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Pound Poised to Gain as BOE Slows Pace of Rate Cuts

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    Pound Poised to Gain as BOE Slows Pace of Rate Cuts

    How true this....Id be willing to say Atw will be proved wrong - we will recover in term of the Euro. Once the Euro appreciates how bad a state it is in the surge will be back on!

    Dec. 29 (Bloomberg) -- The pound may rebound from its worst year on record against the euro as investors start betting on a recovery in the U.K. economy, according to the world’s biggest currency traders.

    The U.K. currency will strengthen 14 percent against Europe’s common currency next year, after depreciating about 24 percent in 2008, based on the median forecast of 42 analysts and strategists surveyed by Bloomberg. Deutsche Bank AG, the largest trader as measured by Euromoney Institutional Investor Plc, predicts a 20 percent gain.

    “We will see some signs of life in the U.K. economy sooner than we do in the eurozone,” said Henrik Gullberg, a strategist with Deutsche Bank in London. “Even though we might be far away from a rate hike in the U.K., the focus for currency traders will shift to that sooner in the U.K. than in the eurozone.”

    The pound also weakened versus the dollar and yen, falling 26 percent against the greenback and 40 percent versus Japan’s currency, the biggest declines since at least 1972, as the Bank of England cut interest rates to the lowest level since Winston Churchill was in power. Prime Minister Gordon Brown was forced to bail out the nation’s biggest banks amid the fallout from the seizure in credit markets.

    The British currency weakened to record 98 pence per euro today. It traded at 97.65 pence and $1.4578 by 3:36 p.m. in London.

    Futures Bets

    The pound’s drop was so swift that less than three months after saying the currency was “overvalued,” Newport Beach, California-based Pacific Investment Management Co., the manager of the world’s biggest bond fund, recommended on Dec. 5 that investors reduce bets on further declines.

    Traders reduced holdings this month of futures contracts betting on declines in the pound, according to the Commodity Futures Trading Commission in Washington, owning 30,400 contracts as of Dec. 16, down from 40,244 on Dec. 1.

    Britain’s gross domestic product shrank at an annualized rate of 0.6 percent in the third quarter, the first drop in 16 years, the Office of National Statistics said Dec. 23. The economy, the fifth-biggest in the world, will contract 1.4 percent next year, the median estimate of 26 economists in a Bloomberg survey shows.

    “While the outlook for the U.K. economy is pretty terrible, we’re at a stage where that’s already in the price,” said Ian Stannard, a senior currency strategist in London at BNP Paribas SA, the most accurate foreign-exchange forecaster in a 2008 Bloomberg survey. “The big shock next year is going to come from the eurozone as the economy contracts much more than currently expected. The ECB will eventually have to wake up and start cutting rates. That’s going to really damage the euro.”

    Rate Cuts

    The pound will advance to 84 pence per euro by the end of next year, Stannard said. The median of 45 analysts’ forecasts compiled by Bloomberg is for the currency to trade at 83 pence by the end of 2009.

    While the ECB lowered the main refinancing rate to 2.5 percent this year, from a peak of 4.25 percent in July, the Bank of England, led by Governor Mervyn King, reduced its key rate five times, to 2 percent. The current level is the lowest since 1951, and down from 5.5 percent in January.

    Britain’s central bank will have to follow the Federal Reserve and Bank of Japan by cutting borrowing costs close to zero before the pound starts to recover, according to Neil Jones, head of European hedge-fund sales at Mizuho Capital Markets in London.

    ‘Prolonging the Inevitable’

    The yield on short sterling futures contracts expiring in March declined 65 basis points, or 0.65 percentage point, to 1.74 percent since the most-recent interest-rate cut Dec. 4, indicating increased bets on further reductions.

    “The quicker the BOE bites the bullet and cuts to zero the quicker the pound can start to recover,” Jones said. “They are just prolonging the inevitable.”

    Sterling may trade at parity with the euro in the coming weeks, he said.

    While a weaker pound may buoy manufacturers by making British goods more competitive overseas, the drop hasn’t yet shown up in export data as helping companies.

    The U.K. trade deficit widened to 7.75 billion pounds ($11.4 billion) in October from 7.36 billion pounds the previous month, the Office for National Statistics said Dec. 9. Imports fell 1.2 percent and exports dropped 3.4 percent.

