Currency Update – Thursday 22nd January

Good morning,

The UK government have taken two attempts to try to bail out the banking system, and now President Obama has had to take two goes to complete his inauguration vows. Obama successfully got through repeating a few lines at the 2nd time of asking, so lets hope that the UK government are also successful with their 2nd attempt, although the markets have their doubts, with increasing demands for Lloyds and RBS to be fully nationalised (the state is already a majority shareholder), their shares actually rose slightly yesterday afternoon, but Barclays continued to suffer and saw their share price drop by over 9%. The Government bail out has also increased concerns over public financing and debt, with yesterday’s figures showing borrowing doubling from last year to GBP71.2bn. Jim Rogers, an investor who made a large fortune from Sterling’s collapse after exiting the ERM, was on the radio yesterday advising anyone who is listening to sell the Pound, with the only UK exports worth anything being north sea oil, and the finance industry; Oil will eventually run out, and the finance industry is finished, with most of the major banks crumbling.

This was always likely to be a bad week for Sterling with the amount of bad economic data released, and yesterday’s unemployment figures didn’t disappoint with a 78k increase in the claimant count and a rise to 6.1% unemployment, a 10 year high. We also had the release of the MPC minutes that provided little new, with a 8-1 vote for the cut, and Danny Blanchflower as always out-doving his fellow committee members to vote for  bigger cut. Sterling dropped yesterday, briefly falling below the multi year low of 1.3682, against the Dollar, shortly after London closing, but has bounced back overnight to sit around 1.3850. Against the Euro the Pound has held relatively steady, staying weak below 1.07.

Sterling’s fall has started to attract global attention with the state of the currency scheduled for discussion in the next G7 meeting, although the chances of a ‘verbal intervention’  are slim as apparently it’s reserved for currencies in crisis, I would have thought a fall of over 30% against the Dollar, and 20% against the Euro would qualify as a crisis. The suspicion is that the UK government are happy with a weak Pound, as it helps exports, and makes domestically produced goods, the ones that are still made here, more competitive. The French are never shy about airing their grievances, and the finance minister has given some friendly advice to the government suggesting that they should do more to help the Pound; the Irish finance minister actually came out and accused the UK government of engaging in a ‘competitive devaluation’ to help UK exporters.

We get a slight reprieve from the barrage of negative UK data today, although it resumes tomorrow with GDP and retail figures. There is the CBI Industrial Trade survey released today, which is expected to reiterate the weakness in the manufacturing sector, but today could be the day that Sterling gets a little breathing space, and could recover a little bit of poise, before yet more problems tomorrow.

Michael Corcoran – Assistant Manager  | Treasury Solutions