The rally of the UK Pound from the lows matches a 1.25% Bank Rate rise

Yesterday was a day where we discovered a few things. For example we learned that  Prime Minister Theresa may was not going to be the new Dr. Who nor the new manager of Arsenal football club as we discovered that she was in fact trying to launch a General Election. I say trying because she needs to hurdle the requirements of the Fixed Term Parliament Act later today although if she does I presume it will fade into the recycle bin of history. Let us take a look at the economic situation.

The outlook

Rather intriguingly the International Monetary Fund or IMF published its latest economic outlook. There was good news for the world economy as a whole.

With buoyant financial markets and a long-awaited cyclical recovery in manufacturing and trade, world growth is projected to rise from 3.1 percent in 2016 to 3.5 percent in 2017 and 3.6 percent in 2018.

There was particular good news for the UK economy.

Growth in the United Kingdom is projected to be 2.0 percent in 2017, before declining to 1.5 percent in 2018. The 0.9 percentage point upward revision to the 2017 forecast and the 0.2 percentage point downward revision to the 2018 forecast reflect the stronger-than-expected performance of the U.K. economy since the June Brexit vote,

However this was problematic to say the least for Christine Lagarde who after the advent of Donald Trump is now the female orange one.

. Asset prices in the UK (and, to a lesser degree, the rest of the EU) would likely fall in the aftermath of a vote for exit…..In the limited scenario, GDP growth dips to 1.4 percent in 2017, and GDP is almost fully at its new long-run level of 1.5 percent below the baseline by 2019. GDP growth falls to -0.8 percent in 2017 in the adverse scenario,

There was more.

On this basis, the effects of uncertainty seem to be universally negative, and potentially quite strong and persistent, even if ultimately temporary.

In fact asset prices rose and the uncertainty had no effect at all. Of course the long-term remains uncertain and ironically the IMF after being too pessimistic has no become more optimistic just as the factor which is likely to affect us is around, that is of course higher inflation. Oh and the UK consumer spent more and not less.

If we stick with the higher inflation theme there is this from Ann Pettifor today.

UK govt promotes usury: interest on student debt rises later this year from 4.6% to 6.1% = RPI + 3%.

That is the same UK establishment which so regularly tells us that CPIH ( H= Housing Costs via Imputed Rents) is the most “comprehensive” measure of inflation so is it not used? Also if we look other UK interest-rates we see Bank Rate is 0.25% and the ten-year Gilt yield is 1.02% so why should student pay 5/6% more please? Even worse much of that debt will never be repaid so it is as Earth Wind & Fire put it.

Take a ride in the sky
On our ship, fantasize

So can anybody guess the first rule of IMF Fight Club?

UK Pound £

There was an immediate effect here and as so often it was completely the wrong one as the UK Pound £ dropped like a stone. Well done to anyone who bought down there as it then engaged some rocket engines and shot higher and at one point touched US $1.29. For those unfamiliar with financial market behaviour this was a classic case of stop losses being triggered as so many organisations had advised selling the UK Pound that the trade was very over crowded. My old employer Deutsche Bank was involved in this as it has been cheerleading for a lower Pound £ at US $1.21, Ooops.

So we only learn from yesterday’s move that the rumours a lot of organisations had sold the UK Pound £ were true. As they looked to cover their positions the momentum built and we saw a type of reverse flash crash.

If we take stock we see the following which is that the UK Pound £ is now some 10.1% lower than a year ago against the US Dollar at US $1.282. As it sits just below 1.20 versus the Euro it is now only down some 5% on where it was a year ago. If we move to the effective or trade-weighted exchange-rate we see that at 79.1 it is some 6.7% lower than the 84.8 it was at a year ago. What a difference a day makes? Of course what we never have is an idea of what the permanent exchange rate will be or frankly if there is any such thing outside the economic theories of the Ivory Towers but if we stay here the outlook will see some ch-ch-changes. For example a little of the prospective inflation and likely economic slow down will be offset.

If we stay with inflation then there are other influences which are chipping bits off the oncoming iceberg. I have previously discussed the lower price for cocoa which offers hope for chocoholics and maybe even a returning Toblerone triangle well there is also this from

The Northern China import price of 62% Fe content ore plunged 5% on Tuesday to a six-month low of $61.50 per dry metric tonne according to data supplied by The Steel Index. The price of the steelmaking raw material is now down by more than a third over just the last month.

Shares and bonds

The UK Gilt market is extraordinarily high as we mull the false market which the £435 billion of QE purchases by the Bank of England has helped create. As someone who has followed this market for 30 years it still makes an impact typing that the ten-year Gilt yield is as low as 1.04%. This benefits various groups such as the government and mortgage borrowers but hurts savers and as I noted earlier does nothing for student debt.

The UK FTSE 100 fell over 2% but that was from near record levels. I do not know if this is an attempt at humour but the Financial Times put it like this.

