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Outrageous Claims and Sterling battles

Posted 12-19-2008 at 08:09 AM by Cableboy
Do you watch CNBC? I find it useful to get some background to the markets. Yesterday they had a markets strategist from Saxo Bank on to give some views about the market. Now, given that this year has been one with some pretty amazing events, which would have been called outrageous prophecies if they had been made in 2007, he has come out with claims for 2009, which also sound dramatically outrageous.

The first one is that China will have a growth rate of 0%. OK, in a western country we could live with that, but in China! Here is a country that has been having double-digit growth in recent years, a fact that has kept commodity prices high. The whole stability of the society is built on high growth and the social unrest that 0% growth will bring could cause problems. 25 million Chinese move to the big cities on the Easter seaboard every year and these have been absorbed into the factories that produce goods for the rest of the world. Now that demand for goods has dried up, and so there is a question of what to do about the migration plus the millions that have lost their jobs. I certainly hope the Chinese Government has a contingency plan!

In any case, commodity prices will fall. The demand has gone and commodity stockpiles are being reduced.

The most interesting outrageous claim for 2009 from a forex perspective, is the one that Italy will leave the ERM, that is, get out of the Euro. I have always considered the Euro to be a flawed project. Why? Because their is no pan-European treasury function. Whatdoes that mean? Well, look at the United Sates: There is one currency and if it goes badly, economically, in one part of the country, funds may be allocated from the wealthier areas to help ease the situation. This has happened several times before. However, if there is a downturn in one part of Europe, there is not the economic help available to ease the situation. It is left to the local government to spend money and thus raise their budget deficits. For this, they are penalized. In addition, a country with a problem suffers high unemployment. The cannot devalue their way out of their misery as does Sweden, and to a degree the United Kingdom.

In a country like Italy, with a very populist President, social unrest caused by high unemployment is not an option. Therefore Silvio Berlusconi may well opt to leave the Euro.

What effect will that have on the rest of Europe? I don't think the Euro will survive. The credibility will be gone. What can replace it? In Scandinavia, pre-1919, there was a common Krone. Because of the First World War, there was a demetallisation of the Swedish component, which meant that you could take Danish Krone to Sweden, melt the coins down, sell the silver and return with a lot more Swedish krone than you took to Sweden. Nice carousel!

The result was that the three countries, Denmark, Norway and Sweden, continued each with its own currency, the Krone, which continues to this day. Only the value is different.

I think this will happen with the Euro. There will be an Italian Euro, a German Euro, French Euro, etc. Great news for forex traders! Crap news for the EU, but probably good news for Germany and the smaller EU countries. The loser? Why, France, of course!

Another claim is that the Australian dollar will slump against the Yen. Australia has an economy that is very dependent on the demand for commodities, especially from Asia. So normally, there is a link between the Yen and the Aussie. However, if commodity prices slump and the Yen remains a 'flight to quality' currency. The Japanese have dropped their interest rates to 0.1%. Will that stoop people buying Yen? I don't think so. The Aussie/yen is at this time 61, and Saxo predict 40. That is quite a move. Surely worth buying some Aussie/Yen puts?

Today's virtual market session is again cable (GBP/USD). Why? It is exciting! When I was in the interbank market, I hated cable, because it moved without rhyme or reason. The market was dominated by Citibank and Barclays with the occasional hammering by West LB and others. Of course later, George Soros and his Qantum fund plus other hedge funds became dominant factors. Some central banks had their moments too, such as the Malaysian National Bank (Bank Negara), until they got it badly wrong! At one stage, his business kept the whole Singapore forex market alive. There was an interesting 'final battle' in 1992, when Bank Negara defended the British Pound against George Soros, causing BNM to lose some $4 billion.

It makes me wonder who are the big players right now. Someone is making/losing a fortune, that's for sure!
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