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OPINION

Who suffers from sterling’s slide?

Who suffers from sterling’s slide?
October 13, 2016
Who suffers from sterling’s slide?

The pound's collapse this year is massive, the sort of thing the Japanese would be proud of and a slump more usually associated with emerging markets. On the Bank of England's trade weighted basis it's almost at the 73.3 record low posted in Q4 2008. Down by almost a quarter against the yen so far this year (much of the move since late June), it's worth remembering that it took 33 months for Japan to manage the same feat against the US dollar.

It's also much weaker against emerging market currencies; even versus the embattled Mexican peso (courtesy of Trump rhetoric) it's off 6 per cent. Down 19 per cent against the Polish zloty and 21 against the Hungarian forint, next thing migrants will be moaning about reduced remittances (worth £11bn last year). Down a total 25 per cent versus the US dollar and the politically unstable South African rand, at a new record low against the New Zealand dollar, and a whopping 32 per cent against Brazil's real, which is going through its worst recession in a century.

 

 

The usual mantra is trotted out: this will help exports - for a nation that's barely had a visible trade surplus since WWII! Because we have to rebalance the economy from services to manufacturing which accounts for just 10 per cent of GDP. Right, so every single person living in the UK sees their assets slashed, wages and pensions shrivel, in order to subsidise inefficient businesses.

But what do the charts tell about the pound's prospects? And how does this translate into anything denominated in sterling? Using cable (because most people are comfortable with this currency pair) we see two gaps over weekends, a rare occurrence hinting at a market tumbling out of control. Friday's mayhem is another version of gapping lower, where the third consecutive one is an exhaustion gap and signals that the end is nigh. To that add the sheer speed of the slump, the extreme levels it's trading at against all too many currencies, that it is as oversold as it was in 1985 and 2009, and traded two standard deviations below its secular mean. You know you're in trouble - and moves are not sustainable.

 

 

FTSE 100 is up 29 per cent from this year's low, not a sign of strength but of an asset keeping up with the tumbling exchange rate - a traditional hedging mechanism in emerging and frontier markets; copying third-world tactics. In theory every asset denominated in sterling should do the same; if they're not you're losing money, like house prices and rental yields.

 

 

This includes UK gilts and all sterling bonds where the only ones which rallied significantly this year are index linked ones as they protect against the ravages of inflation. As this probably will be the case for food and energy, it hits the poorest hardest.

Index-linked Gilt