The surging pound has pushed Britain’s FTSE 100 negative for the year

So a lower Pound £ is bad as is a higher £? Anyway they used to be keen on the FTSE 250 because they told us it is a better guide to the UK domestic economy which has done this.

So more heat than light really here because if we take a broad sweep the changes yesterday were minor compared to the exchange-rate move

House prices

Perhaps the likeliest impact here is a continuation of low volumes in the market as people wait to see what happens next. It seems likely that foreign buyers may wait and see as after all it is not a lot more than a month, so we could see an impact on Central London in particular.

In a proper adult campaign issues such as money laundering and the related issue of unaffordable house prices would be discussed. But unless you want to go blue in the face I would not suggest holding your breath.


The real change yesterday was the movement in the UK Pound £ which will have been noted by the Bank of England. I wrote only recently that some of it members would not require much to vote for more monetary easing such as Bank Rate cuts and of course should the UK Pound £ move to a higher trajectory that gives them a potential excuse. I do not wish to put ideas in their heads but since the low the rise in the UK Pound £ is equivalent to five 0.25% Bank Rate rises according to the old rule of thumb.

By the time you read this most of you will know the British and Irish Lions touring squad and as a rugby fan I look forwards to today’s announcement of the squad and even more to the tour itself. However just like economic statistics there seems have been an early wire about the captain.

By contrast the General Election announcement came much more out of the blue.

UK GDP growth continues to be both steady and strong

Today we find out how the UK economy performed in the last quarter of 2016 or at least the official version of that as the preliminary GDP report is issued. We can be sure that it will be rather different to that implied by one of our official seers as the person who signed this off ( Professor Sir Charles Bean) is now part of the OBR or Office for Budget Responsibility.

I am grateful to Professor Sir Charles Bean, one of our country’s foremost economists and a former Deputy Governor of the Bank of England, who has reviewed this analysis and says that it “provides reasonable estimates of the likely size of the short-term impact of a vote to leave on the UK economy”.

I have looked at before the woeful effort which stated that the economy would shrink by between 0.1% and 1% in the quarter following an EU leave vote so let us pick something else out.

Businesses and households would start to adjust to being permanently poorer in the future by reducing spending immediately.

Actually in spite of a weaker December household spending seems to have soared.

Estimates of the quantity bought in retail sales increased by 4.3% compared with December 2015………The underlying trend remains one of growth with the 3 month on 3 month movement in the quantity bought increasing by 1.2%.

Accordingly our good Professor has ended up looking a right Charlie and of course will fit in well at the OBR. But wait there was worse as all sort of doom and gloom was predicted for our automotive sector as well. Here is this morning’s update from the Society of Motor Manufacturers and Traders or SMMT.

UK car production achieved a 17-year high in 2016, according to the latest figures published by SMMT. 1,722,698 vehicles rolled off production lines last year from some 15 manufacturers, an 8.5% uplift on total production in 2015 – and the highest output since 1999.

I guess Charlie has a different definition of “reasonable” from the rest of us! Up seems to be the new down for him. But wait there was more good news.

More cars are now being exported from Britain than ever before, the result of investments made over recent years in world-class production facilities, cutting-edge design and technology and one of Europe’s most highly skilled and productive workforces.

The UK Pound £

This has been a powerful driving force as I have argued all along and the establishment have ignored. It has been nice to see the UK Pound rebound to above US $1.26 over the past week or so but the truth is that it is now lower and the cumulative effect if we use the old Bank of England rule of thumb is of a 2.6% reduction in the official Bank Rate since EU leave vote night. This has given the economy a boost as I have explained in my articles on the money supply and the surge in unsecured credit. It is also why the Bank of England’s “Sledgehammer” was both relatively puny and a policy error.

This morning has brought some confirmation of the logic behind this from company results. From the Guardian on Diageo.

It is estimated to have boosted net sales by about £1.4bn and operating profits by £460m in the year to 30 June. The maker of Johnnie Walker whiskey and Smirnoff vodka toasted a 28% rise in first-half operating profits to £2.06bn and hiked its interim dividend by 5%. Diageo’s shares rose 4.8% on the news.

There was more in the Financial Times.

Jimmy Choo continued to shrug off difficulties in the wider luxury sector in the second half of 2016, reporting “solid growth” across most regions and enjoying a big boost from the weak pound. In a trading update ahead of its full-year results, the company said total revenues increased 15 per cent to £364m.

The GDP data

This was if you take the view that we have received a strong monetary stimulus from the weaker UK Pound no great surprise.

UK gross domestic product (GDP) was estimated to have increased by 0.6% during Quarter 4 (Oct to Dec) 2016, the same rate of growth as in the previous 2 quarters.

So the establishment and media line of volatility and panic faces a reality of what has in fact been extraordinary stability! No doubt the Ivory Towers will blame the ordinary person. Indeed as we look further we see examples of well “same as it ever was”.

Growth during Quarter 4 was dominated by services, with a strong contribution from consumer-focused industries such as retail sales and travel agency services.

