LONDON, February 21, 2013 /PRNewswire/ --
Britain has returned as a key player in the currency wars after the British Pound tumbled yesterday, hitting an eight month low against the US Dollar, and its lowest level against the Euro in more than a year.
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Nick Beecroft, Senior Analyst at Saxo Capital Markets, says Cable may have entered a "perfect storm" after minutes from the Bank of England's latest Monetary Policy Committee meeting revealed that its governor, Mervyn King, joined two other members in voting for a further round of quantitative easing - although he ultimately failed to secure a majority.
"It was bad enough that the Bank of England has made it quite clear that it is now remarkably relaxed about inflation, with the Governor wanting to print more money and happy to wait three years or more for inflation to return to its 2% target, but also the Chancellor continues to pursue austerity, creating that lethal cocktail for any currency - tight fiscal and loose monetary policies," Nick Beecroft said.
However, Nick Beecroft warns the BOE's power to devalue sterling is restrained.
"When the UK economy hit the doldrums in the wake of the credit crunch in 2008, authorities were left with two main weapons to fight their way out of recession: low interest rates and a weaker sterling to help boost exports. Given that, historically, low rates have failed to boost consumer spending by alleviating households' debt burden, UK policy makers will be tempted to manipulate their currency."
In "Currency wars: has Britain entered the fray?", the sixth e-book in Saxo Capital Markets' FX Debates Series, Saxo examines the potency of Britain's anti-recessionary ammunition and whether UK policy makers will be able resist the temptation to manipulate their currency.
Hopes for an exports-led recovery
George Osborne revealed in the 2012 budget that he had hopes to increase the value of UK exports to £1tn by the end of the decade to boost growth. However, amid tough competition and signs other countries may resort to currency manipulation to boost their own exports, his vision for a British manufacturing renaissance may be stymied if the pound's value either rises, or does not fall as quickly or steeply as the currencies of Britain's main trading partners.
Nick Beecroft comments: "Weakening sterling is the easiest, least politically sensitive policy lever still left to the Chancellor, at least domestically, so why not pull it? A weaker currency would offer the double whammy of boosting exports and help rebalance the British economy, as demand needs to shift more towards exports and rely less on domestic consumption."
Recently, plans to revive the manufacturing industry had been derailed by sterling's performance against the currency of its main trading partner - the euro.
Explains Beecroft: "Capital flight from the continent's debt storm favoured the pound against the single currency, making UK goods less competitive. The manufacturing industry was not the only victim; the strong pound of the last few years has also driven visitors away from the UK, a real blow for the local tourism industry."
Britain's arsenal to devalue the pound is limited
Saxo says that the tools available to the UK to depreciate its currency are limited, with quantitative easing being the most obvious instrument, although authorities may not come to admit it.
Nick Beecroft comments: "When asked about the perceived potential benefits of QE, central bankers of the US, UK and the Eurozone will wax lyrical about some combination of improved monetary transmission, improved sentiment through higher asset prices, cheaper government bond rates, leading to lower mortgage rates and project discount rates, and fear of inflation which promotes near term consumption, but the one benefit that dare not speak its name is currency debasement. We'll never hear an explicit admission from any of those central banks, that a major corollary benefit of their QE programme is a decline in the value of their currency. That would be tantamount to a declaration of economic war - a trade war - such as the one which so damagingly extended and deepened the 1930's Depression.
"The trouble is that, with the political uncertainty about the future of the UK's relationship with the EU hampering investments and British export performances since 2000 being the worst among the G20 nations, achieving economic growth will be difficult. The question is: how long will the BOE be able to keep its powder dry and refrain from currency devaluation."
"Currency wars: has Britain entered the fray?" is the sixth part of Saxo's e-book, #FXdebates - Trading Insights from our Top Analysts.
On March 13, 2013 Saxo will host an event, in collaboration with Bloomberg LINK, focusing on the outlook for FX in 2013 and beyond. For more information please see: http://uk.saxomarkets.com/fxdebates.
Follow the debates via twitter: https://twitter.com/SaxoMarketsUK; Hashtag: #FXdebates
About Saxo Capital Markets
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