Tuesday, January 19, 2010

The "Great" British Pound?

Sterling, sterling, sterling. Macro Man's email and Bloomberg inboxes are filled with all things sterling today. The GBP can be a fun currency, not least because of the jokes that a guy like Macro Man can make with it ("sterling's looking a bit tarnished", "GBP = Gordon Brown's peso", etc.)

Thus far this morning, the British Pound truly has been Great, carrying on a trend of the past few days. Que pasa?

Well, there have been a few things driving sterling. The most obvious (and most credible) source of GBP strength has been the takeover frenzy surrouding Cadbury, with a host of foreign firms circling the purveyor of Creme Eggs like so many buzzards. It looks like Kraft has sweetened their offer just enough to make it palatable to the Cadbury board; at a reported all-in price of 850p/share (including dividends), the whole business has been a tasty treat for Cadbury shareholders.

More viscerally for sterling, however, is the 500p/share cash component of the offer. With 1,373,866,000 or so shares outstanding, that translates to a £6.9 billion cash bung to Cadbury shareholders from Kraft's coffers. It's always difficult to know exactly how and when the cash component of cross-border M&A deals will be effected, but it seems reasonable to asssert that a decent chunk will need to be transacted in the marketplace. And contrary to the apparently common perception of non-experts ("but there's $4 trillion of daily turnover!"), a time-sensitive flow of that magnitude that everyone knows is coming can have a significant short-term effect on the marketplace.

Of course, that effect will have long faded by the time that Kraft is able to jam American shelves with Fruit and Nut or Turkish Delight bars. And from there, sterling will be left to rise or fall on its own merits. In that regard, there are a couple more factors that bear watching. While Macro Man asserted in his list of non-predictions that the UK would avoid a hung Parliament, the risk of one is very real, given the farcically gerrymandered electoral districting.

In that vein, it is clearly worth keeping an eye on Labour's electoral strategy, which has turned abruptly over the last week or two. Following on from an apparent declaration of class war a few weeks ago, Labour has performed an abrupt about-face (courtesy of the unpopularity of their prior strategy) and is now sounding almost Tory-ish. Noted creature of the underworld Peter Mandelson was in the weekend press suggesting that the 50% to tax rate would only be temporary, and today's press is aflutter with Alistair Darling promising steep budget cuts, apparently stealing a key plank in the Tories' election platform. 'Twould be tempting to call it Machiavellian, but that word connotes a degree of artifice that is notably lacking in most of the current crop of Labour politicos (with Mandelson as an obvious exception.)

It's difficult to see how this will play out. A legitimate committment to fiscal discipline should prove supportive for sterling in the medium term, though any near-term negastive impact on growth could have the opposite effect. But if Labour's naked play for the middle class convinces enough voters to generate a hung Parliament, the impact on sterling would aalmost cetainly be negative.

Finally, the press is also trumpeting a GS call that the UK growth will outperform that of other developed economies this year. While that may end up being the case, given the depth and duration of the UK recession (which could thereby mechanistically generate a sharp recovery), from Macro Man's perch the rationale for UK outperformance is not particularly compelling. Macro Man struggles to see much positive impact from sterling's protacted period of weakness; as you can see from the chart below, the TWI has been in the toilet for a good year and a half now.
The most notable impact that Macro Man can see is that the price of certain imported goods has gone up and that the volume of supply has gone down (it's been easier to find El Dorado that a 3 liter TDI A6 Estate.) CPI data would appear to back up that anecdotal impression; for what seems like the twelfth month in a row, inflation surprised to the upside, with even core CPI now up 2.8% y/y!

As for the trade account, it looks to Macro Man like the bulk of the improvement is past us. You can see from the chart below that the trade deficit narrowed sharply during the teeth of the crisis but has, if anything, started to widen in recent months. The reason for this is not hard to deduce; import growth has begun to exceed that of exports.

Much like the US, exports have to dramatically outperform imports on a percentage basis for the trade deficit to improve; over the last six months, imports have risen 8% while exports have risen 7%. That explains the recent widening of the trade deicit, and frankly Macro Man cannot see why it wouldn't continue. So while Macro Man certainly expects that the UK will return to growth this year, hopes of an export-led boom would appear to wide of the mark.

So whither sterling? Macro Man has no position at the moment (other than in his p.a.), and so can view sterling through a relatively unbiased prism. And from his perspective, the most bullish outcome for the pound (fiscal retrenchment and monetary tightening) are unlikely to occur simultaneously for a long time; if anything, if one leg materializes soon, the other is likely to go the opposite way.

