National Debt, Quantitative easing & Exchange Rates

Pound drops
Sterling fell yesterday, dragged down by minutes from the Bank of England which showed that some policymakers had wanted to extend quantitative easing by more than the amount decided on. More on this in a moment. First, a snapshot of rates as at 08:30am, 20/08/09:

  • GBP/EUR 1.1641
  • GBP/USD 1.6550
  • GBP/AUD 1.9923
  • GBP/NZD 2.4484
  • GBP/CAD 1.8143
  • GBP/ZAR 13.149
  • GBP/CHF 1.7661
  • GBP/JPY 1.5598

Sterling’s woes began in early London trade, when traders used comments from UK opposition leader David Cameron, who said Britain’s high levels of government debt meant it was running the risk of defaulting on its debt, as a reason to sell the currency. Read the full story here.

Remember these comments, as in the medium to long term, it’s likely that these huge levels of government debt are very likely to mean that Sterling will remain weaker than all other major currencies. Other majot economies dont have these huge debt levels, they aren’t doing quantitative easing, and they aren’t trying to spend their way out of the recession. The UK is in many analysts opinion, setting itself up for huge problems in the future, This site gives some good information on this.

The pound fell against both the EUR, USD, AUD and NZD. GBP/USD did recover quite well in the afternoon, buoyed by higher oil prices. Changes in equity prices also helped to push the buying rate for US Dollars up. The main news however remains the BoE comments about Quantitative Easing.

BoE Minutes & Quantitative Easing
Minutes of the bank’s recent Monetary Policy Committee meeting reveal that Mervyn King wanted £75bn rather than the £50bn that was injected. Two fellow committee members also voted for a bigger cash injection.

The decision to pump £50bn came as a surprise, and was already twice the £25bn that the market expected. So, the news hammered the pound and we saw dramatic falls across the board. What is Quantitiative easing? This BBC article gives a good summary.

The bank originally set aside £150bn for buying assets, but the decision to inject an extra £50bn took the total to £175bn. Sterling fell sharply as a result of the minutes, as they expressed concern about the strength of any recovery in the UK economy. The pound fell 1% against the dollar, to $1.639, and by 0.8% against the euro, to 1.162 euros.

The 6-3 split on the MPC shows that views within the bank differ on just how deep the recession is, and the outlook for inflation.This clearly suggests the bank is leaving the door open for additional measures should they feel need a rise. Quantitative easing is still very much in play, also indicating that the UK economy may well be in a worse state than thought. The BoE had recently made indications recovery may well be long and protracted. This does not bode well for GBP rates in the near future.

It suggests that if we see a run of disappointing data, they would not hesitate to pull the trigger on more QE, and thus further Sterling weakness. The net effect? Lower exchange rates for those purchasing foreign currency with Sterling.

Also keeping sterling on the back foot was the Confederation of British Industry’s UK manufacturing trends survey, which produced a reading of -54 in August, slightly worse than forecasts for a -50 reading

Todays Data
For the UK, we have retail sales (Changes in Retail Sales are widely followed as an indicator of consumer spending) at 09:30am, in addition to some public sector borrowing figures. For the USA we have jobless data at 13:30pm. A manufacturing survey for the US also, at 15:00pm.

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