We had a bearish start to the week on Monday and the price action across several asset classes remains volatile and chaotic – and that’s especially true for the FX markets shaken by the freefall in sterling.
Last week’s ‘mini budget’ announcement didn’t spur growth expectations, but rather fueled debt worries for Britain.
After Cable tanked to 1.0350, some British lawmakers, including people from Tories, said that the Bank of England (BoE) should intervene in the market to stop the pound’s freefall.
For a while, we saw a rapid recovery in sterling on speculation that the BoE would opt for an emergency rate hike to reverse the course of the falling pound. But then… the BoE battered the pound once again, saying that ‘the MPC will not hesitate to change interest rates as necessary to return inflation to the 2% target sustainable in the medium term’ but that they ‘will make a full assessment at its next SCHEDULED meeting of the impact of demand and inflation from the Government’s announcements, and the fall in sterling, and act accordingly’.
Bloomberg writes that Britain needs an adult in the room and Bailey could be that person. But Bailey acts like a mom seeing her child with an open forehead bleeding out, and says ‘oh honey, we will go to the hospital when daddy is back home, I have to finish cooking diner!’
If the selloff on sterling continues, the BoE can’t afford to wait until the next scheduled meeting to do something. It must act now! Therefore, the market will certainly force the BoE to deliver an emergency 100bp rate hike in the next couple of hours, as the threat of ‘acting accordingly when they meet again’ won’t be enough for the BoE to stop the sterling’s meltdown, especially when the rest of the market is boiling as well, and the US dollar keeps pushing higher.
Money’s next stop
Investors sell assets, and sit on cash. It is reported that $4.6 trillion is now sitting in US money-market mutual funds, which pay 2% or more, with some pockets even paying up to 3-4%. 3-4% return on risk-free investment is very sweet when there is a storm in the market. But of course, the rising sovereign yields are also becoming attractive. The US 2-year paper now yields around 4.30%, whereas the S&P500’s dividend yield is just around 1.7%.
Therefore, what we will most likely see as a next step is: cash leaving the US dollar, and moving into better yielding sovereign bonds. The US papers will certainly lead the game, but the dollar is expensive, and allows investors to buy more of the other sovereign bonds, so the ‘back to sovereigns’ will also benefit to other countries’ debt. That would be the first step in healing from the actual crisis.
FX, commo roundup
The US dollar remains king, on the back of a heavy sterling meltdown due to irresponsible UK government / lazy BoE, and euro selloff on the back of Italy turning right / cautious ECB.
The USDJPY spiked to almost 146 at yesterday’s dollar rally, as if the Bank of Japan (BoJ never intervened last week. The BoJ head says that he supports intervention in the yen. In vain.
Gold is set for a deeper decline to $1600 per ounce, while US crude will likely extend losses to $70 per barrel on the back of rising recession worries and shattered global demand.