GBPUSD was 2.00 in 2007, 1.00 in 2017?

Non-Independent Investment Research

Today's decision  by the Bank of England to leave interest rates unchanged could be an excellent short in GBPUSD as we see both the outgoing governor, Mervyn King, and his replacement, Mark Carney, supporting a monetary regime which in nature is more accommodative.

The Financial Times piece today: Osborne to hand Carney more powers talks about some major changes to the fundamental macro prudential framework as the market loves to call it:

The budget (March 20) renews the inflation targeting and gives both George Osborne and Mr Carney the remit to adjust the two percent inflation target. This might be done either through extending the time by which BoE needs to bring it below the target or altogether change the mandate from a single indicator, inflation, to include employment and even cash spending in the economy.

In other words: George Osborne and the UK government will not be seen to shy away from their commitment to fiscal conservatism and monetary activism - which is another way of saying: Weaker GBP, much weaker. 

Source: Bloomberg LLP

The above chart contains several interesting lessons. GBPUSD collapsed twice: in 1992 during the ERM crisis (when I was a young trader), and then again in 2008 during the financial crisis. The stop-go of the UK economy is widely explained by the policymakers' ability to devalue their own currency. I do not see this time being any different, except for the fact that the whole world is playing the same game and this is increasing the odds of volatility and outright currency war.

Big macro shifts come mainly from policy mistakes and too much macro. The path the UK Treasury and Bank of England is going down will have an end goal of a much weaker GBP to replace the lack of mobility in the economy and a financial sector which, in the words of Governor King, remains underfunded. Solution? Again a weaker GBP.

I will write long piece on this but will add a one-month 1.4850 strike long GBP put USD call my Alpha portfolio, playing on the gradual change of monetary policy towards easier for longer.

                                                                                                                                                                                       

 

 

Med venlig hilsen  |  Best regards
Steen Jakobsen  |  Chief Economist

 

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