Currency Conundrum
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Hi all, this week has seen some fascinating financial news; especially regarding the UK and its bold fiscal policy approach in its pursuit of increasing economic growth. We also delve into Putin’s latest measures in escalating the war in Ukraine and some positive news regarding climate change. Enjoy!
UK Currency gets a Pounding
The value of the pound sterling has been decreasing rapidly relative to the US dollar, especially over the past several months. This has been due to the culmination of highly salient factors both in terms of the relevant strength of the dollar and the weakness of the pound sterling.
The political instability and lack of integrity displayed by the conservative party, concerns regarding the new Prime Minister Liz Truss’ economic and energy policies, and the high interest rates of the US dollar, have all resulted in the US Dollar becoming an inherently stronger currency and the pound a feebler one.
The £45 billion debt-financed tax-cutting package has been the most recent of this multifaceted predicament, seeing the pound plummet below $1.09 (the lowest it has been in 37 years). The rationale behind this package is that tax reductions for the highest earners will facilitate more aggressive economic growth.
Angst and concern regarding this package are ubiquitous, which I feel is epitomised through the words of former US Treasury secretary, Larry Summers, feeling that ‘the UK is behaving a bit like an emerging market turning itself into a submerging market.’ He feels that in years to come we will reflect on Britain ‘having pursued the worst macroeconomic policies of any major country in a long time.’
GBP/USD, Source: Bloomberg
Bonds Bombing Out
In correspondence with the announcement of the tax-cutting package which will be financed through debt, it is expected that a vast amount of this financing will be through bonds. This, coupled with the Bank of England increasing interest rates; which are expected to continue in an even more aggressive vein in the near-term future have resulted in mass sell-offs in UK bonds. In an attempt for the Bank of England to minimise its balance sheet, it announced that it would begin selling gilts it holds next month as a result of previous bond-buying programmes.
Investors have lost some confidence in UK’s fiscal strategy, in what many have felt is a reckless economic gamble in a ‘go big or go home’ approach. Many have also criticised the ‘mini budget’ as a plan to help the rich disguised as a plan to save the economy. The success of this strategy could see if confidence in the UK government’s fiscal approach is reinstated or lost altogether.
Tall Tensions in Ukraine
Cast your mind back to February 2022 when Vladimir Putin launched his invasion of Ukraine. He promised the people of Russia that only professional military personnel would be deployed. However, earlier this Putin announced a mobilisation that could see up to 1 million male Russian citizens being conscripted to fight in the war within the coming months, with the punishment for disobeying these orders being imprisonment. In correspondence with the escalation of the war, Putin also declared that he would defend Russian-occupied districts of Ukraine with nuclear weapons in an attempt to instigate a comeback in which the odds are continually being stacked against him.
Although many political correspondents don’t believe that either of these declarations will have a material impact on the war in Ukraine, there is augmented potential jeopardy of NATO and Russia locking horns in conflict. It is speculated that Putin is hoping that western aid and interest will dwindle after the energy war that Russia has launched against the west. The current widespread cost-of-living crisis has been primarily driven by increased energy prices. Energy price fluctuations in the coming months will be crucial, as we enter into the colder winter months. It could dictate the west’s economic capacity to continue their aid of Ukraine’s counter-charge against Putin and Russia.
Good News (For Once)
In a week with a lack of positive and uplifting news, we can take solace from developments in climate change recently. There was more good news following on from the founder of outdoor apparel company Patagonia, Yvon Chouinard, his wife, and their two adult children irrevocably transferring their ownership to a set of trusts and non-profit organizations to combat climate change. The US Senate ratified a historic global pact to phase out potent polluting greenhouse gases and the density of harmful chemicals damaging the ozone layer has plummeted by 50% since 1980 levels. Scientists have projected that the hole in the Ozone will close over completely by 2070 if improvements continue at this rate!
Thanks for reading, hope you enjoyed my first Market Wrap!
Oliver Guette
Disclaimer
This communication is for informational and educational purposes only and should not be taken nor used as investment advice, as a personal recommendation, or solicitation to buy or sell any financial instrument. This material has been prepared without considering any particular recipient’s investment objectives or financial situation and has not been prepared in accordance with the legal and regulatory requirements to promote independent research. Any references to past or future performance of a financial instrument, index or structured product are not, and should not be taken as, a reliable indicator of future performance. I assume no liability as to the accuracy or completeness of the content of this publication.