More signs of Currency Wars emerge and some songs for #Indyref day in Scotland

18th September 2014 by The Harried House Hunter

Today is of course the day that Scotland decides whether it wants independence and the opportunity to have (one day) its own currency. Although for the moment its government seems set on an unchanged currency at least initially as it intends to continue to use the UK Pound. However as it does so we have seen signs of what have been called the “currency wars” flaring up again overnight.

The US Federal Reserve

The US central bank triggered much of the moves with its policy announcement last night which continued its policy of “tapering” or reducing its Quantitative Easing purchases of debt.  As of next month it’s purchases will be some US $10 billion per month lower and it will be buying US $5 billion of mortgage-backed securities and US $10 billion of Treasury Bonds per month. As you can see it will not be long before it is over as a policy and the next policy meeting is a likely date. However some care if needed as whilst the flow of purchases is drying up the scale or stock of them is increasing as the balance sheet of the US Federal Reserve has risen to US $4.42 trillion now.

The issue over a prospective interest-rate rise has got tied up over defining what the phrase “considerable time” actually means. If you have seen it being debated that is why. This time around Janet Yellen did not repeat her past mistake of actually giving a timespan so it is left hanging in the air. Interest-rate rises are expected for 2015 but of course reality can disappoint!

The US Dollar

This has recently been following the theories of conventional economics recently. The latter phase of its reductions in the rate of stimulus have been accompanied by a rise in the value of the US Dollar on the foreign exchanges. This was reinforced by the market reaction last night as the US Dollar surged.

If we look back the stronger dollar phase began as July opened and it moved through the 80 level on the US Dollar Index. At one point this morning it had risen to 84.7 and it is now at 84.5. So a rise of just over 6% in just under 3 months is what we have seen. As the US Dollar is the world’s reserve currency some of the impact of this is transferred abroad as for example other countries have to pay more for commodities such as oil which are generally priced in US Dollar terms. Buying US goods will be more expensive and for US importers buying foreign goods will be cheaper. As the US runs a substantial trade deficit already we wait to see what impact this has although in the short-term the reverse J-Curve may even improve the deficit slightly.

The UK Pound £

The speculation recently has been about a possible sterling crisis and of course there may well be some excitement in currency markets overnight should Scotland vote Yes. However somewhat typicially the media have missed the strength of the UK Pound against currencies other than the US Dollar. After a drop or two we have rebounded against the Euro to 1.265 which is about as high as we have been in recent years. We have blasted higher to break ground not seen for many years against the Japanese Yen as we reach the giddy heights of 177 Yen being required to purchase a single UK Pound! This is the highest we have been since the 2007/08 depreciation of the UK Pound.

So actually on the day of the independence vote the UK Pound is doing rather well, although of course later the “all bets are off” cry from the film Snatch may be deployed.

The Japanese Yen

Overnight the image of catching the Japanese Yen is the equivalent of trying to catch a falling piano. I discussed a while back the significance of the 101.4 level for technical analysts and now we find that it takes 108.7 Japanese Yen to buy a single US Dollar. So we know which way it broke! It is not only the UK Pound breaking relatively new ground against the Yen.

If we look at the theory we see that the expansionary policy of the Bank of Japan is meeting the reduced expansionism of the US Federal Reserve so a tick in the box for current events. Also hints of future US interest-rate rises are being compared to this.

 Japan’s one-year bill yield extended its decline below zero percent and set a record low………The yield dropped to minus 0.006 percent today, Japan Bond Trading Co. said. It was negative 0.005 percent yesterday.

Now whilst you need a microscope to detect the amount it is significant that the Bank of Japan is operating at negative interest-rates and yields. Previously it has resisted this and we wait to see how far it may now be willing to go in this direction.

However news overnight was not entirely positive to say the least for this experiment. Japan continues to struggle with its trade deficit according to the August data with no real sign of exports responding to the Yen’s fall. Also the Governor of the Bank of Japan was warned that inflation has costs rather than being a magic solution to Japan’s problems. From Bloomberg.

Business leaders in Western Japan warned central bank chief Haruhiko Kuroda that the yen’s slide to a six-year low is boosting costs of imported raw materials and fuel and may spell trouble for the economy.

Companies in the industrial city of Osaka report that their profit margins are deteriorating as they can’t pass along the higher costs even as sales rise,

The Euro

This has been steadily depreciating recently as the European Central Bank deploys all sorts of easing efforts such as negative interest-rates and various other cunning plans. Today’s cunning plan which is the first TLTRO seems to have been something of a damp squib as only 82.6 billion Euros were allocated. It speaks for itself if the banking system can tunr down funds being offered at only 0.15%. It also is a sign of the times that 82.6 billion can be accompanied by the word “only”.

