17th December Planning for Sterling weakness in 2010
I’ve been keep a close eye on Sterling’s movement over the last couple of weeks.
Last week’s Pre-Budget Report (or was that “Pre-Election” Report) gave us the latest warning sign of trouble ahead. Even with an election a mere 6 months away, Alastair Darling was forced to admit the extent to which public spending will be slashed in the coming years. I didn’t see the point in writing about any of this as there wasn’t really anything new here.
However I have taken the time to form a view on Sterling in 2010.
Regular readers will know that I have been bearish on Sterling’s prospects for quite sometime. In fact one of this year’s biggest surprises for me has been our currency’s resilience. While it is certainly true that some of the more dire predictions have failed to materialise (e.g. UK unemployment has hit 2.49 million rather than the 3 million expected by Christmas), there has still been plenty of worse than expected news, not least the uncertainty surrounding the British Quantitative Easing strategy.
By way of comparison there have been two notable news items from the US this week.
The first was the announcement that the TARP programme is ultimately likely to have cost US tax payers $141 billion. While still a very heavy price to have paid for Wall Street’s excesses this is substantially lower than the $700 billion originally budgeted. Although the reduction in cost has largely been driven by bail-out recipients desperately paying money back to avoid restrictions on executive pay, this is still a positive step forward.
The second announcement came from the Federal Reserve yesterday that it plans to withdraw fiscal stimulus measures over the course of the first half of 2010. On the face of it this is another positive step, but any number of caveats remain about the strength of the recovery and how the economy will react to the withdrawal of fiscal support.
So while the the long term-viability of recent fiscal policy is still debatable, for the time being America’s financial sector revival should continue and it is probable this will help the US Dollar rise.
This is all in stark contrast to prospects on this side of the Atlantic.
There is still a great deal of uncertainty over the extent to which the next Government will be forced to cut spending, there is great uncertainty over where spending cuts will fall and, perhaps most worryingly, there is great uncertainty over how the deficit will be repaid i.e. where will the new jobs be created, so vital for increasing the tax base. Where in the US the exposure of taxpayers has reduced, over here we can’t even be sure that Quantitative Easing has finished (for what it is worth I would not be at all surprised to hear of a further increase at February’s Monetary Policy Committee meeting).
I have maintained for a while that 2010 is going to be a very tough year for Britain, so it is about time I put some numbers to this prediction. Recent price movements indicate that the market is about to turn on Sterling. If this happens then I expect to see a 15 - 20% decline in the value of the Pound across the board. I see particular weakness versus the US, Australian, Canadian and New Zealand Dollars, the Norwegian Krone and the Japanese Yen. There should also be a good trading opportunities versus the Euro, but I want to see how events in Greece and Ireland develop first.
Tags: bail-out, Bank of England, Britain, Federal Reserve, Financials, General Election, MPC, Quantitative Easing, Sterling, TARP