Yesterday, sterling was the loser in the G10 universe once again and analysts don’t think that will come as a surprise as we see expansionary fiscal policy everywhere. However, there is a difference if the ONS publishes British budget data and announces a surprise rise in debt.
According to, Ulrich Leuchtmann, Head of FX and Commodity Research at Commerzbank, there are many ways of reducing high levels of government debt: “Austerity is one option, but in view of struggling social care and health systems in the UK that is a particularly painful exercise; or it is possible to raise revenue through economic growth. But the UK outlook on that front is a bit dire too.”
Are Brexiteer right?
“In the end, I am not interested in whether the Brexiteers might be correct in the long term (something that I have to admit I find very difficult to imagine). The only thing is: at present it does not look as if they will be. And at the moment it does not look as if this impression will change any time soon.”
And that is why gilts (and with them other UK investments as a whole, and as a result also Sterling) are particularly unattractive at present.
Pound is weak also against yen
The GBP/JPY has struggled to find any significant support following the Bank of Japan’s decision to change its yield curve policy, a move which many believe heralds the start of the end of its extra-ordinary loose monetary policy. Meanwhile, the pound has struggled ever since the Bank of England’s rate decision last week was perceived to be dovish by markets.
The split among the MPC gave rise to speculation that the rate increases might stop sooner than expected as high inflation in the UK continues to hurt pockets of consumers and weigh on business activity. The ongoing industrial actions across the UK are likely to hurt the economy further.
As a result, the GBP/JPY pair has been falling continually in recent days, with minimal bounced. It did find some support around 158.60, but it has since struggled to hold its own above the key 160 handle. At the time of writing, it was still struggle and so a move below this week’s low at 158.60 looked increasingly likely.
If that level breaks and we hold below its then there is little further support until around the 157.00 area. But given the surprise policy change from the BoJ, the GBP/JPY could fall a lot lower over time. So, it is definitely one to keep a close eye on.
Also CNY in focus for government rules on Covid-19
The Chinese government has repeatedly vowed to support the development of private enterprises in this week’s meetings following the Central Economic Work Conference last week. This includes efforts to support “platform” internet companies that have been under regulatory crackdowns over the past two years.
A key policy motive is to restore business confidence which has been battered by three years of zero Covid. This also signals that regulatory tightening has probably peaked and crackdowns will stop for next year.
Meanwhile, Covid surge in China has continued to hammer the economy. The public health system is under immense strain following the recent Covid policy U-turn from zero Covid. Weak consumption and supply chain disruptions will likely persist well into Q1 2023 as the country braces for the current outbreak and expected widespread infections after the Chinese New Year holidays in January.
How will the PBoC act to help CNY?
To support the economy, the PBoC will provide ample liquidity, push for a gradual decline in corporate financing costs, and support private corporate bond financing and SME financing. This suggests modest interest rate cuts can be expected.
The central bank also said it will optimize expectation management to maintain CNY exchange rates at a “reasonable equilibrium level”. USD-CNY traded in the 6.95-6.99 range in much of December, after reaching 7.30 in early-November, the highest since 2007. But the CNY could weaken again should the Covid situation worsen sharply before any improvement in sight.