Whether the travel agents were seeing a flood of people departing the UK (remember when the media headlines screamed that?) or holidaymakers coming here because the lower £ makes it cheaper is not explained. However the march of the services continues. Indeed the general pattern continued as well.

UK GDP was estimated to have increased by 2.0% during 2016, slowing slightly from 2.2% in 2015 and from 3.1% in 2014.

The Service Sector

As this is our main player let us look into the detail we get.

Within the services aggregate, the distribution, hotels and restaurants industry performed strongly, increasing by 1.7%, which contributed 0.24 percentage points to quarter-on-quarter GDP growth. Retail trade, wholesale trade and the trade and repair of motor vehicles were all strong performers.

The business services and finance industries also performed strongly, increasing by 0.9% in Quarter 4 2016, which contributed 0.28 percentage points to quarter-on-quarter GDP growth. A particularly strong performer was the travel agency industry, which increased by 7.3%, contributing 0.05 percentage points to headline GDP growth.

Thus there was a hint that it was travellers to the UK boosting travel agencies but just a hint. Also let us check in on the main player last time around.

Growth in transport, storage and communications slowed to 0.3% in Quarter 4 2016, following growth of 2.6% in Quarter 3 (July to Sept) 2016.


This had a good quarter although the overall picture is one which seems pretty much to be following the ebbs and flows of the volatile pharmaceutical industry.

manufacturing increased by 0.7% in Quarter 4 2016, mainly due to a large rise in the erratically performing pharmaceuticals industry, after a fall of 0.8% in Quarter 3 2016;

Production flatlined but was heavily affected by this.

The Department for Business, Energy and Industrial Strategy advised the decrease can largely be attributed to continued maintenance to the Buzzard oil field in the North Sea.


If we look back we see that the UK economy has managed several years in a row of economic growth now. The media and establishment panic over the EU leave vote has in fact been replaced by a period of extraordinary economic stability and what is described officially as “steady growth”. In any ordinary line of work people would be disciplined for such gross mistakes but of course different rules apply to the establishment. In essence the UK economy has relied on the consumer (again) so thank you ladies one more time, and rebalanced even further towards the service sector as we are reminded yet again of the “rebalancing” in the other direction promised by former Bank of England Governor Baron King of Lothbury and the “march of the makers” of the current darling of the expensive speech circuit George Osborne.

Yet there are disturbing sounds below the surface such as the return of inflation and another ongoing issue.

GDP per head was estimated to have increased by 0.4% during Quarter 4 2016 and by 1.3% during 2016.

So it continues to underperform the overall or aggregate numbers leading to this as summarised by the Guardian.

It is now 8.7% higher than its pre-crisis peak in 2008. But on a per capita basis (adjusted for population changes), it’s only 1.9% larger.

Also let me offer my usual critique of GDP data. It is in no way accurate to 0.1% especially on the preliminary report and has been boosted in recent years by substituting a lower for a higher inflation measure ( CPI for RPI). As the gap between the two widens that becomes a bigger issue and it is currently ~1% per annum. Regular readers will be aware that there are plenty of other flaws too.






Is this a genuine “currency war” or just happenstance?

It is time for us to take a look at what I have long argued is the major player in monetary policy these days which is/are exchange rates. Actually although he would not put it like that Bank of England Governor Mark Carney implicitly agreed with me on Tuesday.

“The UK economy has … had a large external imbalance and that large external imbalance as represented by a large current account deficit needed to be righted,” he said. “The exchange rate is part of that adjustment mechanism.”

I will return to the situation of the UK later but the main mover recently has Trumped (sorry) markets as we have seen the US Dollar soar. This morning put it like this.

The dollar paused on Thursday after rising to 14-year highs against a basket of the other major currencies……..The US dollar index, which measures the greenback’s strength against a trade-weighted basket of six major currencies, was at 100.26. On Wednesday, the index hit highs of 100.60, its highest level since April 2003.

Regular readers will be aware that I have been pointing out that the US Dollar has been strong for some time. It has been rising since the dollar index dipped near 73 in April 2011 but the main move has come from just below 80 in June 2014. The Trump push has really only taken it back to where it started the year.

This poses a problem as of course we see something familiar which is the US Federal Reserve promising interest-rate rises which it was back then with the “3-5” of John Williams and now where a rise is expected by markets. We will never know if we might have been in the same place if Hillary had won.

The impact on the US economy

Most analysis concentrates on the effect elsewhere but let me open with the fact that in spite of the fact that it is still the world’s reserve currency there is an impact on the US economy from this. Just over a year ago ( November 9th) I used the numbers of Federal Reserve Vice-Chair Stanley Fischer.

The New York Fed trade model suggests that a 10 percent appreciation of the U.S. dollar is associated with a 2.6 percent drop in real export values over the year. Consequently, the net export contribution to GDP growth over the year is 0.5 percentage point lower than it would have been without the appreciation and a cumulative 0.7 percentage point lower after two years.

