"Sterling falls on Brexit fears"

Said all the headlines last week. The BBC goes with Pound hits lowest level against dollar since 2009.

As per usual it is a load of flummery. I've done some charts showing each currency against a basket of other major currencies (the vertical scale is arbitrary, the long run average for each is about 1).

It is true that GBP has fallen again recently, but it's still well above its low point of 2011:


Here's the chart for EUR for the same period, in relative terms, EUR has fallen against GBP over the five years, from 90p at the peak, down to 70p and then a recent uptick to nearly 80p:


If anything, it is USD which recovered, from a low of 62p (which happens to be the average since 1990) up to 72p today:

Japanese Yen Intervention

Steve_L did a post on AUD/USD, which reminded me that six weeks ago I remarked that JPY looks a bit on the high side as well.

The BoJ finally intervened in the currency markets a day or so ago, and allegedly pushed down the value of JPY by around 5 cents against USD.

1. If we look at JPY against a basket of currencies, yesterday's move does not look spectacular on a five-year chart, if anything, JPY had been drifting down since my earlier post, from 1.20 to 1.17 last Sunday, it's about 1.14 as at today (click to enlarge):2. The question is always: does the BoJ time its interventions to reinforce an existing downward move or do insiders cash in on a planned intervention, thus precipitating the downward move?

3. The other question is, how dumb are some people at the BBC? They mentioned it on Radio 4 yesterday morning, and the reporter announced quite earnestly that the BoJ has got lots of foreign currency reserves which it can spend to intervene in the currency markets. EPIC FAIL! A central bank only needs foreign currency reserves if it wants to prop up its own currency (see Black Wednesday) because you have to sell those reserves and buy your own currency; if a central bank wants to depress the value of its own currency, it does this by selling its own currency (which is can print at will) and using it to buy foreign currencies.

Or you can do like the wily insanely mercantilist Chinese or Germans and instead of printing your own currency, actually manufacture stuff that people in other countries want, sell it to them, and then lend them back their own money - because swapping their currency back into yours would push up your own currency and hence make it more difficult to export. Of course, beyond a certain stage, that small bit of marginal extra income you can earn from exporting gets wiped out by the constant erosion of the value of your foreign currency reserves, but hey...

Currency wars: No news is... er... no news.

Here are the charts for USD and EUR for the past three years (against a basket of currencies).

USD is still bumping along the bottom where it was three years ago, which is far lower than it has ever been in the last twenty years. Can anybody think of a good reason why it was so much higher in late 2008, early 2009? EUR slid nicely in 2010 (once the whole Greek/Euro-zone bail out tomfoolery kicked off) but it is still higher than it was ten years ago - between early 2000 and mid-2002, it was in the range between 0.8 and 0.9.
To sum up, not much excitement here at all. You can safely ignore what you read in the papers.

Currency Wars: USD, CAD

Here are the charts for US dollar and Canadian dollar against a basket of currencies since 1990:

Oo-er, this is not good...

From BusinessWeek:

The Bank of England said it plans to sell three-year bonds in dollars to finance its foreign-exchange reserves.

The U.K. central bank hired Barclays Capital, BNP Paribas SA, Goldman Sachs Group Inc. and JP Morgan Chase & Co. to manage the issue, which will be benchmark in size, it said in a statement. The bank paid 106.2 basis points more than Treasuries when it issued $2 billion of three-year notes in March last year, according to data compiled by Bloomberg.

“The notes will likely receive good investor appetite seeing that it’s a AAA rated name,” said Trevor Welsh, a portfolio manager at London-based Aviva Investors, which manages about 10.5 billion pounds ($14 billion) of fixed-income assets. “This bond sale is purely a technical move for the bank’s foreign currency reserves.”

The Bank of England is seeking to raise funds as confidence in the U.K. currency plummets on concern no party will win an outright majority in a forthcoming general election. The pound weakened 7.6 percent against the dollar this year, the worst performer among the 16 major currencies, as traders bet a new administration won’t be strong enough to reduce the nation’s budget deficit of more than 12 percent.

“It will be interesting to see if investors require a slightly higher spread because of sovereign risk,” Welsh said. “But if so, it won’t be more than a couple of basis points.”

The central bank has issued three-year notes in March every year since 2007 to finance foreign-exchange reserves that support its monetary policy objectives, according to the statement.

Make up your own mind whether this means much. Sure, $2 billion is a drop in the ocean, but who's to say it's not the thin end of the wedge? Me, I don't like it. Although to be fair, I ought to seriously consider buying some, just as a hedge...

Via Paul at HPC

US Dollar, Canadian Dollar

Here are some more charts, of USD and CAD against a basket of currencies from 1990 up to today, just to put things in perspective. It is quite startling how little correlation there is, there's not even inverse correlation or anything (click to enlarge):

My currency basket

For the record, when I post charts showing currency movements, these are all against the same 'basket'. Commenters have asked me how I calculate this, so I shall explain it properly and add this post to my 'Quick links' widget in the top right hand corner.

Step 1. I can't be bothered to ascribe relative weights to each country, so I use two currencies from the North American bloc (USD and CAD); three from the European bloc (GBP, EUR and CHF) and three from Asia-Pacific (JPY, AUD and SGD), so the overall weighting is 'roughly right'. I don't include Chinese Yuan or Hong Kong Dollar as I don't trust them as far as I can throw them.

Step 2. Using GBP as a base currency, I download daily rates from the excellent www.oanda.com (starting from 1 January 1990) 'A'.

Step 3. I then adjust the daily value (in GBP terms) of each currency by dividing it by its long-run average value (in GBP terms) 'B'. For example, EUR is currently GBP 0.9021, but its long-run average is GBP 0.7090, so that then goes into the calculations as 1.2724 'C'.

Step 4. For each individual currency, I add up the 'C' values of the other seven currencies (GBP is always 1.00, of course) and divide it by 7 to arrive at 'D', the value of a unit of 'world currency' from the point of view of each individual currency.

Step 5. Each individual currency then gets divided by the value of one unit of 'world currency' to give the final value 'E' that I use in my charts. For good measure, I also add 183-day and 365-day moving averages.

Here's the example of how I calculated the final value 'E' for 10 April 2009 (the actual spreadsheet I use is in rows down, not columns across, of course), click to enlarge:

Just sayin', is all.

US Treasury Bonds rocket on the back of US money printing

As I glanced idly at the charts this afternoon, I noticed that the June US T-Bond future had jumped by a full point in a few minutes when the session opened (that's at 7.20 am Central Time, I think), and on the assumption that UK and US bond prices move in line, I thought it best to bail out of my short position of one UK Long Gilt future. The price then fell back again. When I had another look this evening I noticed that the T-Bond future had jumped by a full seven points (although it's dropped back a bit since), which is quite staggering, this is a once-every-few-years event, see chart:

It turns out that the economic illiterates who run the US had decided to go for the same tactic as the morons in the UK, i.e. for one branch of government (the central bank) to print money to buy bonds issued by another branch (the Treasury). What is interesting is that when the UK government decided to print/spend between £75 and £150 billion, UK gilt prices jumped five points, and the US has committed to print/spend $1.2 trillion, if you scale that down for exchange rate and different sizes of economy that's about the same as the upper end of what the UK will print/spend, and the impact on US bond prices was pretty much the same.

CityUnslicker looks at the corresponding effect on the price of gold. USD fell slightly as well, this is all textbook stuff.