However the Euro has fallen against the strong US Dollar to the 1.29 area and indeed below overnight. The ECB will welcome this on two counts. Firstly it is currently rather keen on seeing some inflation in the Euro area and secondly it will be hoping for an economic boost. On a more minor scale it will be happy that the Euro remains relatively weak versus the UK Pound.

However we have a genuine currency wars clash when we move onto considering the moves of the Euro versus the Japanese Yen. For a while the Euro was falling but the latest plummet from the Yen has taken it back to the 140 level. What do they say at boxing matches? Ah yes, seconds out……..

The magic of 18

There are two possible issues here either 18 is a magic number or whoever bought the boardroom table for the ECB was not a fan of future possible expansion. Whatever the reason there are consequences as for example Spain will not be voting in January. However minds are already mulling this bit (h/t @econhedge ).

ECB SAYS BUNDESBANK CHIEF WEIDMANN TO SIT OUT MAY & OCTOBER 2015 MEETINGS; AND MARCH, AUGUST 2016 MEETINGS

What could go wrong?

Never say that the European Union does not help us!

From today’s UK retail sales report.

Feedback from retailers suggested that sales were increased as consumers sought to buy high powered vacuum cleaners before the EU energy saving regulation came into force at the end of August.

Comment

There is much to consider in the recent currency moves and for brevity I have missed out today’s announcement by the Swiss National Bank. Along this road you may note something I have long both predicted and feared which is the spread of negative interest-rates. It will be a difficult environment for all especially a new currency which may well be part of the reason that Scotland wishes to remain in the relative comfort blanket of the UK Pound.

As we await news today I have some songs for you for #Indyref day and some suggestions have been sent already on Twitter.

When Will I See You Again? By The Three Degrees

Should I Stay Or Should I Go? By  The Clash

Don’t Leave Me This Way by Thelma Houston (and also by The Communards)

Also here is a song for whatever the result may be…

We Can Work It Out by The Beatles

For a No vote

Better The Devil You Know by Kylie Minogue

If you leave me now by Chicago

Breaking Up Is Hard To Do by Neil Sedaka

For a Yes vote

Set You Free by N-Trance

Never Going Back Again by Fleetwood Mac

Freedom by George Michael

For a tight vote

Borderline by Madonna

Other suggestions are welcome.

 

 

 

 

 

 

 

 

26 thoughts on “More signs of Currency Wars emerge and some songs for #Indyref day in Scotland”

  1. dutch says:

    We have a dream by the Scottish world cup team 1982

    https://www.youtube.com/watch?v=ThWQcJqeE88

    1. Anonymous says:

      Hi Dutch

      Thanks I am not sure how that one got missed out. Perhaps under crimes to music! Do teams still do a song as I cannot remember any recent ones?

      1. Andy Zarse says:

        Don’t forget the World Cup 1978;
        We’re on the march we’re Alec’s Army,
        We’re gonna win the plebiscite
        And we’ll really shake’em up
        When we win the oil…

        1. Bones says:

          If the Yes team win then David Cameron may be singing a bit of Marianne Faithfull – Why D’ya Do It?

  2. dutch says:

    for the no camp also from 82 Dream On by Nazareth
    https://www.youtube.com/watch?v=xdtv1asgcZ8
    ‘thos its hard to tell,
    that you’re foolin yourself,
    dream on.’

    I’ll get my coat

    1. Anonymous says:

      Thank you Dutch.

  3. Anonymous says:

    An independent Scotland could quickly move to a separate currency which they peg to GBP. They already issue their own banknotes.

    This gives a timing advantage should they find the BOE interest rates and/or exchange rates unsuitable for Scotland.

    1. Anonymous says:

      Hi ExpatInBG

      I agree that this would be a much better and in particular a more flexible choice than just simply adopting the UK Pound. The whole currency issue seems to be an after thought. It would be reasonable to think that the previous plan of joining an “arc of prosperity” in the Euro would have been taken as a warning to think deeply about this. But apparently not.

    2. Noo 2 Economics says:

      If they used a peg this would determine their interest rates dependent upon what the BOE was doing so I don’t see the advantage over simply staying with the GBP? Albeit I don’t believe staying with the GBP to be a good medium or long term solution for Scotland if it votes yes.

      1. Anonymous says:

        It took the Eurozone years to issue Euro banknotes. Greece would have a massive task issuing new drachma notes, which could not be done overnight.

        The drawback of a peg is that Scotland might pay higher interest rates. The Bulgarian Lev is pegged to the Euro, Lev borrowers pay higher interest.

