Tuesday, 10 March 2009

Sterling starts to wilt

Yesterday Sterling fell by 3% against the Euro and 4% against the Dollar. These are huge moves in a market where a 0.3% move would normally be regarded as big. Most investors expected this fall at the end of last week but yesterday Sterling capitulated in a delayed reaction to the BoE's QE announcement. Some dealers attached some weight to the government increasing its stake in Lloyds to 70% or so. Sterling clearly has further to fall as the BoE increases the money supply over the next months.

Gilt yields have also fell below 3% at one time, the lowest since 1989. This reflects it is the safest haven to park Sterling in over the next few months and stuff lending to risky businesses. Gilt yields have risen from this low to 3.1% today. Unlike the BoE, I expect inflation to pick up as the fall in Sterling feeds into higher oil prices and import prices generally. When this is recognised Gilt yields will rise rapidly.

The coming G20 meeting this weekend will see a clash between the Franco-Prusian rulers of the EU who want more regulation and a big crackdown on tax havens and the Anglo Saxons who want to concentrate on a new international accord on bailing out the financial system. I would not like to have to write the press statement, traditionally written before the meeting so the politicos can have lots of photo ops. The Anglo Saxons want to reflate but want to see some reciprocity from the Fourth Reich.

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