Be glad we aren't in the Eurozone. Anyhoo, this is all temporary caused by:
1) Flight to liquidity (USD) 2) Unwind of carry trades (JPY)
And then just a generally scramble away from risk (mostly emerging markets) into low risk/low yield (mostly bonds of senior governments). Once that's played out we'll be back to normal exchange rates.
My guess is USD/GBP will be 1.7 and JPY/GBP will be 180
This is a massive run on the pound: I am seeing predictions of the pound hitting 80 US cents before xmas. This is bad! I would hedge your wealth because the pound will be toast very shortly.
Willem Buiter seems relaxed, if not resigned, on this point:
"The reason I would go into the rate setting meeting expecting to participate in a decision to cut rates by somewhere between 100 and 150 basis points, is that I am not at all convinced that the most likely response of sterling to a rate cut of such magnitude would be a sharp decline in its value. Conventional economics of the type I still teach when they let me implies that, holding constant the exchange rate risk premium, an unexpected cut in the policy rate (not accompanied by equivalent unexpected hikes in future rates) would indeed cause a depreciation of sterling.
But during my time on the MPC, I have learnt to give up trying to treat the exchange rate as either endogenous to the decisions taken by the MPC or as predictable. Instead, I now think of the exchange rate as a rogue elephant: unpredictable, dangerous and to be treated with respect, if not with fear; not something to be manipulated or managed by the hunter, camera-toting tourist or monetary policy maker."
From here: http://blogs.ft.com/maverecon/2008/10/making-monetary-policy-in-the-uk-has-become-simpler-in-no-small-part-thanks-to-gordon-brown/
I would love to believe this. But I am concerned that it is not the case.
This currency slide happens against the relative low value of what we produce in the UK compared with Japan and much of the rest of Asia now, and even the best economies in continental Europe.
We (and the US) have been living on borrowed time by living on Asian credit. The world has discovered that our much-vaunted and bloated Financial Services sector has really been rendering disservices, and we really have little else to offer to cover the cost of our needed imports.
Asian credit has allowed wage costs here to hover about 200% above their real value - excluding the negative value of much of what has gone on in the City.
Yes, the carry trade unwinds. The question is: Why does it have to unwind? - Re. the above.
I didn't want to sound alarmist, but we are going to see a massive unwinding of the pound, and an almighty global repricing. It is going to be one of the great economic shocks of all time.
When over, we will be valued in true accordance vis-a-vis China. I think 80 US cents is about right for the most indebted country in human history. Sorry for bringing the truth.
"When over, we will be valued in true accordance vis-a-vis China. I think 80 US cents is about right for the most indebted country in human history. Sorry for bringing the truth."
Well the pound is worth more than 80 US cents. This is because the dollar is as worthless as the pound is.
The Chinese yuan is also worthless with reserves full of worthless dollars and with loads of factories producing items that no-one can afford.
The game of "last currency standing" will be an interesting one. I think low-debt agricultural countries may do well out of this one.
Nick Von, You'd have been better off if you held yen in your bank account.
Part of me feels smug that I realised that it would have been better to hold a currency with a lower interest rate... and part of me feels gutted that - in practice - I did nothing about it. Never mind, eh?
Asteve, "You'd have been better off if you held yen in your bank account."
I wish I'd got last week's lottery numbers too. I think I'm feeling the same way as you in that I was very close to transfering about 20% of my cash to yen when it was 210/£1. The reason I didn't was logistical (I've lost the inkan stamp I need to authorise transactions, and the Jap bank has no UK branches to go in and sort it out). Wish I had.
But still, just holding pounds since mid-2007 leaves me about 60% up on nearly every other investment class.
You don't need the inkan stamp if you set up the bank account with your signature in the first place. In the little circle where you put the stamp just do a little signature. Works at Hokkaido Bank and also the post office bank. In addition, you may obfuscate your name to prevent computerised matches by switching between the representation of your name in either romanji(english writing), hiragana or katakana. I think City bank has a yen account too, whether they will go bust or not I have no idea.
Yeah, if I still lived in Japan I'd have worked my way around it in one of the ways you suggested. Problem is I couldn't do it from London and my bank doesn't have branches here.
I could've (and in retrospect should've) just opened a yen-denominated account at HSBC but didn't want to take the 4% hit on the way in, the annual fee, and still having my money within reach of Gordon's theiving hands.
While I'm generally extremely happy with how I've protected my savings, this pound fall thing was something of an oversight.
FSE - I don't know how long till it all settles. I'm guessing by Xmas cos the hedgies are puking up all their carry trades and the Jap speculators are dumping foreign assets in a hurry to cover losses on the Nikkei. If you look at long term exchange rates you'll see sterling has been as high as 250 in 1998 or so, and that's BEFORE we had the crazy bubble. It's been as low as 150 a few years later. I think the "all things equal" rate is around 180.
