Modern Day Sterling Crisis
For someone who has not only lived but traded through previous sterling crises, most notably the one in September 1992 involving a certain Mr Lamont – one of yours truly’s most successful ever trading months – the current depreciation of the Great British pound is reminiscent of old-fashioned runs on the currency. Do you remember being told by the boss never to hold sterling over the weekend, in case the Sunday press reported something highly damaging on the UK economy? Well, here we are again. Although this time, it’s not just journalists that are putting in the proverbial boot, but our esteemed Chancellor, Mr Darling himself. What better help for my long-held bearish view!
All the headlines, of course, have been of sterling’s sharp decline against the dollar and euro. However, it is against some of the more fundamentally sound emerging currencies where the action has been most exciting. Having become bearish sterling at the end of last year, for all the obvious reasons – politics, banking sector, public and private debt, housing market, growth outlook, NHS, education standards, failure to qualify for Euro 2008, the weather…sorry for the rant – I needed to find a currency that rewarded me, in interest rate terms, for holding it against the pound. Enter the Brazilian real. Buying the emerging currency last December, as I suggested on www.businessmonitor.com, would have generated some 19% of spot appreciation, not to mention nine months of awesome carry. Given that Brazilian rates are likely to head higher still from their current level of 13.0%, while UK rates are heading lower in time, the interest rate differentials are too good to ignore. Currently at BRL2.9600/GBP, I see further medium-term weakness towards the BRL2.5000/GBP area.
Exchange Rate, BRL/GBP
Against the dollar and the euro, it’s hard to pick a low, but the feeling is still for a weaker pound. Bad news for British skiers this winter, but good news for British exporters. Do we still export anything?