Notes From Underground: British Currency Gets Pounded

Yes, the dollar rallied Wednesday as the U.S. Treasury curve continued to steepen but European and British news was very negative. The potential downgrade of Spain and German Parliamentary battles roiled the European currencies. In Germany, politics are being played out to see if the economic locomotive of Europe is going to be more European or more German. A Financial Times op-ed by Frank-Walter Steinmeier and Peer Steinbruck set the tone for the battle lines. These are political heavyweights as Steinmeierwas foreign minister and Peer Steinbruck was finance minister in the first Merkel administration so their voices are louder than others.

They propose three measures that OUGHT to be done to secure the Eurozone:

1. A haircut for debt holders;

2. Debt guarantees for stable countries;

3. The limited introduction of European-wide bonds in the medium term.

As the proposal reads, it’s just posing the question about where Germany sees itself in the world: As a state within a community or a sovereign nation state searching for its own national interest?

Heading into 2011 this will be the real issue for Europe: German national interest versus the EU needs for German transfers to secure the financial rectitude of the PIIGS. In the FT, George Soros weighs in about what he deems is needed to secure the EU. The two changes Soros proposes resolve the issues of recapitalizing the banks and reduce the interest rates at which the EU itself can borrow–basically creating the EUROBOND. The problem for Soros is that the EU, which he rabidly promoted, was flawed to begin with and by centralizing the community-wide bailout mechanism and thereby having a common treasury. As usual, Soros proposes things that fall outside the legal purview of the EU and forgets that his proposals would fail the review of the GERMAN CONSTITUTIONAL COURT. It seems for George that legalities are never a problem when it comes to philosophical constructs.

Wednesday brought the employment report from the U.K. and it was very disappointing. Consensus was expecting for a 7.7 percent unemployment rate but it jumped to 7.9 percent as Britain embarks upon its austerity plan. The BOE under Mervyn King has been a proponent of QE and while not enacting QE2 as of yet, it’s possibility is discussed at every meeting. The POUND had remained relatively strong as it seemed that the market was rewarding the BRITS for an AUSTERITY BUDGET.

Recently the GILTS have been under pressure as have all the LONG END of the debt markets and the British curve has steepened with the U.S. curve. Problem for the BOE is that it has an inflation target that it has been above for the last few months and this ties the hands of the MPC of the BOE. If inflation continues to be higher than the target there will be no QE even as the economy starts to slow. The BANK of ENGLAND can hold rates low in lieu of austerity but the markets will push GILT rates higher and probably force the POUND lower. The only thing the U.K. will have to offer on the alter of economic growth is a depreciating POUND.


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4 Responses to “Notes From Underground: British Currency Gets Pounded”

  1. Ray McKenzie Says:

    You have to go back to Peter Gabriel in Genesis, for Selling England by the Pound

  2. Hugh Parsons Says:

    It seems to be unofficial British policy to keep the value of the Pound low. Every speech King makes seems to knock a few cents off the value by mentioning further QE or saying low interest rates are here to stay.

  3. Arthur Says:

    … and almost two thirds of UK high net worth individuals are worried about inflation rising in the next 12 months.

  4. yra Says:

    Hugh–right on target as King knows the best thing that U.K. has is the depreciation of the pound to gain some trade advantage—especially within Europe–if Ireland could float the currency their problems would be minimized–look at how fast Iceland has turned.Also by keeping overnignt rates low the curve is /will steepen which makes the case for weak currency and a steepening curve

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