So there is an ongoing impact at these levels of the order of 1.5% of US economic output or GDP. If we add the impact of the currently higher bond yields we see why there are still doubts about a Federal Reserve interest-rate rise next month, although of course this is circular as these levels depend on it happening.

The rest of the world

Whilst the rest of the world in general should get a competitive advantage from a lower US Dollar it is not all one way. For example inflation will rise as so many commodities are prices in US Dollars and there is also the debt issue. From the 7th of December last year.

Dollar credit to non-banks outside the United States reached $9.8 trillion at end-Q2 2015. Borrowers resident in EMEs accounted for $3.3 trillion of this amount, or over a third. EME nationals resident outside their home countries (for instance, financing subsidiaries incorporated in offshore centres) owed a further $558 billion.

So the US Dollar is strong and yields are rising, what could go wrong? The BIS ( Bank for International Settlements) was on the case earlier this week.

A stronger 29 dollar is associated with wider CIP deviations and lower growth of cross-border bank lending denominated in dollars…….In particular, a strengthening of US dollar has adverse impacts on bank balance sheets, which, in turn, reduces banks’ risk bearing capacity.

It was also intriguing as to why the all the Ivory Towers miss this.

However, in textbooks, there are no banks.

So those places with US Dollar denominated debt have “trouble,trouble,trouble” right now and the obvious places to look would I guess be Mexico and Egypt in the way we looked at Ukraine and Russia in the past.


On the 10th of October I pointed out that the trend for the Yuan had been “down,down” in spite of its achievement of attaining reserve currency status at the IMF (International Monetary Fund).

The currency fell after the People’s Bank of China set the midpoint CNY=PBOCat 6.7008 yuan per dollar, its weakest fix since September 2010.

From the Financial Times.

China’s renminbi traded near at an eight-year low against the US dollar on Thursday, as the election of Donald Trump intensified longstanding depreciation pressure…The Chinese currency has weakened for seven of the eight trading days to Wednesday and is down 5.5 per cent in 2016 — on pace for its worst year since authorities depegged it from the dollar in 2005.

A type of stealth devaluation sees it at 6.88. Rather oddly the Wall Street Journal tells us it is not devaluing and then prints this.

The Chinese yuan has been steadily depreciating this year against a basket of 13 currencies that make up the underlying reference point for the currency.


I thought I would throw this in as having been (correctly) critical of the FT  let me also say that it can also be good. From @M_C_Klein.

If I were going to hit a country for currency manipulation on day 1 it would definitely be Sweden.

Makes you think er well yes, doesn’t it?


There is no stealth devaluation here and the sound of cheering from the Bank of Japan in Tokyo at the recent fall echoes around the world. Governor Kuroda has been enjoying his sake and his favourite Karaoke song even more.

Get down deeper and down
Down down deeper and down
Down down deeper and down
Get down deeper and down

That of course would be the status quo if he had his way. Mind you his pleasure at an exchange rate of 109 to the US Dollar does have a fly in the ointment. After all it has happened after he did nothing as opposed to the currency rise following his “bold action” in January. I would suggest that Bank of Japan staff who want a career describe the recent phase as an example of the “masterly inaction” so beloved of the apochryphal civil servant Sir Humphrey Appleby.


I pointed out on twitter yesterday that Mario Draghi would be celebrating as the Euro dipped into the 1.06s versus the US Dollar. He needed something like that as you see the effective or trade weighted exchange rate for the Euro has risen in 2016 in spite of the 80 billion Euros a month of QE bond purchases. There is still a way to go from the 94.7 of now to the 92.7 of then. A Baldrick style cunning plan might be for the Euro to leave the European Union….Oh hang on.


As you can see there is much going on and if we compare this to a possible 0.25% interest-rate rise in the US we see again a bazooka and a pea shooter. Although of course the two factors are correlated so we can never entirely split them. But much is in play as we remind ourselves that unless there is life on Mars it is a zero-sum game.

I did say I would look at the UK which recently has been reversing some of its depreciation. It has a case for a lower currency due to its current account deficit but whilst the economic numbers are good now the problem will be the inflation of 2017 and maybe beyond. Meanwhile having checked the booming UK Retail Sales numbers let me say thank you ladies,women and girls one more time and I am on the case.

Is the lack of lining on UK ladies coats this season another example of and has made a quality adjustment in its numbers?

Me on Tip TV Finance

Post-trump moves: Like old times, but not exceptional times – Shaun Richards




Currency movements are the major players in monetary policy now

One of the features of these economic times is the way that we get so many denials that monetary policy is pretty much impotent. We of course know what to do with official denials. But whether you choose interest-rates or longer-term yields via QE ( Quantitative Easing) there is now the obvious issue that 8 years or so of what have been extreme moves have not produced the “escape velocity” of Bank of England Governor Mark Carney. However movements in exchange-rates have retained quite a bit of power albeit that there is always an element of robbing Peter to pay Paul about them. What I mean by this is that a currency rises or falls against another one which means that overall it is a zero sum game with the losers matching the winners. Or at least at the first stage it is as in our increasingly centrally planned world all movements seem to cause trouble. But as ever we see much going on in the currency markets.


