Notes From Underground

It was 12 days ago the BOE’s Mark Carney delivered his Mansion Speech and warned markets that interest rates could rise faster than investors were forecasting, resulting in a strong rally in the British Pound against all currencies. The POUND was especially strong against its largest trading partner the European Union. Today, Governor Carney synchronized his thoughts with Fed Chair Yellen and announced that the BOE may be able to keep rates low for longer because the lack of rise in wages meant that there was still GREAT SLACK IN THE ECONOMY. (It appears that the central bankers have been cheating off each others’ papers.)

The market s reacted by SELLING the pound against all the major currencies, undoing some of its appreciation of two weeks ago. While the market reacted to the foreign currency the short term interest  rates in the U.K. barely moved and the SHORT-sterling three-month interest rate futures closed a touch lower on the session. Mr. Carney may be trying to create some volatility in the market to keep speculators and investors on edge, but if he keeps contradicting himself Carney will sacrifice the BOE‘s hard-earned credibility. It seems a great deal to risk for not much gain.

When the Bank of England really needs the market to absorb risk the traders will not be there to cushion the market. If the governor was trying to ease the recent upward pressure on the pound sterling then it was a declaration of a currency skirmish as every central banker is intent on keeping its currency as low as possible to preserve export markets. Shortly after Carney’s statement, ECB Member Ewald Nowotny was speaking about Europe being on the verge of deflation. There  seems to be a very great effort to keep pace with other central bankers intent on maintaining downward pressure on their currencies. t the very least the efforts to jawbone currencies undermines whatever credibility exists for the G-20/G-7 gatherings.

Also undermining the G-20 is China’s effort to create an Asian version of the IMF and World Bank. The Chinese are very troubled by the continued dominance of the world lending institutions by the powers of the old-established order. Chinese efforts at finding their place on the world’s stage is not to be minimized. China has vast reserves and more importantly a billion plus consumers to which the world’s businesses want access. Also, the recent bout of U.S. equivocation on foreign policy have led to China and others lifting their profiles in an effort to gain greater influence in world affairs. More reason to be cautious in the age of complacency.

***In a picture that appeared online yesterday, I couldn’t help but insert my own caption: Merkel Giving Birth To Jean-Claude Juncker! Any other captions would be welcome in an effort to insert levity into the dreariness of the world affairs.

Tags: BOE, ECB, Mark Carney, Merkel, Pound, short sterling, volatility

This entry was posted on June 24, 2014 at 10:55 pm and is filed under ECB. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.