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22nd April 2014
Sterling’s Ticking Time Bomb…

Whilst sterling has been a strong performer on the currency markets in 2014 (it is currently ranked as the 6th strongest major currency in 2014, appreciating 2.23% versus the USD), one of the main factors which concerns us with respect to the UK currency continues to demonstrate a worrying trend. The UK’s current account balance is now approaching a record low (see chart). In fact, in the second half of 2013, the deficit was the biggest for any six-month period since World War II.  

 

Chart I: UK Current Account as a Percentage of GDP

 

 

The current account is comprised of two main components:  the trade balance (exports and imports) and investment income (as well as transfers).  Interestingly, despite all the political focus on improving UK exports, the trade balance itself is not the main problem here, and the UK’s trade deficit has actually contracted recently, shrinking...



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14th April 2014
Central Banks causing confusion…

Nobody ever said running a central bank was easy. Almost six years on from the height of the financial crisis and the global economy is only just showing signs of reaching a point where central bankers can begin to contemplate exiting the extreme monetary stimulus efforts that have been designed to avoid the unthinkable.

 

Clearly all the major economies are at very different points on the road to recovery. The rate of recovery in the UK has surprised even the most bullish of economists over the past year and consequently, the Bank of England is widely expected to begin raising interest rates in the first half of 2015. By contrast, the Eurozone remains plagued by problems and consequently, the latest debate is over whether the ECB will be forced to engage in additional stimulus efforts to stave off the risk of deflation.

 

Last week, the focus was on...



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7th April 2014
The €1 Trillion Question…

At the ECB’s press conference last week, President Mario Draghi seemed determined to tease the financial markets with the prospects of a European quantitative easing programme.  Despite leaving all policy rates unchanged, he stated:

 

“the Governing Council is unanimous in its commitment to using also unconventional instruments within its mandate in order to cope effectively with the risks of a too prolonged period of low inflation…”

 

This statement was almost immediately given additional significance due to rumours of a hypothetical €1 trillion European QE programme that is currently being modelled and tested by the ECB.

 

There are two ways to interpret the ECB’s statement (and modelling exercise):

 

1. Take it at face value, as a statement of intent to launch a European QE programme imminently; or

2. Treat it with a healthy dose of scepticism, as simply another attempt to talk down the value of the...



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