Good morning everyone.
In today’s Money Morning, after the debacle of last week’s general election, we consider, once again, the prospects for our currency, the great British pound.
I have to say, continually returning to this subject, I’m starting to feel like a broken record. But the unending run of political surprises this last year makes it inevitable.
So here we go: sterling…
The election was a disaster – yet the pound hasn’t collapsed
For three months or more, conversations with my editor, John Stepek, in the lead up to my weekly Money Morning have gone something like this:
John: What are you going to write about this week?
Me: Don’t know. Should really cover gold. Haven’t done it in a while.
John: Yeah. Agreed.
Me (two hours later): Actually, John, bitcoin’s looking really interesting at the moment. I think I should cover that.
John: Yes. You’re right. Do that.
The following week runs along the same lines. John gets an email saying, “Actually Asia’s looking really interesting.” Or “Politics, John, we’ve got the election, we should look at the odds/the pound/what May should be doing”. Then I get the ever-agreeable reply saying, “Yes. Do that”.
And so it is this week. The plan was to cover gold. But with the chaos that is the general election and its aftermath, gold has been bumped yet again. Instead we’re looking at the implications for sterling.
The problem is: gold is so uninteresting at the moment. You look at what’s going on in the world – government debt, overvalued stockmarkets, political upheaval and all the rest of it – and you want to scream: “Can none of you see? Buy gold for goodness sake. Protect yourselves!”
But the world just shrugs its shoulders and looks the other way. It couldn’t be less interested – whether on the long side or the short. Gold is a boring trade. It’s not going anywhere and the world seems to know it.
One day, Rodney, one day. But for now we turn our heads to sterling.
As regular readers will know, I’m a sterling bull. I think it’s undervalued, oversold, past the low point in its cycle and set to go higher in the years ahead. I have a considerable bet going that it will do just that, and I’m getting increasingly frustrated watching it flash red at me, even if only marginally so.
The bottom line is that a currency is the issuance of a government. For it to go anywhere, it needs a semblance of strength and stability – remember those words? – up top. And the greats balls-up that was last week’s general election means that some of the gains which have been made this year have been given back.
It’s been nothing like the panic we saw after the EU referendum, but the pound has lost a couple of cents against the dollar and the euro, and the uptrend that was building momentum, if only a little, has been checked. Here are the charts for your reference.
First, sterling vs the US dollar (known as “cable”).
You can see the post-election sell-off was extremely mild in comparison to the Brexit vote. In fact, the pound is actually still higher than it was before Theresa May called the vote. So the currency markets – despite the hysteria reported in other less reputable rags than ours – are relatively sanguine about the whole thing. But, nevertheless, the nice uptrend that had been apparent since March is no more.
Below, you can see the euro (I’ve used a line chart as it’s slightly clearer). Reading some papers you’d think that monetary Armageddon had hit since last week. Actually, the pound lost about a cent.
(Note: when the chart below is rising, the euro is rising and the pound is falling).
The euro, for whatever reason you care to project, has been rising against the pound since mid-April. To that, I kind of shrug my shoulders and repeat the oft-stated words of my teenage daughters: “Whatever”.
Here’s a ten-year chart. The euro’s on the upper side of its range – ie it’s a little bit strong – but nothing too drastic.
In the longer term, without meaning to be too candid this early on a Wednesday, the euro won’t be here, the pound will.
The pound will neither crash nor soar – it will meander
So to my current projection for the pound. Its short-term fluctuations will be determined by political events. Will May be here next week? Your guess is probably better than mine.
I rather think that she will and that, gradually, this mess will sort itself out so that politicians can, as they are wont to say, “get on with the job”. But I struggle to be as bullish on the pound as I was, with a leader who seems to have so gravely misread what is going on.
May’s mistake, in my view, has been to try and occupy the middle. If this election was a rejection of anything, it was a rejection of the middle. People have had enough of Blair, Cameron and third-way politics. The electorate wants people to stand for something. Corbyn is now doing that for Labour – and with some success, though he only got 262 seats. That’s some way off a majority.
There now needs to be a Tory who will do the same for the Conservatives and stand for low tax, individual responsibility and so on. Judging by her words, actions and appointments of the last week, May doesn’t share this view. She seems to think she hasn’t been centrist enough. It’s like a central banker who thinks the problem is not printing money, but that he didn’t print enough.
If the Tories choose a new leader and there’s another election, then of course we wobble, and future forecasts will have to be made on the basis of who is in charge.
If May pulls some rabbit out the hat and weird hitherto-unknown adjectives like strong and stable can be used to describe the UK, then maybe the pound can stage a meaningful rally. But I doubt it.
Bottom line: the pound doesn’t crash, it doesn’t soar, it meanders and it oscillates until the Charlies in charge get their act together.