    No Quick Rebound

    Auto output from British factories dropped 33 percent in November from a year earlier to 97,604 units, the Society of Motor Manufacturers and Traders said this month. Britain’s car industry usually produces about 1.7 million cars and trucks a year, accounting for 10 percent of the nation’s exports and earning 51 billion pounds in revenue. The industry employs 850,000 people and hundreds of supply firms. General Motors Corp., Ford Motor Co., Nissan Motor Co. Ltd. and Honda Motor Co. each maintain major factories in the U.K.

    Britain’s economy expanded every quarter since the period ended June 1992, when it contracted 0.4 percent. The contraction last quarter compares with negative 0.5 percent in the U.S. and growth of 0.6 percent in the euro-zone.

    There was no quick rebound the last time the pound weakened this much. In 1992, sterling fell 19 percent against the dollar as the Bank of England slashed its target rate to 6 percent from 10.5 percent between May 1992 and January 1993. The following year it depreciated another 2.18 percent, and took until 2007 for the currency to fully recover.

    Less Bearish

    In addition to rate cuts, Brown proposed a reduction in value added taxation to 15 percent from 17.5 percent to boost the economy. The International Monetary Fund’s top economist said last week the plan probably won’t encourage consumers to increase spending.

    “The temporary cut in VAT, which was adopted in the U.K., doesn’t seem to me to be a good idea,” the IMF’s Olivier Blanchard said in an interview with Le Monde newspaper. “A two- point reduction won’t be noticed by consumers as a real instigation to spend.”

    Investors began turning less bearish on the pound last month, according to a Merrill Lynch & Co. survey of investors published Nov. 20.

    The New York-based firm’s index tracking short positions against the pound among global debt and currency managers was at 45 in November, compared with 43 in October and 35 in September. A reading below 50 indicates investors are more bearish than bullish on the currency.

    Even if the pound drops to parity with the euro, it’s unlikely to keep falling, Bank of Tokyo-Mitsubishi Ltd. said.

    “It is increasingly likely that the current value of the pound fully discounts negative fundamentals,” Lee Hardman, a London-based currency strategist at Tokyo-Mitsubishi, wrote in a Dec. 23 note. “The pound will likely appreciate modestly on a trade-weighted basis through 2009.”

    http://www.bloomberg.com/apps/news?p...Hc8&refer=home

    #2
    Originally posted by Liability View Post
    How true this....Id be willing to say Atw will be proved wrong - we will recover in term of the Euro. Once the Euro appreciates how bad a state it is in the surge will be back on!
    I don't think we will see surge - it may go up before new budget is announce but once the markets learn what kind of deficit is going to be in the UK and how much Labour plans to borrow pound will be below euro IMO.

    It's not just sterling vs frank vs mark anymore - euro is a reserve currency now so it will be in big demand - pound on the other hand is a 2nd tier currency now, the only people who would want to buy it will be those who do trade with the UK but they will increasingly ask to trade in euros.

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      #3
      Originally posted by AtW View Post
      I don't think we will see surge - it may go up before new budget is announce but once the markets learn what kind of deficit is going to be in the UK and how much Labour plans to borrow pound will be below euro IMO.

      It's not just sterling vs frank vs mark anymore - euro is a reserve currency now so it will be in big demand - pound on the other hand is a 2nd tier currency now, the only people who would want to buy it will be those who do trade with the UK but they will increasingly ask to trade in euros.
      Lets see as the year progresses - I still dont think people will commit to the Euro and those in will move there reserves to other areas of the global economy. All depends on how bad [in true terms] the top 5 of the Euro's economies are. Judging from indicative information and reporting - its a heck of alot worse than the UK.

      Comment


        #4
        Originally posted by Liability View Post
        I still dont think people will commit to the Euro and those in will move there reserves to other areas of the global economy.
        It's already happened for big countries - Russia for example diversified a few years ago and keeps reserves 40% in euros 55% in dollars and I think 5% in sterling/yen (the latter is probably just for trade).

        Europe is very lucky that this crisis comes when they got single currency - this makes them fight it all together rather than in individual selfish states who can't see further their noses.

        Comment


          #5
          Originally posted by Liability View Post
          Lets see as the year progresses - I still dont think people will commit to the Euro and those in will move there reserves to other areas of the global economy. All depends on how bad [in true terms] the top 5 of the Euro's economies are. Judging from indicative information and reporting - its a heck of alot worse than the UK.
          Well, if atw says so, this means... that the pound will go up...

          That is unless you can find me a post where he said something right.
          I've seen much of the rest of the world. It is brutal and cruel and dark, Rome is the light.

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            #6
            Originally posted by Francko View Post
            That is unless you can find me a post where he said something right.
            I post something right using my other nick.

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