Article / 22 January 2013 at 13:44 GMT

The UK’s ultimate weapon in the currency wars

Chairman, Saxo Capital Markets UK Limited / Saxo Bank
United Kingdom

I think it’s fair to say we’re now in the midst of a full-blown currency war. The US can’t complain, as there’s little doubt that the US dollar’s persistent weakness (even in the face of a currency as laden with problems as the euro - I ask you!) has been a welcome but obviously unheralded by-product of the Federal Reserve’s quantitative easing shenanigans; the Japanese are now overtly adopting currency debasement tactics, as have the canny Swiss, whose central bank will shortly be sitting on very nice profits, thank you.

Given the way the European Centeral Bank has been happy to abandon its Bundesbank heritage thus far, it’s highly likely we’ll see much more aggressive, unsterilised quantitative easing from that quarter as the misery of austerity truly bites this year in southern Europe. There’ll be some story to excuse it. It’ll be given a fancy acronym, but if it smells like QE, and looks like QE, it is QE.

So what about us poor Brits? We’re also destined for ‘austerity infinite’, and the Old Lady now owns so much of the gilt market that serious questions are being asked around the monetary policy committee table, meaning that increasing the dose may be tricky. So how can the UK keep its currency weak, with a pea-shooter in our holster, compared to the other kids on the block?

Here’s a thought from left-field. As the year goes on and the British economy wallows in triple-dip recession, thrown into stark relief by what I expect to be a surprisingly robust US recovery, the next general election will start to loom large in the frontal lobes of an increasingly worried conservative leadership - they know, ‘it’s the economy, stupid’. Desperate times call for desperate measures, and, increasingly, credible economic voices have been heard recently suggesting that, whilst independent central banks may have been a great thing when inflation was the real enemy, now that deflation is a more imminent threat, maybe having monetary and fiscal policy under the same roof makes sense. Even the UK’s persistently sticky inflation rate will look less worrisome by the end of 2013.

To take the Bank of England back under the Chancellor’s control would be a radical step, but imagine a world in which Japan’s Prime Minister Abe’s pressure on the Bank of Japan to ease dramatically is successful and the Japanese economy looks like it’s bouncing for the first time in twenty years, come our Autumn, then British spin doctors may be in full flow, advocating a return to Treasury control over the Bank - all the man in the street cares about is economic success and fretting about central bank independence may seem hopelessly arcane by then. Now THAT would get sterling down.

Incoming Governor Carney may not find all of this so alien - before recent events in Japan, the Bank of Canada has notoriously been the least independent of the major developed economy central banks. Was this maybe also part of his famous deal with the Chancellor? 

Follow Nick Beecroft on Twitter @Nick_Beecroft

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Tradingfloor.com permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Tradingfloor.com and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Tradingfloor.com is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Tradingfloor.com or as a result of the use of the Tradingfloor.com. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. When trading through Tradingfloor.com your contracting Saxo Bank Group entity will be the counterparty to any trading entered into by you. Tradingfloor.com does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws. Please read our disclaimers:
- Notification on Non-Independent Invetment Research
- Full disclaimer

Show latest activity
Check your inbox for a mail from us to fully activate your profile. No mail? Have us re-send your verification mail