Don't underestimate the willingness of the BoJ to undermine their own currency. They print desperately to juice exports because that's the only part of the Japanese economy that does well (until the past few months, at least).
If you want to be sanguine look at it this way. All the important goods in the UK are positional and non-exportable (housing, education, healthcare, personal services). Therefore it doesn't matter how strong the pound is relative to other currencies. It matters how many pounds you have relative to (i) other people and (ii) asset prices. By staying away from crashing markets you maintain your GBP wealth and get to buy all those positional assets at 50% off 2007 prices. That's doubling your wealth in a year.
Exportable goods are different. However they are mostly either (i) cheap as a percentage of total outgoings, e.g. food or (ii) luxury goods you could likely trade down or do without. While the cost to the UK of importing them is relatively higher than some stronger currency countries, the general global depression will reduce their prices in today's pounds regardless. You'll still be richer, just not as much as someone who followed the same strategy but in yen.
Look chaps, this is all a bit after the event. GBP has fallen over 20% on a trade weighted basis over the last year; much the same as in the months before/after Black Wednesday; we are now roughly at the levels of 1994 to 1996, when GBP was very low (kickstarting the subsequent recovery).
JPY has already rocketed - the last eight years carry trades have been unwound and it is back to 100JPY = AUD 1.70-plus (where it was eight years ago, natch).
And yes, I did have a lot of money in JPY until last week, I could kick myself I didn't have it all in JPY, but hey.
And for every doom monger who says GBP will fall further, there is one who says EUR will fall further, or USD, or JPY will fall back again, or whatever, currencies are a zero sum game, they cannot all fall at the same time.
There comes a stage at which a sensible currency speculator gets back in to GBP.
It is down 13 percent this month alone. 
18 comments:
Be glad we aren't in the Eurozone. Anyhoo, this is all temporary caused by:
1) Flight to liquidity (USD)
2) Unwind of carry trades (JPY)
And then just a generally scramble away from risk (mostly emerging markets) into low risk/low yield (mostly bonds of senior governments). Once that's played out we'll be back to normal exchange rates.
My guess is USD/GBP will be 1.7 and JPY/GBP will be 180
This is a massive run on the pound: I am seeing predictions of the pound hitting 80 US cents before xmas. This is bad! I would hedge your wealth because the pound will be toast very shortly.
It will bounce back.
"I am seeing predictions of the pound hitting 80 US cents before xmas."
Why is it that when something changes somebody draws a straight line through it and predicts then end of the universe?
I thank the Almighty that the people who prepare the tide-tables don't do the same thing.
It will bounce back, and yes it'll be a dead-cat bounce. First it was Iceland, now the UK. Other currencies still have the cliff to fall off.
The UK is insolvent, but no worse than many other countries. And better than a few.
The statistic that is causing me the most concern is the Baltic Dry Index...
Willem Buiter seems relaxed, if not resigned, on this point:
"The reason I would go into the rate setting meeting expecting to participate in a decision to cut rates by somewhere between 100 and 150 basis points, is that I am not at all convinced that the most likely response of sterling to a rate cut of such magnitude would be a sharp decline in its value. Conventional economics of the type I still teach when they let me implies that, holding constant the exchange rate risk premium, an unexpected cut in the policy rate (not accompanied by equivalent unexpected hikes in future rates) would indeed cause a depreciation of sterling.
But during my time on the MPC, I have learnt to give up trying to treat the exchange rate as either endogenous to the decisions taken by the MPC or as predictable. Instead, I now think of the exchange rate as a rogue elephant: unpredictable, dangerous and to be treated with respect, if not with fear; not something to be manipulated or managed by the hunter, camera-toting tourist or monetary policy maker."
From here:
http://blogs.ft.com/maverecon/2008/10/making-monetary-policy-in-the-uk-has-become-simpler-in-no-small-part-thanks-to-gordon-brown/
Oil down from $147 to $61
Gold down from $1040 to $730
FTSE down from 6,800 to 3,800
Median house down from £210k to £170k
And you want to tell me holding pounds in a bank account is a BAD idea?
You crazy people.
Hi NIck,
"Anyhoo, this is all temporary caused by:..."
I would love to believe this. But I am concerned that it is not the case.
This currency slide happens against the relative low value of what we produce in the UK compared with Japan and much of the rest of Asia now, and even the best economies in continental Europe.
We (and the US) have been living on borrowed time by living on Asian credit. The world has discovered that our much-vaunted and bloated Financial Services sector has really been rendering disservices, and we really have little else to offer to cover the cost of our needed imports.
Asian credit has allowed wage costs here to hover about 200% above their real value - excluding the negative value of much of what has gone on in the City.