And so while the British pound might be doing great today, if anything the current bull could well set up a great selling opportunity sooner or later. Macro Man will be watching and waiting.


Anonymous said...

Who can take a sunrise (who can take a sunrise)
Sprinkle it with dew (sprinkle it with dew)
Cover it with choc'late and a miracle or two
The Candy Man (the Candy Man)
Oh, the Candy Man can (the Candy Man can)
The Candy Man can
'Cause he mixes it with love
And makes the world taste good
(Makes the world taste good)

Who can take a rainbow (who can take a rainbow)
Wrap it in a sigh (wrap it in a sigh)
Soak it in the sun and make a groovy lemon pie
The Candy Man (the Candy Man)
The Candy Man can (the Candy Man can)
The Candy Man can
'Cause he mixes it with love
And makes the world taste good
(Makes the world taste good)

(The Candy Man makes everything he bakes)
(Satisfying and delicious)
Now you talk about your childhood wishes
You can even eat the dishes

Oh, who can take tomorrow (who can take tomorrow)
Dip it in a dream (dip it in a dream)
Separate the sorrow and collect up all the cream
The Candy Man (the Candy Man)
Oh, the Candy Man can (the Candy Man can)
The Candy Man can
'Cause he mixes it with love
And makes the world taste good
(Makes the world taste good)

Boycott Kraft

Rossco said...

Given that such a high proportion of UK "exports" have historically been financial services it is hard to make any bullish case for the trade deficit..... especially now that global cooling will push up the value of imported foodstuffs, ugg boots and puffer jackets

Charles Butler said...

Against the euro it's a little more interesting perhaps.

Margerie said...

Rossco, surely the composition of the FTSE suggests there is a bit more diversity in the "UK Portfolio" than the banking propoganda would have you believe?

I am beginning to take the view that all currencies will continue to trend until some sort of paradigm shift occurs. People seems to still be sitting on the sidelines waiting for "a sign"

Margerie said...

Where I said trend I clearly meant "range"


Anonymous said...

posted just before UK CPI... I'm pretty pessimistic on sterling (as alas is almost every punter), even though it looks very cheap against EUR in particular from a historical perspective. However, if growth is 3% (GS) and inflation is 4% (as Citi would have it), the BoE might be forced to act.

Rossco said...

Margerie, I'm not sure what bearing the composition of the FTSE has on the trade balance ? Like it or not though, back in the boom times fin services were 34% of GDP and now they patently are not, so doesn't that bode poorly for the trade balance as fin services shrink in value ?

Trywalker said...

As you said, the GS research and Kraft deal coming out early in Asian session put pressure on the large stops above 1.6400 and sovereign interest to buy good amount of Cable around 1.6380-90 area pulled the trigger.

I lost good money on that two way quote and watching Cable at 1.6335 offered after a high at 1.6459 post CPI data is not shocking me at all as a spot monkey..

Still feels like toppish around here with a 1.6355 daily close needed to take it up to 1.70 to test the topside of the range...


Anonymous said...

Hey MM,

We already know that you believe that the Fed won't hike rates this year. What do you see the BoE doing as far as monetary policy goes?

Donlast said...

Rail Traffic stats in US up to Jan 9 showing no oomph whatsoever. This data cannot lie. Usually taken as a long lead indicator on sales. See:


Macro Man said...

ANon @ 12.06: I tend to think that the BOE will maintain the current easy setting longer than warranted (i.e., they won't be pre-emptive), but then one day Merv will wake up and decide that policy needs to be tighter, at which point they put rates up and drain reserves....potentially by a lot. At this juncture I don't know if that will be this year or not...it probably depends on a lot of the issues discussed in the main body of the post!

Anonymous said...

Exports v Imports is where the outcome is determined,BUT when you line up every major economy you can see that virtually everyone of them wants to play the same Export driven/Weak currency card. On the back of that I don't see how anyine can make a case that the Uk will somehow outperform any of the other economies in question with the exception of the Euro Zone.

Furthermore,the more fical restraint we use in comparison to our trading partners the stronger will our currency become which in itself is akin to shooting the case for outperformance right in the foot.

All I can see is seesawing action as each of the major economies ,make that culprits ,take it in turn to pursue their 'beggar thy neighbour' policies.

leftback said...

"diversity in the "UK Portfolio" ..."?

Don't make me larf. Banks and miners, innit, with BP and an occasional maker of chocolate thrown in for good measure.

MM, there are a few FX traders out there long GBP who are going to be in for a good pounding before long.

Anonymous said...

What about financial asset flows?

Willy said...

Trywalker: "...the GS research and Kraft deal..."