For those unaware something I have mentioned in the past took place at the beginning of this month which was this. From the International Monetary Fund.

The Board today decided that the RMB met all existing criteria and, effective October 1, 2016 the RMB is determined to be a freely usable currency and will be included in the SDR basket as a fifth currency, along with the U.S. dollar, the euro, the Japanese yen and the British pound.

This does have real effects as for example some countries are likely to use it as a benchmark for foreign exchange reserve holdings. So we may see more demand for the Renminbi and we may have seen the biggest shift of all which is the SDR of the IMF increasing in importance. From Bloomberg at the beginning of September

The World Bank issued 500 million SDR units ($698 million) of three-year notes in China’s interbank market this week, the first sale of debt in the International Monetary Fund’s alternative reserve assets since the 1980s.

So we see that the US Dollar is facing potential challenges from both the Chinese Renminbi and the SDR of the IMF. Although care is needed with the latter as one bond issue will not cause sleepless nights!

However we did get a flicker of response as the other currencies in the SDR basket needed to be reduced to let the Renminbi in and they ( Euro, Yen and £) were except for the US Dollar which was nearly unchanged ( 41.9% to 41.73% compared to 37.4% to 30.73% for the Euro).


However rather than strength we saw this today according to Reuters.

The currency fell after the People’s Bank of China set the midpoint CNY=PBOCat 6.7008 yuan per dollar, its weakest fix since September 2010 and about 0.3 percent weaker than the setting on Sept. 30, before a one-week National Day holiday.

Just for comparison it has dropped from 6.33 to the US Dollar a year ago. Meanwhile it now buys 15.4 Yen rather than the 19 of a year ago which will focus attention in Tokyo.

The official view admits only a minor depreciation.

On August 31, 2016, the CFETS RMB exchange rate index closed at 94.33, losing 1.06 percent from the end of July;

It is now 94.07.

The Euro and the Yen

These are places where expansionary monetary policy was designed to reduce the value of the respective currencies albeit that one was explicit (Yen) and the other implicit (Euro). However more recently both have seen their currencies go through stronger phases in spite of both negative interest-rates and large-scale QE programs.

Overnight they have been echoing each other.

BOJ’s Kuroda: BOJ may delay hitting inflation target to 2018 ( @DailyFXTeamMember )

Draghi: Euro zone inflation could approach the ECB’s target by late 2018 or early 2019 ( Reuters)

Actually if you look at the surge in the value of the Japanese Yen in 2016 then it is it which is the furthest away from getting anywhere near its inflation target. But in the debates over possible reductions in unconventional monetary policy or “tapers” seem moot in comparison to this reality. Accordingly both will being trying to have lower currencies except after inflation success we saw one rebound strongly and the other stop falling a rebound a little.

Saudi Riyal

It gets only a small amount of attention but there are more than a few signs of stress in the financial system of Saudi Arabia right now. The issue of the lower oil price is clearly the main game in town but its effects have been added to by this. From the Saudi Arabian Monetary Authority on the 12th of August.

With regard to media news about the riyal exchange rate policy, SAMA Governor would like to reiterate SAMA’s commitment to maintain the current riyal exchange rate at SAR3.75 per USD, and that bets on the riyal on futures market are based on incorrect information.

So a fixed exchange-rate to the US Dollar with all the inflexibility that it provides which includes a currency which has appreciated at a time of economic difficulty. Not the type of “masterly inaction” so beloved of the apocryphal civil servant Sir Humphrey Appleby. We see an exchange-rate which is too high combined with speculation against the currency creating uncertainty.

Nigerian Naira

This years heavy faller in exchange-rate terms has been Nigeria where I note that in late July Bloomberg noted that it had passed 300 to the US Dollar for the first time in late July. Let is now skip to Bloomberg’s report from Friday.

with the central bank holding the naira in a tight range around 315 per dollar since the beginning of August.

So not much change? Er no.

Most local businesses and Nigerians going abroad can’t get foreign-exchange from their banks and have to turn to the BDCs, which have more leeway in setting prices, and black-market street-traders openly plying their services across the country. They sell each dollar for around 475 naira, compared with 425 in mid-September.

Oh so in reality quite a lot of change then. Two exchange-rates at the same time lead to an economy signing along with Earth Wind & Fire.

Take a ride in the sky
On our ship, fantasize
All your dreams will come true right away

On a wholesale level it is possible to get foreign exchange from the Central Bank of Nigeria except it then wants to know where you got the money from.

