Simply take a view on a big economic announcement, say the Budget, and trade the relevant currency, say the pound, accordingly. Last week, traders believed the Budget’s borrowing and debt forecasts would be bad news for UK PLC, and sold the pound in anticipation.
It comes as no surprise, with a backdrop of £220 billion in government debt issues, this was the right trade to make. On 22 April, Alistair Darling revealed public sector net borrowing - how much the government owes the private sector each year - even worse than the City was expecting...
You can see from the chart below that the average City forecast (in blue) for public sector borrowing was in every year lower than the colossal debt burden Darling revealed last Wednesday (in black).
Worse than expected - Public sector net borrowing exceeds pre-budget forecasts
By Darling’s own projections, by 2013 public sector debt will hit 79% of GDP (i.e. the cumulative public debt up to 2013, including pre-existing debts). To put that in context, Brown once had a fiscal rule where no more than 40% of GDP could be in the "national debt" and the Maastricht Treaty defines countries with gross debt over 60% of GDP as an "excessive deficit".
We are approaching a level of debt that makes it tough for the UK to maintain its place as a leading economy of the world. We have a public sector anchor that will slow UK growth for years to come. These are, as the traders could have told you last week, yet more reasons to continue selling the pound.
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