Further Pound Sterling Crashes On The Cards

Further Sterling Crashes On The Cards

Date 27/10/2008

Fleet Street Letter

Theo Casey

The UK is caught in an economic death spiral.

Fear of recession causes asset sales causes more fear of recession causes more asset sales and so on ad infinitum.

The downturn has done us one favour, however. It has speeded up the appreciation of our play on the Euro. What’s more, the Central Bank and Government seem to be doing all they can to force the pound ever lower.

Mervyn King in the last week’s MPC minutes:

"The UK banking sector has been relying on external capital flows to finance its lending. Those external inflows have fallen sharply.

"Unless they are replaced by other forms of external finance, the adjustments in the trade deficit and exchange rate need to be larger and faster than would otherwise have occurred."

Translation: The pound must fall.

And, my goodness, the currency markets certainly took their cue.

Our currency has been in freefall since the Governor sounded this latest bleak warning on the state of our economy. This fall has resulted in good returns for our Euro trade.

The Euro has many long-term advantages over the pound. One is in trade. There is a lot of intra-economy trade within the Eurozone. Goods are bought and sold in Euros without another currency entering the equation. This makes it a lot less likely that the currency area will run up a huge trade deficit.

The kind of deficit that King himself acknowledges the country now needs to deal with.

Further falls are on the cards, and the next set of rate cuts could spur them on.

Expect another rate cut

High interest rates are good for keeping up a currency’s value, unfortunately the UK cannot keep up the act.

I expect The Bank of England will make another 50 point cut in interest rates.

And again, I expect it to come sooner rather than later. If not at the Bank’s next official hearing on the 6 November, then before. One of my sources reckons we should expect another global coordinated rate cut alongside the US, which has its official interest rate meeting this week.

I stress that global rate cuts are just City hearsay at the moment, but it does makes sense...

There’s not much point clinging onto their monthly meeting tradition when matters are as dire as they are now. Gordon Brown acknowledged this in what is a not-too subtle hint to The Bank of England:

"Now inflation is coming down over the next few months, it gives scope to monetary authorities, including the Bank of England, round the world to make a decision about interest rates.

"Over the world, you will see people responding to this lower inflation.",

It’s likely to be another 0.5%, though in the middle of such unprecedented volatility, nobody can say that with any degree of certainty. It could be more, it can’t be less and it must come soon.

How can we prepare?

First the good news, our hedge is doing what it is supposed to do.

It has been rising while the stock markets have been falling.

And it’s not too late to take advantage of this investment. You might have missed one big wave, but there are more to come. As a price taker and net importer, the pound will continue to struggle.

The currency has lost its appeal as a reserve currency and as a high yielder. Neither the currency hoarders or the carry traders want anything to do with it... Recession is a massive turnoff for the buy and hold crowd.

So we have an opportunity is to profit from the currency’s downfall, and you can do that with our Euro recommendation.

It’s only available to our subscribers in the latest issue of The Fleet Street Letter.

If you’d like to get this latest recommendation, you can do so right now, by joining up for a no-obligation three-month trial to. Click here to find out more about The Fleet Street Letter and we’ll send you our latest issue in an email by return.

Best wishes,

Theo Casey
Investment Director
The Fleet Street Letter

P.S. If you enjoyed this article then we encourage you to sign up for The Fleet Street Letter. Get contrarian, cutting-edge analysis for sensible, long-term investments that secure you high growth and healthy dividends.

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