Comments: Trade see-saw could leave sterling exposed

Nice article David. The point that the balance of payments has to balance is fundamental, but I think it is not mentioned enough in the press. As with the US trade deficit, it is not the outright deficit itself that is the problem, but the willingness of investors to finance it. The greater the deficit, the greater the risk of an unwind, but on its own, a deficit on it's own doesn't have to be problematic.

I do believe the pound is overvalued and I tend to trade it from the short side, but the trade balance and monthly statistics don't figure in to my thinking. While capital inflows have the potential to be less robust than having a trade balance surplus, I think the risk of 'hot money' flight is negligible.

Posted by Caravaggio at February 25, 2007 12:23 PM

To second Caravaggio. Given today's exchange rate environment, the trade balance is hardly the concern it was through most of the last century. So much so that the 'living beyond our means' arguments, which were abundant during the USD weakness of 2004, sound a little dated, its naive to evaluate an economy like a company - with the balance sheet approach.

Taking away the Foreign Direct Investment element, and i think that sterling will always be able to stand its ground in the markets, especially in the context of global diversification away from USD. Recall the UK's other competitive advantage - diversity - the world loves us, surely. + consider the strength of London as the financial intermediary of choice.

Finally, on the Bankof England's "rebalancing" aim - what a joke. Granted, i didn't believe them about falling oil prices, or the strength of an investment led recovery, but this one is ridiculous. UK exporters will never be able to compete on price, irrespective of wthat sterling does, the core of the problem is clearly in the regulatory and fiscal tapestry of gulag-Britain. Strategy: Buy sterling / sell Britain ?

Posted by Jonathan Blaze at February 25, 2007 02:21 PM

To second Caravaggio. Given today's exchange rate environment, the trade balance is hardly the concern it was through most of the last century. So much so that the 'living beyond our means' arguments, which were abundant during the USD weakness of 2004, sound a little dated, its naive to evaluate an economy like a company - with the balance sheet approach.

Taking away the Foreign Direct Investment element, and i think that sterling will always be able to stand its ground in the markets, especially in the context of global diversification away from USD. Recall the UK's other competitive advantage - diversity - the world loves us, surely. + consider the strength of London as the financial intermediary of choice.

Finally, on the Bankof England's "rebalancing" aim - what a joke. Granted, i didn't believe them about falling oil prices, or the strength of an investment led recovery, but this one is ridiculous. UK exporters will never be able to compete on price, irrespective of wthat sterling does, the core of the problem is clearly in the regulatory and fiscal tapestry of gulag-Britain. Strategy: Buy sterling / sell Britain ?

Posted by Jonathan Blaze at February 25, 2007 02:23 PM

Dear David,

A lot of funds finding its way into the sterling causing the pound to rise could be the " carry trade" where hedge funds borrow in Yen and convert to sterling because of higher interest rates and relative stabilty of the sterling pound.

How much of these funds will have to go back when Japanese interest rates rise is anybody's guess however the markets take it that it will take interest rates of around 2% to cause the yen to strengthen and for hedge funds to start moving back to Japanese yen.

Probably we will have to see when this happens however the last increment in Japanese interest failed to move the sterling one single bit.

Posted by Hitesh Damani at February 27, 2007 09:37 AM
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