Yes, the carry trade unwinds. The question is: Why does it have to unwind? - Re. the above.
B. in C.
I didn't want to sound alarmist, but we are going to see a massive unwinding of the pound, and an almighty global repricing. It is going to be one of the great economic shocks of all time.
When over, we will be valued in true accordance vis-a-vis China. I think 80 US cents is about right for the most indebted country in human history. Sorry for bringing the truth.
"When over, we will be valued in true accordance vis-a-vis China. I think 80 US cents is about right for the most indebted country in human history. Sorry for bringing the truth."
Well the pound is worth more than 80 US cents. This is because the dollar is as worthless as the pound is.
The Chinese yuan is also worthless with reserves full of worthless dollars and with loads of factories producing items that no-one can afford.
The game of "last currency standing" will be an interesting one. I think low-debt agricultural countries may do well out of this one.
Nick Von, You'd have been better off if you held yen in your bank account.
Part of me feels smug that I realised that it would have been better to hold a currency with a lower interest rate... and part of me feels gutted that - in practice - I did nothing about it. Never mind, eh?
Great chart, not what the longs like to see, but the visual says it all!
Jesse W.
http://www.subprimeblogger.com
Anon 1828 and von Mise: The pound will bounce back?
OK, but when and to what level? How long do we have to wait to the beginings of a climb out of this hole?
Asteve, "You'd have been better off if you held yen in your bank account."
I wish I'd got last week's lottery numbers too. I think I'm feeling the same way as you in that I was very close to transfering about 20% of my cash to yen when it was 210/£1. The reason I didn't was logistical (I've lost the inkan stamp I need to authorise transactions, and the Jap bank has no UK branches to go in and sort it out). Wish I had.
But still, just holding pounds since mid-2007 leaves me about 60% up on nearly every other investment class.
You don't need the inkan stamp if you set up the bank account with your signature in the first place. In the little circle where you put the stamp just do a little signature.
Works at Hokkaido Bank and also the post office bank.
In addition, you may obfuscate your name to prevent computerised matches by switching between the representation of your name in either romanji(english writing), hiragana or katakana. I think City bank has a yen account too, whether they will go bust or not I have no idea.
anon 10:42
Yeah, if I still lived in Japan I'd have worked my way around it in one of the ways you suggested. Problem is I couldn't do it from London and my bank doesn't have branches here.
I could've (and in retrospect should've) just opened a yen-denominated account at HSBC but didn't want to take the 4% hit on the way in, the annual fee, and still having my money within reach of Gordon's theiving hands.
While I'm generally extremely happy with how I've protected my savings, this pound fall thing was something of an oversight.
FSE - I don't know how long till it all settles. I'm guessing by Xmas cos the hedgies are puking up all their carry trades and the Jap speculators are dumping foreign assets in a hurry to cover losses on the Nikkei. If you look at long term exchange rates you'll see sterling has been as high as 250 in 1998 or so, and that's BEFORE we had the crazy bubble. It's been as low as 150 a few years later. I think the "all things equal" rate is around 180.
Don't underestimate the willingness of the BoJ to undermine their own currency. They print desperately to juice exports because that's the only part of the Japanese economy that does well (until the past few months, at least).
If you want to be sanguine look at it this way. All the important goods in the UK are positional and non-exportable (housing, education, healthcare, personal services). Therefore it doesn't matter how strong the pound is relative to other currencies. It matters how many pounds you have relative to (i) other people and (ii) asset prices. By staying away from crashing markets you maintain your GBP wealth and get to buy all those positional assets at 50% off 2007 prices. That's doubling your wealth in a year.
Exportable goods are different. However they are mostly either (i) cheap as a percentage of total outgoings, e.g. food or (ii) luxury goods you could likely trade down or do without. While the cost to the UK of importing them is relatively higher than some stronger currency countries, the general global depression will reduce their prices in today's pounds regardless. You'll still be richer, just not as much as someone who followed the same strategy but in yen.
Smart people get rich in depressions.
Look chaps, this is all a bit after the event. GBP has fallen over 20% on a trade weighted basis over the last year; much the same as in the months before/after Black Wednesday; we are now roughly at the levels of 1994 to 1996, when GBP was very low (kickstarting the subsequent recovery).
JPY has already rocketed - the last eight years carry trades have been unwound and it is back to 100JPY = AUD 1.70-plus (where it was eight years ago, natch).
And yes, I did have a lot of money in JPY until last week, I could kick myself I didn't have it all in JPY, but hey.
And for every doom monger who says GBP will fall further, there is one who says EUR will fall further, or USD, or JPY will fall back again, or whatever, currencies are a zero sum game, they cannot all fall at the same time.
There comes a stage at which a sensible currency speculator gets back in to GBP.
What Mark said.
Jammy bastard.
there goes the summer holiday.
Post a Comment