UK Pound

I have covered the details of this on more than a few ocassions but merely to say that the UK Pound £ has joined the ranks of the currency depreciators in 2016 with an obvious acceleration post the EU leave vote. Let me add that if you change your money up at an airport it will feel like the UK has two exchange-rates as well.


There is much to consider in what were some 6 years ago labelled “currency wars” by the then Finance Minster of Brazil. Of course its fortunes have turned downwards since then as we note how things can turn. There are big economic impacts from currency moves as we observe the later effects on both growth and inflation.

There is also the issue of yet another central planning failure as markets which increasingly only exist to front-run central banks get less liquid and this now seems to also apply to the previously relatively highly liquid currency markets. The Financial Times has these examples today.

The biggest flash crash of recent times was in January last year with “frankenshock” — when the Swiss franc jumped nearly 40 per cent against the euro and the dollar.

The New Zealand dollar lost more than 2 cents against the US dollar amid last August’s market turmoil over China growth fears. The South African rand fell 9 per cent against the US dollar in a mere 15 minutes in January this year.

To that we can add the UK Pound flashcrash of Friday morning. However the Financial Times sadly cannot resist its party line by publishing a quote that there were no buyers of Sterling at all. Yet it is now as I type this some 6 cents higher than the low. Did it just levitate?





The economic consequences of today’s UK Pound flash crash explained

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

The economic consequences of the Brexit Vote

I think that there is only one opening today so let me hand you over to Kate Bush.

Wow! Wow! Wow! Wow! Wow! Wow! Unbelievable!
Wow! Wow! Wow! Wow! Wow! Wow! Unbelievable!

This is the song being sung by not only the UK establishment but quite a few establishments around the world. They were able to ignore the fact that it looked incredibly close from a few weeks in and there are a few who look rather foolish today. For example much of the polling industry especially if it is true that private polls for hedge funds are what led to the UK Pound £ to rise about US $1.50. It is hard to believe that the UK Pound £ was there only 7 or so hours ago. The impact has been seen on financial markets “all around the world” as ELO put it so let me remind you of the words on the cover of The Hitch Hikers Guide To The Galaxy.

Don’t Panic

UK Markets

These have been in turmoil and the currency markets have led this. For example the UK Pound £ has seen a range from just above US $1.50 to US $1.32 so far which is something of a record in terms of an intra-day move. However as I explained on Bloomberg Radio earlier and on social media we should not judge years ahead on knee-jerk market reactions. They were wrong at midnight so could quite easily be wrong again now. I remember vividly us leaving the ERM in 1992 and nearly all of the snap judgements were wrong or as the saying goes news one day, chip paper the next. The rebound in the UK Pound £ to above US $1.37 emphasises that point.

We have moved much less against the Euro and are around some 5% down at 1.24 as we see a clear consequence of this which is that we have pulled it down with us. Mario Draghi will like that although there are other consequences he will not like at all. I think that as time passes people will muse on what this means for the European project and can see weakness ahead for it on that basis. Losing the UK matters a lot – confirmed by all the official denials of it – and others may also chose to head for the exit. Oh and for those worried about the possible price for football transfers these are usually in Euros so those using the US Dollar change are wrong.

The FTSE 100 has also headed south after a brief rally to above 6200, anyway it looks like it will open more than 500 points down. If we move to the bond market then I expect quite a surge in it and a fall in yields. A clue to this has come from the 10 year yield in Germany which has fallen to a record low of -0.18% today and from the United States where the 10 year Treasury Bond yield is now 1.5% as opposed to 1.75%. So we can expect the UK 10 year Gilt yield to head towards 1% and set new record lows.

The Bank of England

It has been on the news wires maybe prompted a little by me.

Wake up Mark Carney and the Bank of England! Hint this might be what FX reserves are for

Firstly in an odd development considering how things have gone for the Bank of Japan it copied its language.

The Bank of England is monitoring developments closely. 1/3

Then we got this.

It has undertaken extensive contingency planning, working closely with , other domestic authorities & overseas central banks 2/3

After a short delay -which matters at times like this- we got this.

will take all necessary steps to meet its responsibilities for monetary and financial stability.3/3

We have also receive  a statement from Governor Mark Carney  which considering his proclamations of what a Leave result would mean must have been a challenge. We did learn a few things. Firstly some reassurance.

There will be no initial change in the way our people can travel, in the way our goods can move or the way our services can be sold.

Actually the reassurance theme continued in numerical fashion.

Moreover, as a backstop, and to support the functioning of markets, the Bank of England stands ready to provide more than £250bn of additional funds through its normal facilities. The Bank of England is also able to provide substantial liquidity in foreign currency, if required.
So a welcome calming salve although we did get yet another demonstration of how central bankers speak in their own language as he used the word “resilience” so beloved of Mario Draghi to describe the banks.
The Bank of England has stress tested them against scenarios more severe than the country currently faces. As a result of these actions, UK banks have raised over £130bn of capital, and now have more than £600bn of high quality liquid assets.



What about interest-rates?

