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Currency Speculations

An Anomaly Called the British Pound

Wed, Sep 19 2007, 13:57 GMT
by Mihai Nichisoiu

Mihai Nichisoiu

In my letter to clients of last Wednesday, September 12th - less than 48 hours before the Northern Rock bailout announcement - I was noting (an adaptation appeared on FXstreet.com on Sunday, September 16th):

'Says one of those articles, 'In the U.K., the gap between the three-month money market rate, which stood at 6.9 percent today, and the benchmark central bank rate has widened to the most in at least two decades.'

In an article titled 'Is FX Volatility Dead?', dated November 29th, 2006, and published on the European Central Bank's website - Monica Fan, Global Head of FX Strategy for RBC Capital Markets was concluding in a way that now sounds very interesting relative to the current context of most global markets, as well as ahead of the approaching Federal Reserve's monetary policy decision:

'Increases in volatility are only likely to be sustained if there is a loss of credibility in central bank policy, i.e., central banks appear to be behind the curve.'

In spite of liquidity worth almost half a trillion US Dollars injected over the past 5 weeks, and even though the Federal Reserve finally has a fundamental pretext at hand in order to cut the key interest rate i.e. the very recent dynamics of the US non-farm payrolls - central banks across the board still do not really seem pro-active.

However, during a global crisis and manifest of generalized panic, the ties between fundamental logic and economic calculations - on the one hand - and the market mechanics - on the other hand - more often not are being compromised. If global markets transacting tens of billions of dollars every day have already taken on a life of their own counter to the multi-annual trends displayed until very recently, I think the fundamental pretexts justifying the new reality won't be too difficult to be found.'

Now, think about this: on September 12th the Governor of the Bank of England, Mervyn King, tells lawmakers that central banks should avoid giving the impression they will help lenders that made bad decisions.
And yet, only one day later the same Bank of England decides to relax deposit rules in order to spur lending. And just another day later, Northern Rock gets emergency Bank of England funding - first event of such magnitude in almost 35 years.

While today, the Bank of England has decided in favour of precisely what it did not want to do one week ago: providing funds at a 3-month maturity against a wider range of collateral, including mortgage collateral. In a statement published today, the Bank of England writes, 'This measure is being taken in order to alleviate the strains in longer-maturity money markets'.

So, of course my attention has been fully focused on the British Pound as of very late, acknowledging in my letter dated Sunday, September 16th massive (and leading) selling pressures accumulating on the currency's (too) various fronts like against the US Dollar, and particularly the Euro and the Danish Krone:

'The world's major central banks - the Bank of England in particular - act nowadays like under the pressure of being caught between quite a rock and quite a hard place.

The Bank of England's recent lack of pro-active initiative relative to the global liquidity crunch - let alone the incoherence of its messages sent one way or another to the global markets - as well as the Northern Rock announcement have synchronized with the currency markets reloading selling pressures in the British Pound against the Euro and the US Dollar (and that at a time when the US Dollar really had some hard times mostly elsewhere across the board).

As well, within a large technical context, the British Pound looks vulnerable to a heavy downfall against the Danish Krone right through a long-term line of support being nowadays tested in the corresponding, GBP/DKK pair. The following, updated monthly chart of the GBP/DKK reveals a picture worth checking on a regular basis: (...)'

Since early this week, buyers have been driving the EUR/GBP higher, while the GBP/DKK already began a heavy downfall right through a line of important long-term support. Plus, the Northern Rock shares plunged last Friday and on the first day of this week for about 50%.
Right now, with the current technical data at hand, I could only be reinforcing the perception of just massive bearish pressures existing in the British Pound against the Euro and the Danish Krone.

After all, the succession of events related to the Bank of England's own performance nowadays strikingly resembles the central bank's massive lack of coherence during the speculative attack against the British Pound happened precisely 15 years ago.
The bigger irony is that Mervyn King - who on August 8th, just one day before fear turned into riot in the credit markets, sustained the 'not an international financial crisis' hypothesis - is a former professor at the London School of Economics - meaning, the same institution which earlier on had hosted George Soros as a student.

Published on  Wed, Sep 19 2007, 14:29 GMT

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• August 19, 2008
  Published On Tue, Aug 19 2008, 14:15 GMT
• August 14, 2008
  Published On Thu, Aug 14 2008, 13:53 GMT
• August 8, 2008
  Published On Fri, Aug 8 2008, 14:06 GMT
• August 7, 2008
  Published On Thu, Aug 7 2008, 14:20 GMT
• August 5, 2008
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Mihai Nichisoiu  | Bucharest, Romania
http://www.mihainichisoiu.com | mihainichisoiu@gmail.com