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Comment by rossdavidh | Hacker News Reader

I'm not sure it's so much a story of the British pound, as of the US dollar, given that the pound-euro exchange rate is still well within it's range for the last 5 years:

https://www.xe.com/currencycharts/?from=EUR&to=GBP&view=5Y

The Chinese yuan and Japanease yen are also both at their lowest value vs the dollar in recent years, and moving faster than they normally do.

For each of these (UK, EU, China, Japan) there are local conditions you can blame the currency depreciation on, but given the number of major currencies depreciating rapidly vs the $ I think it makes more sense to look at what the US is doing as the simplest explanation.

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If it's about the US dollar, what important US economic news landed early in the morning US time ?

For the UK the consideration is that this basically happened as the Chancellor announced his intent to fund huge tax cuts for the wealthy by borrowing. You don't need a whole lot of specialist knowledge to figure out that means the government has to sell more bonds and isn't in a position to reject higher prices for those bonds, which puts a downward pressure on Sterling.

> isn't in a position to reject higher prices for those bonds

Not lower? Or am I misreading it?

I struggled with that phrase too. I think "higher prices" means the government has to pay more to borrow money (i.e. issue bonds).

It's probably not you, this is not my sphere of expertise. It's totally possible I have either the actual numbers, or the way people talk about the numbers, upside down.

I don't understand. If the government is forced to accept higher interest rates for those bonds, wouldn't that drive up the value of GBP?

The government isn't forced to accept higher rates. They control the central bank and can force the BoE to buy government debt at whatever interest rate they like. At one point in the past I think Osborne actually forced the BoE to quietly return to the Treasury all the interest payments the government had been making to them! However, shifting bonds from external lenders to the BoE is money printing and will create inflation + lower the value of the currency. So lower currency value is effectively a bet that the government will stop bond rates rising too much by making up the difference via printing.

The actual move that will destroy public finances (even more) isn't the tax cuts for the 'wealthy', that's of relatively minor impact. The fiscal nuke is the energy price cap. The cost of preventing local energy prices from going over real wholesale prices is likely to be astronomical unless global gas prices fall significantly.

Fortunately, it appears wholesale gas prices are falling quickly. If the trend of the last couple of weeks continues, the energy price cap will be significantly less expensive than predicted (although there is no guarantee it will continue to fall).

https://tradingeconomics.com/commodity/eu-natural-gas

And yes, removing the higher income tax band will have little impact on the economy overall.

>If the trend of the last couple of weeks continues

In the current volatility, which is lasting since a year now, a trend of a couple of weeks means absolutely nothing in my view…

The Euro area may be more important as a trading partner, but it’s a big problem for energy and other commodities priced in USD. We’ll be importing inflation.

It's because the US is raising interest rates to combat inflation. This is attracting capital as it seeks higher rates, and pushing down the exchange rates with USD across the board.

The ECB and BoE are also raising their rates, and they have a consistent history of being lower than US rates...

For the purposes of attracting capital, that consistent history hurts them, no? Investors want higher rates, not lower, in this case.

Few foreign investors are buying UK & European treasuries.

It's mostly the ECB and BoE - and local pension funds mandated by local governments - so foreign investors are irrelevant.

General investors usually prefer low rates because they want their asset prices to be inflated.

If investors you mean people taking out shorter dated loans to buy higher expectation yield securities (aka "the carry trade"), then yes, they want lower rates.

But for investors choosing between a basket of interest bearing sovereigns, they will choose the bond that has the largest risk adjusted rate of return 101% of the time.

This is what you are seeing in exchange rates, the exchange rates are swinging to normalize this risk. (ie. There is an appropriate amount of premium in investing in USD that balances the currency exchange rate risk of the exchange rates swinging back on you.)

> But for investors choosing between a basket of interest bearing sovereigns, they will choose the bond that has the largest risk adjusted rate of return 101% of the time.

The percentage of bonds bought by this type of investor is so small that the ECB, BoE, BoJ, and FED aren't even giving them consideration.

The only reason anyone in their right mind would buy a 10-year treasury from the BoJ at negative interest rates is if they feel like the BoJ will eventually buy back the worthless bond from them for even more money than they bought it for originally.

Traditionally, this has been a pretty safe bet - because the entire economy of Japan is dependent upon the BoJ paying people endlessly more money for the same worthless garbage...

USD tends to strengthen in a crisis as it tends to be considered to be the most stable currency

China specifically also directly sets the rate bands that are allowed.

They’ve specifically weakened their currency to juice their economy (and they are lowering rates).

I think many of the countries that are "suffering" from currency depreciation, are actually doing covert currency devaluation (looking at you, Turkey). If you announce "we're devaluing our currency", it reminds people of the 1930's "beggar thy neighbor" policy of increasing your own exports' competitiveness at the expense of everyone else. If you suffer from your currency dropping in value, it is mathematically the same thing, but it sounds like something that's being done to you, rather than something you are doing to everyone else.

So it's not the pound plummeting, but the dollar recovering.

No, it's the pound plummeting.

Basically, nobody thinks that Kwarteng's extreme tax changes make any sense. Not even in his own party, apart from a tiny gang of nutters. He's planning an enormous increase in government debt, so he can give money to people who already have too much. His tax-cut plans are inflationary.

Meanwhile, the Bank Of England has a mandate to keep inflation within a window that it's already moved out of. So the Bank is required to increase interest rates. Kwarteng and the Bank are therefore pushing in opposite directions; Kwarteng's moves will tend to heat the economy up, interest rate rises will try to cool it down. I wouldn't be surprised if rates rise to 15%.

So the rich people who benefit from these tax cuts will invest their loot overseas (or in property); and overseas investors will steer clear, until we've got rid of these fanatics.

Truss/Kwarteng have no mandate for this nonsense; the only mandate they have is to "Get Brexit Done", and it's done. So the government is now skiing off-piste. It's disgraceful that this gang of crazies have managed to take over the government on the strength of the votes of about 80,000 Tory party members, without ever presenting a manifesto to the nation.

‘Kwarteng's moves will tend to heat the economy up, interest rate rises will try to cool it down’

100% this, it’s utter madness. I had the same thought this morning, both acting in opposing directions.

Are we looking at the same chart? I see it go way up at the end to a level that only matches a few previous, short-lived spikes

Yes, but at the moment it's still within the range of the previous 5 years, which is not a long time period. If it continues spiking at the same rate for weeks longer, then yes it will be unusual. But the fact that you don't have to go back very far to see multiple examples of spikes of this size or greater, means that as of this point it isn't yet that unusual.

If it keeps going for weeks at this rate, then it is a big deal, of course.

Hmmm, I wonder what could have caused such volatility 5 or 6 years ago?

I think that the last five years have been bad for sterling, and the last five days are a big part of that.

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