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2 March 2010
As the 10
anniversary of the peak of the Tech bubble approaches, should wereally care what the market
about sterling, or indeed much else?
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Much hand-wringing is accompanying sterling’s renewed slide. The market is reacting to therapidly falling odds of an outright Conservative victory in the forthcoming election, which willprobably mean the huge public sector deficit will stay larger for longer. But ultimately, in theIce Age, a weak currency is an escape route of choice from the deflationary quicksand. A lookat Japan shows the other extreme - a strong yen pushing Japan back into deep deflation.
s latest slump contrasts markedly with the continued resilience in the yen (seechart below). Should investors be as concerned about sterling as they so obviously are?Perhaps not. Market participants are fickle creatures. I have previously likened them toshoaling fish, heading as a group in one direction only to change direction for no particularidentifiable reason (perhaps headless chickens would be a better analogy). I read muchabout market discipline forcing profligate governments into deep spending cutbacks.Sterling
s plunge will be painted as one example of that market discipline and we will nodoubt be told that that the market
deep public spending cutbacks.
I was left scratching my head after reading the FT
s currency comment last Saturday,
“the yen pushed firmly higher yesterday as concerns about sovereign debt ratings in southern Europe sent investors scuttling for the relative safely seen to be provided by the Japanese currency”.
That is indeed the market
s perception. Except, as my colleague DylanGrice has shown, the Japanese fiscal situation is many times worse than almost anywhereelse! If any currency should be plunging at the moment, it is surely the yen!
It is an anathema to most commentators to suggest that Mr Market can possibly bewrong. But the notion that it can somehow offer us some definitive wisdom about what isthe
course of action is surely nonsense. Investors can be totally and utterly wrongfor prolonged periods about what ultimately is
for an individual stock or bond market,or indeed a currency such as sterling.
Contrast the weakness of the trade weighted sterling to yen strength (JP Morgan narrow index)
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