We had a lot of proclamations about higher mortgage-rates should the UK vote to leave the European Union which were hinted at only a couple of hours ago by the new ITV economics correspondent Noreena Hertz.

Big decision looms for Bank of England. Raise interest rates to shore up pound? Or keep as is to avert household/mortgage debt crisis?

I pointed out she had missed the currently most likely option which is in fact a Bank Rate cut. This would presumably be presented by the Bank of England as a response to the recession it has forecast should we find ourselves leaving the EU. I have already pointed out earlier that bond or Gilt yields have headed that way and so in fact have interest-rate futures.

Short sterling opens 40-50ticks up.

For those who are unaware of such a market it is where I used to trade options but more importantly is signalling a Bank Rate cut or to be more specific the interest-rate path is circa 0.5% lower than it was only yesterday.

An international perspective

This started early this morning when I pointed this out on Twitter.

Governor Kuroda of the Bank of Japan will be staring at a UK map asking where Sunderland is?!

For those wondering why I pointed this out? It was because this was the first sign of a strong move towards Leave and of course there is a particular irony with the Nissan plant being there. But the Yen was already surging and the Nikkei 225 equity index was falling in response.

Let me give you a theme for today and the coming days that we got a clear signal here of how tightly wound together financial markets are these days. After all how much would this really affect Japan on the other side of the world? We also return to the thought of what sort of economic recovery have we had if events like this are such a shock?

Anyway Japan Inc had a bad night/day with the Yen strengthening through 99 at one point and the Nikkei 225  closing some 8% lower at 14,952. Mind you as I warned earlier market moves will be fragile and volatile as the Yen is now in the 102s.

Concerted Intervention

This was moved downwards in probability by this. From Bloomberg.

“Following the United Kingdom’s vote to leave the European Union, the Swiss franc came under upward pressure,” the central bank said via e-mail. “The Swiss National Bank has intervened in the foreign exchange market to stabilize the situation and will remain active in that market.”

My point is that the Swiss National Bank moved in isolation and not in concert with other central banks. So for now the likelihood of concerted central bank action has retreated. The day is of course young and the ECB plans to issue a statement later but for now that is the position.


So what do we know? The UK political establishment is in disarray as this is a bad result for most of it. It is hard to figure out who is worse off and I do realise that David Caneron has announced he will go by October when I write that. As to the economics we seem set to have a lower value for the UK Pound £ going forwards. This is simultaneously both an upwards push on prices and an economic stimulus. However that works out depends on whether we follow what happened in 1992 (good) or 2007/08 (not so good).

There will be obvious uncertainty from a future which is unclear and that for the time being is likely to be a drag for some economic activity. As to the Bank of England well under old central banking theory it would be considering an interest-rate rise to shore up the UK Pound £. But as I have suggested earlier the modern version of central banking seems much more likely to head towards a Bank Rate cut. That would only change if the UK Pound £ really plunged.

The husband of the murdered MP Jo Cox has made quite a powerful statement this morning in my view.

Today Jo wld have remained optimistic & focussed on what she cld do to bring our country back together around our best values

I will add updates if further major events occur but for now let me leave you with Frankie Valli and the Four Seasons.

Oh, what a night (Do do do do do, do do do do)
Oh, what a night (Do do do do do, do do do do)
Oh, what a night (Do do do do do, do do do do)
Oh, what a night (Do do do do do, do do do do)


Update 9:15 pm

Some things remain the same as the UK Pound is closing the weekend near to where I looked at it earlier versus the US Dollar and the 10 year Gilt yield closed the week at 1.08% The FTSE had quite rally from the lows reaching 6200 before closing at 6138. We will see more on Monday after the weekend but there were some familiar issues at play.


We have been ahead of that particular curve on here.


Monetary policy seems to have been delegated to the currency markets

Last night was simply superb at what might be called the battle of Stamford Bridge where at times an exciting football match broke out leading to a 2-2 scoreline which meant that previously lowly Leicester City are champions of the premier league. Well done to them and their fans and it was a shame that the sonic booms of the RAF Typhoons in the air were over another town beginning with a L namely Leeds. It makes me think how bad we are as humans at comparing events with perceived ultra low probability. From Hilary Evans.

Betting odds in August. Leicester to win Premier League 5000-1 Elvis to be found alive working in a chip shop in Macclesfield 2000-1

Oh and the 2000-1 bet was probably influenced by fans of this song from Kirsty MacColl.

There’s a guy works down the chip shop swears he’s elvis

However there is another event or two be precise two events taking place now that according to economic theory should not be happening and we find them in the currency markets.

The currency depreciators in fact appreciate

There has been a change in 2016 and what it represents is that the two main central banks which are trying to lower their currency have in fact seem them rally. This morning there were two clear notable sights in markets as the Euro pushed towards 1.16 versus the US Dollar and the Japanese Yen strengthened though 106 to 105.6. This will have Mario Draghi of the ECB spluttering on his morning espresso or cappuccino and perhaps ordering an extra glass of chianti with his lunch. Actually as Mario notes that around a third of the new bank rescue fund for Italy has already been used he may raise his chianti order to the whole bottle!

