the currency banks have made fortunes, I expect to see the £ have a material RALLY now.

However, until and unless the economics (and politics of debt-fuelled meagre growth) change, the £ will continue in a long term downtrend. 

It seems to me the US will enter recession next year.  This will affect the entire planet.  If so, in the coming Recession, I wouldn't at all be surprised to see parity with the US$...

Nine years ago you could get $2.10 for £1.

By 2014 it was $1.70.

Now, it's c $1.23 and I can see it rising to $1.40/1.50.  

Then $1 to a £1.

Total and utter calamity.  Created deliberately by politicians and The Bank of England.

100 year chart of $ v £ As number of Dollars fall (per £1), Sterling weakening.

The last time the £ was this low was in the 1980s.  Think Thatcher and Wham! 

This is our £s losing their purchasing power decade after decade.  Thank you, the esteemed politicians and academic central bankers in their ivory towers.  

Incidentally, please note we haven't just crashed our currency against the US$.  Our 'Trade Weighted Index' is also back to the lows of the 1970s.  Remember them...?  Think Wilson/Callaghan/Healey, 3 Day week and Glitter.

 

Curiously, in actual fact, the exchange rate has hovered around $1.60 for some 40 years.  See the black horizontal lines.

Sometimes the £ has fallen down to near parity and sometimes it has risen above $2.

Clearly, there has been concerted effort to keep the £ and the $ within this channel.  So, unless and until the relationship moves outside of this channel we have to assume it remains there.  That is why a move to parity is likely.

It also follows that the £ is likely to strengthen v the US$ from this level, though eventually bounded by the $2/$2.30 upper level - as I say unless and until the relationship breaks down or up outside of the channel.

Please note, if £ rises sustainably this is likely to coincide with other countries' currencies rising sustainably v the US$.

Now, when the US$ falls, sustainably, this is normally positive for commodity prices (eg oil, gas, gold, wheat etc) and this is inflationary.

This is the principal reason why our inflation rate has ticked up this year (oil has practically doubled in price).  Add to it the fall in the £, particularly since 2014, inflation should rise from 0% earlier this year, to 3-4% by next year.   Quite a move.

Yet, public sector staff are on 1% rises.  As the song goes: There will be trouble ahead...    

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