Wednesday, July 6, 2016

The British Pound's 100-Year Debasement & The City's China Wild Card

Bloomberg (Jul 5, 2016) - Sterling first slumped after coming off the gold standard in 1931 in which it had been overvalued, just as it was in 1944 when it joined the Bretton Woods system of managed exchange rates. Another 30 percent devaluation was swallowed in 1949 and then Wilson sanctioned another drop in 1967 amid Britain’s balance of payments crunch. While the IMF was called in to help avoid a sterling crisis in the 1970s, it fell again in the early 1980s. 

UK Equity Markets Dip Below 5%.
Source: Bespoke (Jul 5, 2016)
The U.K. joined the Exchange Rate Mechanism, a precursor to the Euro, in 1990 but was forced out just two years later because it couldn’t sustain a link to the Deutsche Mark. Now there is speculation that life outside the EU will cost the pound its place in the top tier of reserve currencies. It currently accounts for 5 percent of foreign exchange reserves, according to the IMF. A weaker currency may not do that much to prop up the U.K. economy. While it should boost manufacturing and tourism, three-quarters of the economy is dependent on services such as finance and their future is subject to whatever access to the EU the British government can negotiate. There are also
British Pound Sterling (GBP) to Chinese Yuan Renminbi (CNY)
structural weaknesses leaning against the pound. The U.K. ran a near-record current account deficit of 6.9 percent of output in the first quarter and is suffering from weak productivity. Demand remains weak abroad and prices may not be that sensitive to swings in the exchange rate because producers still rely on foreign components for their goods.

Thierry Meyssan (Jul 04, 2016) - The Western Press keeps repeating the same message – by leaving the European Union, the British have isolated themselves from the rest of the world, and will have to deal with terrible economic consequences. And yet, the fall in the Pound could be an advantage within the Commonwealth, which is a far greater family than the Union, and present on all six continents. Famous for its pragmatism, the City could quickly become the international centre for the yuan and implant the Chinese currency in the very heart of the Union [...] The London Stock Exchange announced an agreement with the China Foreign Exchange Trade System (CFETS), and, in June, became the primary Stock Exchange in the world to rate Chinese treasury bonds. All the elements were in place to transform the City into a Chinese Trojan Horse in the European Union, to the detriment of US supremacy.

Ahmed Farghaly (Jul 6, 2016): GBPUSD: Contradicting the EUR