Meanwhile in Japan Governor Kuroda will not be in a mood to celebrate the 3 day Golden Week break and of course if anyone has had an anti-Midas touch it is him. As in essence the policy of Abenomics he was appointed to enforce involved a lower Yen there is an obvious problem with it rising. In fact even hard-core supporters must be struggling to name an arrow of Abenomics that is even partially working right now and I wait to see how the many in the media deal with this reality.

Let us analyse the scale of what has taken place here. It reminds me of quite a few instances in UK economic policy where the UK Pound £ has done exactly the reverse of both plans and hopes for it.

The Euro

As a backdrop we need to recall that the ECB has cut its deposit and current account interest-rate to -0.4% and raised its monthly amount of QE (Quantitative Easing) bond purchases to 80 billion Euros a month, or just shy of a trillion a year. What has it got for that?

If we look at the chart against the US Dollar we see that the falls were in 2014 and early 2015 and that over the past year the Euro is now up by over 3%. This fits with my theory that the main currency falls from a policy of QE happen in advance of it as expectations build and that the reality of it sees a situation where the boat often has already sailed. If we look at the effective or trade weighted exchange rate it fell from 104 to 89 in early April 2015 but has since rallied to 95.

A couple of years ago we did get a “Draghi Rule” for measuring the impact of all this.

Now, as a rule of thumb, each 10% permanent effective exchange rate appreciation lowers inflation by around 40 to 50 basis points.

So the same inflation which he is trying to raise will in fact be reduced by around 0.3% by the Euro strength.

Oh and the ECB is also pot-shotting at the behaviour of other central banks. Whilst I welcome that it is catching up a little with my “early-wire” theme it seems to have forgotten that it used to give private-briefings to hedge funds.

Eleven out of these 21 announcements exhibit some pre-announcement price drift in the “correct” direction, i.e., in the direction of the price change consistent with the announcement surprise. For seven of these announcements the drift is substantial.


The Yen

Whilst the Yen has been something of a currency twin with the Euro it has been in the worst place as you see it has rallied against it as well. Cue more pictures of Governor Kuroda with his face in his hands. Back in late 2014 it just failed to make 150 Yen per Euro compared to the 122.5 now. Thus the Yen has surged and with apologies for it being tardy with updates but the trade weighted Yen courtesy of the Bank of England has risen from 127 to 141 over the past year.

Sadly the Bank of Japan has not published any form of the Draghi Rule as I suppose it is anti their culture. But of the rules we do have I think it applies the most so we see that inflation will be some 0.6% lower due to the appreciation over the past year. The calculation assumes we remain here as do the ones above and they give plenty of food for thought.

Another way of looking at the situation is that Abenomics has jumped into the TARDIS of Doctor Who and travelled back to November 2013.

The UK

There has been a reversal here too as the falls of early 2016 have been followed by a recovery to US $1.47. The trade weighted index has recouped about half of its earlier losses with in essence the 2016 falls being against the two currencies discussed above. Of course so much is in flux but with UK manufacturing weak and the Pound stronger we could easily see someone at the Bank of England vote for a Bank Rate cut. At which point we see yet another reversal for Forward Guidance.


If we look to the land “down under” we see that the Reserve Bank of Australia cut interest-rates by 0.25% to 1.75% this morning. This did seem to be aimed at one particular target.

though an appreciating exchange rate could complicate this.

As the “Aussie” has fallen I guess they will be happy. Those familiar with the UK experience will feel a chill down their spines as the note the use of “rebalancing” in a situation proving central banks all borrow from each other.

The US Dollar

Here we get the most awkward situation for economic theory as it is raising interest-rates and therefore should have a strong dollar. Reality by contrast fits much more nicely with my anticipation and expectation theme especially as the Federal Reserve seems to have forgotten and redacted its own Forward Guidance. The Dollar Index had a couple of goes at passing 100 but now is at 92. According to US Federal Reserve vice-Chair Fischer that will raise GDP by between 0.8% and 1.2%

So we have the country which was tightening monetary policy via interest-rate rises ( although in reality we do not need the plural as only one has happened so far) and a higher currency is now seeing easing via currency falls. Oh what a tangled web and all that..


I have left one elephant in the room until now which is the supposed existence of a Shanghai Accord. Some elements of it do seem to be in play but I am cautious about conspiracy theories especially in currency markets. Maybe that is because I am British as the UK Pound £ has spent so much time at the “wrong” level meaning that we have not been able to control it! Maybe just the existence of the theory has contributed to what we have seen especially as we note that the moves were already in play well before the accord.

But as the moment most currencies seem to be getting what their central banks do not want! Still according to the Rolling Stones that may not be all bad.

You can’t always get what you want
But if you try sometime you find
You get what you need