Good morning
Or is it? Kwanteng’s mini-budget last week was supposed to make us all feel better off but I can assure you that the subsequent collapse of GBP does nothing for me. I’ve talked for a long time about GBP’s possible decline but even I didn’t see it as low as this. GBPUSD has fallen almost 25% this year. Not even England football team has sunk to such lows despite their shoddy performance on Friday. It’s obviously not all Kwarteng’s fault, GBP was struggling long before he became Chancellor, if anything Kwarteng merely made it less possible for markets to overlook the rather dismal situation we have right now.
Overnight GBPUSD has traded down to 1.0327, the lowest level since decimalisation. It has managed a meagre recovery to 1.5050 as I type but there is not denying the risks are to the downside and parity is going to be a real focus point. Who is going to buy GBP now? For our clients who need to buy US dollars or indeed and other currency for their business, the pounds decline has serious connotations.
A real worry of mine is not the level firms will be buying their dollars, but the risks they may take in trying to secure a rate better than spot. Forwards offer great downside protection but risks are clear if spot were to recover. I don’t like spot down here at all but we do have structures in mind that protect the downside while not locking the buyer into these low rates.
Seen some question of whether UK would intervene to prop up the currency but so far this is regarded as highly unlikely. Japan did intervene buy buying yen recently although it always seems like a short term fix, USDJPY is now 144.00, 200 points or so from where Japan intervened but some 350 points off the post-intervention lows.
Levels for now are GBPUSD 1.0545, GBPEUR 1.0950, GBPAUD 1.6250, GBPJPY 152.00. Expect rallies to be sold into.
Elsewhere in the world, Russia’s sham referendum is taking place, we all know the result anyway. But as soon as those Eastern regions are annexed under Russia, any Ukrainian forays into those areas will allow Putin to say Ukraine is attacking Russia, with potentially horrendous consequences. Its not looking good. Putin now actually has what he wanted in the first place, that is Eastern Ukraine and an open route to Crimea, so weirdly the only hope now is he calls a stop to the overall offensive. What Putin does seem to have done, planned or otherwise, is put Europe under immense pressure, both politically and economically. I am reminded of how the world changed after the 11th Sept terror attacks in the US. Has Putin’s actions in Ukraine had a similar effect?
Meanwhile, on the heels of Sweden’s vote towards the far-right, Italy look set to do the same after Draghi’s coalition fell apart in the summer. The far-right party ‘Brothers of Italy’ under Giorgia Meloni, together with a couple of other right-win parties, including that of Berlusconi, have pretty much secured victory in the general election. Meloni’s promise of restoring national pride has struck a chord in Italy, her party earning some 25% of the votes compared with just 4% in the elections four years ago. It will be interesting to see how they deal with EU. The last thing we need right now is talk of EU falling apart.
Three other pieces of news caught my eye over the weekend, all involving intrigue and skulduggery. One was the CIA opening its museum doors to a small group of journalists. I’d love to have a look round that.
The second comes from the murky world of chess, where Magnus Carlsen, world champion since 2013 and undefeated in 53 games, left a tournament after losing to Hans Niemann. Carlsen was careful about his choice of words but vaguely suggested Niemann had cheated. Niemann does have a history of cheating in online chess but not in face-to-face matches, he denies it and there is no evidence to support the allegations. Can’t wait to see how this story develops.
The third came as social media reported a coup in China, claiming Xi has been deposed and/or arrested. He’s not been seen in public since his venture outside China to Uzbekistan recently. Rumours of thousands of flights in China being cancelled fuelled the claims. Experts say a coup is unlikely, more likely Xi is in strict quarantine after his trip abroad. Xi does come down hard on his opponents, which is no doubt part of the reason he looks set to secure power for another term of five years next month. Assuming he hasn’t been ousted by then!
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