        But I think the benefits outweigh the risk of higher interest rates. A Scottish govt could dissolve an inappropraite peg overnight. The British leaders have stated they will not have a currency union without political union – Salmond is either in denial or being deliberately dishonest. The BOE points out that currency union without political union has caused problems in Greece.

        I suggest independence also means separation from the Bank of England.

        Zimbabwe use USD, Kosovo use Euro. Would Scotland want to join the club “we don’t have our own currency because we’re too incompetent, corrupt etc” ?

      2. Anonymous says:

        Just seen the results.

        The UK could devolve much power similar to the USA. UK budget for defence, foreign office etc with low federal taxes to fund it at equal rates across England, NI, Scotland & Wales. Each country can then set local tax rates for policing, education, health, transport etc as the voters see fit.

        We need to answer the West Lothian question, preferably without adding extra politicians and costs.

        1. Eric says:

          Right. All we have to decide now is the location for the English Assembly. Can I register my vote for York.
          I honestly think we have taken the first step to Federalisation. If there’s one thing Westminster should understand it is that things have to change. Whole sections of the population are p’d off with them about the mess they created and can’t clear up.
          But I’m very happy the UK has not been abandoned.

          1. Anonymous says:

            A new assembly in York – that adds extra politicians and costs. :-(

          2. Eric says:

            Oh no. Dozens of ’em in Westminster have to go. They had their chance. Part of the problem is the current system is too Capital- centric.

            Think of the quality of the London – York rail service! :-)

            If they can’t do it cheaper, better, with fewer people then they will have failed again.

          3. Anonymous says:

            UK democracy has it’s flaws. First Past the Post disenfranchises too many voters. Referendums are too infrequent – allowing party whips to impose laws.

            But it isn’t all wrong. UK MPs are much cheaper than Eurucrats. UK ranks 14th by transparency Intl, so it is in the top 10% in the world. By comparison, Spain ranks 40th and refuses to permit independence referendums.

            So I suggest the best way forward is evolution of the UK system(s). I favour decisions Swiss style by referendum.

            Moving Westminister to York imposes relocation costs without changing the MPs.

          4. Eric says:

            Taking my tongue out of my cheek for a moment – suggesting York is a means of asking for radical change. I don’t really expect any relocation. But if we don’t have either – an English assembly, or power devolved to the Regions or Counties (Swiss style!) then I fear nothing much will change of decades.

          5. Anonymous says:

            Hi Guys

            I just wanted to add that whilst a decentralisation of powers from Westminster would be welcome across the UK (including England) we need to do so in a way that reduces rather than creates political jobs. I have long thought that as political power has gone to Europe in one direction and to Scotland,Wales and NI that the numbers of MPs should be reduced accordingly.

            Instead the plan to reduce 650 MPs to 600 seems to have been redacted and the number of Lords is approaching bubble status!

        2. Noo 2 Economics says:

          This is really just to let you know I do read replies to my comments in case you were wondering about my silence.

          I mostly agree with your USA example (being a US citizen myself I tend to be partisan when the US is mentioned) but would add that each “country” must have it’s own Central Bank linked to and with a representative on the big “Federated Central Bank” as the American States and EZ do, otherwise it wouldn’t work because the markets (in which I am a participant) would doubt the resolve of the one Central Bank to bail out the individual countries in times of stress. I’m ending here as this is getting too close to politics for my liking.

  4. Eric says:

    Hi Shaun,
    I’m surprised you missed the chance for a little Rick Rolling – Together Forever

    1. Anonymous says:

      Hi Eric

      Okay let me get in the Rick Rolling spirit. What about this?

      http://www.youtube.com/watch?v=dQw4w9WgXcQ

      The song Never Gonna Give You Up has lasted better than the accompanying video I think.

  5. Zummerzetman says:

    How about : Let’s stick together-Bryan Ferry or
    I’m sticking with you-Velvet Underground?

    1. Anonymous says:

      Hi Zummerzetman

      Thank you, having seen Roxy Music back in the day certainly a couple of decades ago I can respond by wondering if the Yes camp think they are building an Avalon?

  6. Zummerzetman says:

    If they don’t get their Avalon, they might end up wishing for More Than This.

    1. Anonymous says:

      Hi therrawbuzzin

      Sadly there were more than a few candidates for that song title during the overall campaign. Do you have anyone particular in mind?

      1. therrawbuzzin says:

        The whole Westminster establishment was my target, and so many of the lyrics really fit.
        Thought of a joke whilst shopping today, it’s not relevant, but I’ll share it anyway<
        Wanted to by a book of free poetry at Morrison's today, but got to the checkout and it wouldn't scan.
        Sorry, still dreadfully disappointed.

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