Currencies: Quo vadis, Sterling & the yen?
Summary
So where are foreign exchange rates headed? We have given you our view of why you should go long of the yen for some time, particularly in light of ever-more karaoke politics engulfing Japan. But what about that other island's currency, Sterling?
First we briefly assess what the Economic Clock® is revealing about the the Economic Time® in the UK, and then we tell you how to make money off this idea.
Topics Covered
- Backdrop: Britain's Economic Time®
- Sterling
- How to make money off these ideas
Background
1. Backdrop: Britain's Economic Time®
It does not take a genius to figure out that from the perspective of end-demand, both economie's Economic Clocks® are characterized by an "excess supply of goods". In Japan, because the government is broke. In Britain, because banks are broke.
It takes a little more thought to derive the monetary Economic Time in Britain. On the one hand, there is ample liquidity sloshing around, as we all know. So we could say that there is an "excess supply of money". Problem is, banks are not lending it. So from a credit perspective, there is an "excess demand for money". Indeed, it is precisely this "excess demand for money" which is causing the excess supply of goods: banks are not lending, - so particularly - consumers, mortgagees and medium-sized businesses are going broke on account of being starved for cash. So the few rich go to the restaurants, and the poor go home.
2. Sterling
Sterling will continue to weaken very much for a political reason: the government and the Bank of England want to help create an excess demand for goods by reviving the UK export machine - via a weaker Pound.
Indeed, according to yesterday's FT, "Sterling dropped to a fresh five-month low against the euro yesterday..." Fueling this continued demise were statements by Bank of England (BoE) Governor Mervyn King's comments encouraging a weaker pound in order to revive exports. Secondly, a weak pound makes imports more expensive in Sterling term, so imports slow down. This, in turn, helps to create a trade surplus. Finally, it seems as if the government is keen to achieve parity between Sterling and the Euro: per yesterday's close, you needed Sterling 0.9138 to buy one Euro. Were Sterling to achieve parity with the Euro, it would have to fall by another 9.4%. Given the rotten Economic Time in the UK, this might happen faster than you think.
3. How to Make Money Off This Idea
- Always consult your financial adviser first.
- Go short Sterling, long Euro.
- Go short Sterling, long yen.
