MacroScope

10 days to define the United Kingdom

The Flag of Scotland, the Saltire, blows in the wind near Berwick-upon-Tweed on the border between England and Scotland

The earthquake may be about to happen. Over the weekend the first opinion poll putting the independence campaign ahead landed with a resounding thump.

That prompted the UK government to rush forward to this week plans to spell out what further devolved powers Edinburgh would get if the Scots vote to stay on Sept. 18.

With the caveat that the last two dramatic polls have both been from one group – YouGov – and others have suggested “No” remains ahead, it seems momentum is well and truly with Alex Salmond.
In response, sterling has fallen about 1 percent in Asian trade to its weakest level in nearly 10 months. The pound has now dropped the best part of three percent against the dollar this month. The banks and other business will now be seriously alarmed as well.

The latest polls show that if the union holds together it will be old people that will have delivered. Women and Labour supporters, previous “no” strongholds, are deserting fast if YouGov has it right.
The other question is whether there will be a “shy No” vote. In the 1980s many Britons wouldn’t admit publicly to voting for Margaret Thatcher but then did in the privacy of the ballot box, so her poll ratings often underplayed the reality. This time, the bold thing to do is vote Yes and the independence campaign has been robust to say the least. So it’s possible there are a voters who won’t admit to it but will put their cross by “No” a week on Thursday.

In the 1995 Quebec independence campaign, the “Yes” camp was well ahead with a week to go and lost by a whisker.

Rip-off Britain on the line

For all the talk about imported inflation in the UK as policymakers talk down the pound and financial markets merrily give it a good beating, here’s a stark reminder that a lot of British inflation remains home-grown.

British inflation has been so sticky over the past decade that regular Bank of England pronouncements that it will come back down from wherever it is to the 2 percent target at the 2-year horizon has become something of a policy piñata in financial markets. And there is rampant speculation the government will soon modify that inflation target.

But it’s no joke to British consumers, whose wages have stagnated for years and with a plunging currency in their pocket that is down more than 8 percent so far this year. They’ve been much more frugal with their spending, and as a result the economy is on its back.

Time already to switch off the sterling printing presses?

A clutch of top UK economic forecasters on Thursday swept under the rug predictions for another 50 billion pounds of gilt purchases they thought would take place starting just in a few weeks.

News that the UK economy bolted ahead at a 1.0 percent quarterly pace in the three months to September – nearly double the consensus prediction in the Reuters Poll and easily more than twice the last measured growth rate in the United States – was probably a good enough reason on the surface.

But most agree the main reason was an extra work day compared with the prior quarter – when the Queen’s Jubilee celebrations left vast swathes of the country idle – along with a spending boost from accounting for tickets for the Olympic and Paralympic Games.

from Global Investing:

Pity Poor Pound

Britain's pound has long been the whipping boy of notoriously fickle currency markets, but there are worrying signs that it's not just hedge funds and speculators who have lost faith in sterling. Reuters FX columnist Neal Kimberley neatly illustrated yesterday just how poor sentiment toward sterling in the dealing rooms has become and the graphic below (on the sharp buildup of speculative 'short' positsions seen in U.S. Commodity Futures Trading Commission data) shows how deeply that negative view has become entrenched.              

 While the pound's inexorable grind down to parity with the euro captures the popular headlines, the Bank of England's index of sterling against a trade-weighted basket of world currencies shows that weakness is pervasive. The index has lost more than a quarter of its value in little over two years -- by far the worst of the G4 (dollar, euro, sterling and yen) currencies over the financial crisis. The dollar's equivalent index has shed only about a third of the pound's losses since mid-2007, while the euro's has jumped about 10% and the yen's approximately 20% over that period.

There's no shortage of negatives -- Britain's deep recession, recent housing bust, near zero interest rates and money printing, soaring government budget deficit (forecast at more than 12% pf GDP next year, it's the highest of the G20) and looming general election in early 2010. In the relative world of currency traders, not all of these are necessarily bad for the pound -- the country is emerging tentatively from recession, the dominant financial services sector is recovering rapidly and  short-term interest rates (3-month Libor at least) do offer better returns than the dollar, yen, Swiss franc or Canadian dollar. 

Strolling away from the dollar

All this talk about ditching the dollar as world reserve currency may be irrelevant — central banks are already walking away.  The latest International Monetary Fund figures show dollar share of world FX reserves falling to 64.0 percent in last year’s fourth quarter from 64.4 percent the previous quarter. Doesn’t sound much, but at that pace dollar is less than half of world reserves in less than a decade. years. It was the same for once mighty sterling. The pound’s share dropped to 4 percent from 4.5 percent. The euro rose 1 percentage point to 26.5 percent.

Marc Chandler of  Brown Brothers Harriman says not too much should be made of this though. ”The reserve figures are heavily influenced by valuation swings,” he says.

Still, given the debate about SDRs. . .

(Reuters photo: Kai Pfaffenbach)

Rip-off Britain or the cost of cheaper sterling?

Inflation is plunging faster than analysts are forecasting just about everywhere in the developed world. Except for Britain. Those accustomed to high prices and inflation-busting increases in tube and rail fares at the start of every year were probably not surprised.

A tiny decrease in January inflation to 3.0 percent from 3.1 percent, left plenty of City analysts scratching their heads and talking of a blip in the data that is sure to be followed by significant drops in months ahead.

The puny move is all the more puzzling given the fact that forecasters have been suprised by the speed inflation has been falling elsewhere. In the euro zone, inflation has already tumbled to just 1.1 percent.

from Davos Notebook:

London — warmer and cheaper

London is cheaper and warmer, at least compared with Davos, says London Mayor Boris Johnson.

"The fall in the pound is of huge value to London's exports and all sterling-denominated assets. We're seeing a very impressive effect here. We take advantage of the upside and the upside is that the pound is competitive," Johnson told Reuters.

"And everybody in Davos, once they finish this massive negotiation of egos, this complete vanity, should come to London. It's considerably cheaper and considerably warmer."

from Global Investing:

Wish I hadn’t said that…

As sterling sinks to a 7-1/2 year low against the dollar, traders and investors are wondering who was the established political figure that made the following comments when Britain was kicked out of the Exchange Rate Mechanism in 1992.

"A weak currency arises from a weak economy which in turn is the result of a weak government."

Answer: Gordon Brown, then Shadow Chancellor, in an article in London's Evening Standard newspaper.