The Great Debate UK
- Mark Bolsom is Head of the UK Trading desk at Travelex, the world’s largest non-bank foreign exchange and international payments provider. The opinions expressed are his own. -
The rise in November’s CPI figure was larger than expected, but not a total surprise and markets have largely ignored the data.
In the Bank of England’s quarterly inflation report, published last month, Mervyn King reiterated his belief that short-term inflation looked set to rise quite sharply, in line with higher oil and petrol prices. There is little doubt as well that Sterling’s relative decline against a basket of other currencies has also contributed to inflationary pressure. This is particularly significant for the UK, as Britain remains a net importer of goods, and thus far there has been no sign of a reduction in the trade deficit. In fact the trade deficit actually widened to 3.2 billion pounds in October from 3.1 billion pounds in September 2009.
In the short-term, we expect inflation to carry on rising, as the reversal in VAT, scheduled for January (currently at 15 percent, set to revert back to 17.5 percent), will add to inflationary pressures. As the pace of the global recovery picks up, we also expect the cost of raw materials to increase, further adding to upwards price pressure and quite possibly pushing inflation to 3 percent by the end of the first quarter in 2010.
Spot gold prices are up over 40 percent year on year. Yet, according to the World Gold Council, demand for gold in the third quarter of 2009, dropped by 34 percent year on year. Of course, demand in the third quarter of 2008 was exceptionally high due to the financial crisis. As well, relative to the third quarter average of the five years to 2007, demand for gold in Q3 2009 was down 4 percent.
When confronted with the ferocity of the rally in gold, the fact that the third quarter demand for gold was below the seasonal average is surprising. The dynamic between price and demand suggests some fall in supply perhaps led by increased hoarding.
A month or so ago, there was a lot of talk that risk appetite would be pared back over the coming months. This talk was built around relatively cautious expectations for economic growth in most of the G-10 next year.
The discrediting of the efficient markets theory in the aftermath of the financial crisis appears to have been accompanied with growing support for the view that rather than efficient in nature, financial markets are predisposed towards the formation of bubbles.
-Jane Foley is research director at Forex.com. The opinions expressed are her own.-
If there is one foreign exchange story that will run and run it is the one about the U.S. dollar (USD) and its future as the world’s dominant reserve currency. The discussions on this topic have at least brought some agreement, namely that there is no clear alternative and therefore there can be no quick fix change. That said, much uncertainty remains as to what can, if anything, eventually replace the dollar.
from The Great Debate:
Twenty-four years ago, major nations called for depreciation of the dollar to rebalance the global economy. Now, as another effort at rebalancing looms, the dollar will again bear the brunt -- though officials will try to ensure its fall is less dramatic this time.
from The Great Debate:
It looks bad for the dollar, but looks can be deceiving.
Its sharp decline in the last week has pushed the euro to its highest level in a year and reignited fears that there's only one place for the dollar to go, and that's down.
Rhetoric from influential investors like Warren Buffett as well as big foreign buyers of U.S. debt like China and Russia has fed that sense of doom.