Oh what a difference a couple of days make! It was only on Monday I wrote a post on here entitled ” Will this be seen as the sterling crisis of 2016?” and today we wake up UK time to see the UK Pound just above US $1.24 and at 1.12 versus the Euro. In fact this is not the half of it as the BBC points out.
The pound has dived on Asian markets with automated trading being blamed for the volatility.
At one stage it fell as much as 6% to $1.1841 – the biggest move since the Brexit vote – before recovering to $1.23, still down 1.5%.
It is not clear what triggered the sudden sell-off. Analysts say it could have been automated trading systems reacting to a news report.
There is a fair bit to consider and let me start with the debate over the basic facts as you see that it has also been suggested that the low was US $1.15 you get the idea. We saw this before when the Yen shot higher back in the day that there was considerable doubt to the exact numbers for a while. There are plenty of theories in the media that vary from unlikely to rubbish but Polemic Paine has written a good description of the way the market would have been.
But back to sales. Those that are still on the phone are quoting the reason for the fall on anything that they feel everyone else is saying because no one has a real clue. They will probably repeat what JPMChase or Goldman say as they reckon that the guys there are cleverer than them and more likely to know. So, clients will currently be being told that it is due to- “Barriers being hit at 1.25, 1.20 , and 1.15” and if they can’t even manage that will say “Stop losses”, which is a great generalised term that demands no justification. But some foolish folk will have done a Bloomberg News search for GBP and decided that it is due to the news that fracking had been allowed in North West England. Which is of course rubbish, because we all know that it happened because Diane Abbott was made the shadow Home Secretary.
For my own part I had a wry smile as only yesterday afternoon I was involved in a discussion about Goldman Sachs’ forecasting US $1.20 for the UK Pound which none of us realised was going to take less than 12 hours. My personal experience of such markets and I particularly think of the Italian bond market here is summed up again by Polemic Paine.
First, every salesperson is struggling to call all their clients who had ‘call levels’ at zones never expected to be hit, whilst trying to fill orders in systems at levels that they think they can get away with. Oh, hang on, no they can’t do that anymore as they need audit trails. So, they will all be huddled around spot desks arguing over whose order was hit at what……….Meanwhile, clients will be calling in demanding to know why their stops were done 7% below current market and why no one called them. Because if they had been called they would have bought it back at 8% below current markets because they are all retrospective geniuses.
Back in the days when the BTP ( Italian bond ) market swung wildly there was then a scramble to check stop-loss orders to find invariably that some had been forgotten in the melee. Because trading is now automated they should have been done except were ones that low even entered? Anyway a long day is ahead in dealing rooms just dealing with that and the recriminations. Meanwhile the media will have invented all sorts of stories which may or may not have any truth to them.
The economic impact
Much of this is uncertain and in fact the major initial impact is simply that uncertainty. This is the financial market equivalent of the night after the vote for Brexit as no-one will be exactly sure of what has just happened. However some things we do know as for example the UK Pound had been falling anyway and as I pointed out on Monday.
As we have fallen since then my estimate may now go as high as 1.5% for the boost to annual inflation.
We can add a little more to that if we stay here and of course there will be a boost to output but as I pointed out then it is much more difficult to quantify. This from the Market Purchasing Managers Indices is all we have so far.
rising demand from overseas clients linked to the weak pound sterling…….enjoyed the benefits of a weaker currency.
Another potential impact comes from the fact that due to more fears about inflation as discussed above the UK Gilt market has fallen heavily this morning. This is different to the UK Pound as it has lost some of its gains rather than adding to losses but if we continue like this there are two issues. Firstly the plan for an extended fiscal policy I discussed on the of this month as just got more expensive and secondly we may see some mortgage-rate rises. The prospect of the latter usually causes panic at the Bank of England in the same vein as Gollum in the Lord of the Rings worried about his precious.
To put this into numbers the 10 year Gilt yield has risen to 0.97% and for fiscal purposes the 30 year has risen to 1.68%. Both very low by historical standards but higher than they were.
Where was the Bank of England?
According to the Financial Times the UK Pound fell 6% in 2 minutes so we may ask where was the organisation which claims this?
Promoting the good of the people of the United Kingdom by maintaining monetary and financial stability.
It does have the ability to intervene and such a move is a clear case for intervention using this.
the Bank can intervene in support of its monetary policy objective using the Bank’s own resources rather than those of the EEA. (Exchange Equalisation Account).
As it happens it would have closed the position for a profit which is usually the case in such circumstances but not the reason for doing it. Does the Bank of England only work what used to be called gentleman’s hours?
Just as a pointer I have contacted them to say that the foreign reserves system is a mess and need reform. If I ever get a reply I will let you know.
Moving onto the economic position the Bank of England has its hands all over this and consequently a lot of egg on its face. What did it expect when it undertook Open Mouth Operations promising a monetary “sledgehammer”? Also I did point out on Monday that this statement from Dame Nemat Shafik could have been in the script for the film “Dumb and Dumber”
it seems likely to me that further monetary stimulus will be required at some point
Also there is the issue of this from Ben Broadbent of the Bank of England (h/t @LiveSquawk)
If sterling really starts to fall uncontrollably then it could have consequences for monetary policy.
And to be fair this bit turns out to be on the case.
the effect could be coming through faster than we’d anticipated
Having talked the UK Pound lower I suspect the Bank of England will be quiet for a bit or perhaps we will get some more like this from the FT about Governor Carney.
“In the absence of anyone else showing much economic leadership, this gives him a chance to shine,” said one Whitehall official. “He quite likes the media opportunities his current job gives him on the world stage.”
Right now it would involve yet another Forward Guidance U-Turn for him to support the UK Pound on the world stage.
There has been some economic news today which I will pick up in full detail another time as with markets in panic mode and the US employment report due later they will be ignored. Our persistent trade deficit persists and the small drop in monthly industrial production (0.4%) was more than explained by a fall in oil and gas (0.5%).
When this settles down we will have more idea of the full economic impact but I think John Lennon got it right all those years ago.
It’s been a hard day’s night, and I’d been working like a dog
It’s been a hard day’s night, I should be sleeping like a log
Those long the UK Pound may well have a different tune of his in mind though.
Help, I need somebody
Help, not just anybody
Help, you know I need someone, help