The compliance departments at all the investment banks in the United States have made it a point to prohibit their market commentary staff from calling their work "research".

In most firms (all that I am aware of), employees titles have been officially changed. No more "analyst" or "research" departments. They are now called "market commentators" or "strategists" or similar.

But nothing they do is called "research" anymore.

This is Wall Street's belated answer to "Where are all the customers yachts?". The people sending out this faux research are **SELL** side strategists, who's job it is to sell securities and derivatives.

They are not independent, they are not unbiased, and at least some of the time they are simply talking their own trading desk's book.

Goldman even went to far as to send out a disclaimer that their strategists regularly cavort with their trading desk first, and customers are not all given the advice at the same time -- some customers are given the advice 2-3 days before the last customers.

That means, by the time the helpless lemmings who read the news get the commentary -- every Goldman trader has acted on it, then preferred Goldman customers, then disliked Goldman customers and regional broker customers who piggyback on the advice.

And THEN it hits Bloomberg, FT, WSJ or UK Telegraph.

Where are all the customers yachts? The brokers sailed off with them 3-4 days ago

Gary said...

Not that we need it, but more evidence the economy is not recovering and nothing has changed:

Citigroup's Pandit was happy and smiling as he announced a 4th quarter loss of USD $7.6 Billion (with a "B").

Just to review the new economic reality, according to banks and Washington DC:

failure = success, pay me
loss = success, pay me more
bankruptcy = success, pay
. me an exit fee
deficits = progress
profits = evil capitalists
. that must be taxed
loyal employees = must be laid off
. quickly
inept employees = should be considered
. for future roles in management

up = down
good = bad

leftback said...

Yes, that's right, Gary, welcome to Idiot World.

Brilliant analysis = you're fired.
Incompetence and peddling dodgy assets = bonus + promotion.

Anonymous said...

Lies = Fed

Anonymous said...

Can anyone tell me where Macro Man's graphs come from (the ones with the black background)?

Willy said...

Can I just say this: If I see one more dim-witted talking head "news" journalist standing around in Haiti -- with neatly pressed clothing, full makeup, hair combed and styled, and breath still reeking of the meal their personal chef just prepared for them back on their nice air conditioned boat offshore -- telling us about the hellish conditions going on in the background of their broadcast, I am going to lose it.

If they aren't pushing and promoting Washington DC's out of touch agenda, they are telling the rest of us how we should send money to help Haiti while they go back to their yachts to have lunch.

Relief supplies are stuck circling the airport, unable to land because all the "news" aircraft are blocking the runways.

Ships filled with relief supplies can't reach port because the "news" companies boats-- filled with talking heads, cameras, personal chefs, etc -- are blocking most of the harbor.

I think the Haitians should turn their looting and gunfire against the press

leftback said...

Just what I was dreaming of today, another bloody 24 hour carry trade. Welcome to another DGDF-driven risk-on Groundhog Day mini-rally.

MM, do you ever just feel like having a post entitled "The Usual"... and then going home for a kip?

Macro Man said...

Anon @ 19.13: they are Bloomberg charts.

Willy: Amen. Reminds me of the old Sam Kinnison line about Ethiopia in the mid 80's: What, you're telling me the camera crew can't turn around and give this starving kid a sandwich?

LB: Virtually every day since March 10, 2009.

Anonymous said...

Times are a changin' -- and not in favor of the status quo

Gary said...

Willy -- the news coverage just gets better.

I just read a recently updated news story from Associated Press (so they had at least one revision to correct errors already).

The title was:
"New Crisis: Getting Sea Water to Haitians"

Lets put aside the fact that Haiti is an island and thus could never have a shortage of SEA water. That logic would assume the news journalists actually navigated to Haiti themselves. The plane pilot knew how to get there, no reason for the journalists to crowd their little minds with geography facts.

Sea water, which contains salt, will kill you faster than drinking no water.

So apparently, the fact checking news media thinks the new crisis will be killing off the remaining Haitians by having them drink salt water instead of fresh

Yes, these people walk among us, and we rely on them to tell us what is happening in the world

Cortex said...

How confident can one be that we won't see a Chinese rate hike on Friday?

British pound value said...

Dollar strengthens in early US session after Fed Chairman Bernanke said that additional fiscal stimulus package should be considered to help improve “access to credits” by consumers, homebuyers, businesses and other borrowers given the “extraordinarily uncertain” economic outlook. In his testimony to House Budget Committee, Bernanke said that such actions might be “particularly effective” at promoting “economic growth and job creation.” Dollar index soars to as high as 82.92.