Is U.K. PM Cameron Trying To Weaken The Pound?

Includes: FXB, FXE
by: Ralph Shell

The scheduled address by UK Prime Minister David Cameron to the EU was canceled today because of the new hostage crises in Algeria. Parts of the speech were released to the press today.

According to Bloomberg News:

"Cameron planned to say that the deepening integration of the 17 euro countries, which don't include Britain, and the demands of global competition raise 'fundamental questions' about the nature of the U.K.'s relationship with the EU.

"People are increasingly frustrated that decisions taken further and further away from them mean their living standards are slashed through enforced austerity or their taxes are used to bail out governments on the other side of the continent," he was due to say.

Forty-two percent of the electorate say they would vote in a referendum to leave the EU compared with 36 percent who said they would back staying in, according to a YouGov Plc (YOU) poll conducted online on Jan. 10 and 11. A YouGov poll in November found 51 percent favoring an exit."

The europhiles in Britain are quite vocal, and the Financial Times has long been an advocate, but that may not be the sentiment of the people. Better Off Out is an organization vigorously proposing that Britain does just that -- get out.

Is PM Cameron getting ready to make a reset of Britain's relationship with Europe, a cause that will separate his views with Labour, the Liberal Democrats, and even some within his own party? Jeremy Warner in The Telegraph recently noted:

"The Foreign & Commonwealth Office is in the midst of a 'review of EU competences' -- an audit of what the EU does and how it affects the UK. This is a tremendously important exercise that should lay bare for the first time just how intrusive the EU really is, as well as present some kind of a balance sheet of benefits and detriments. It won't satisfy those of a strongly Europhobic frame of mind, but it ought to address some of the concerns of the silent majority and act as a good starting point for renegotiation."

There is fear in the London Financial District that Cameron's negotiations may cause a loss of financial service business from the continent. Britain though, is a big importer of German products, so both side have risks. And if Britain left the EU, they would likely not be the last to leave. The loss of several weaker economies from the EU, leaving behind the north European countries, might send the euro skyward. We suspect the vaunted German export machine would be severely handicapped.

During the many months of the euro debt crises, as the leaders dawdled, prudent people, fearful of the worst, moved money to "safe havens." The Swiss did not want the money, the Scandinavian markets were not big enough to absorb the money flow, U.S. Treasuries yielded little, and the Washington spending was frightening, so lots of scared money flowed into the pound.

Since the euro fears have abated, the pound versus the euro has been under pressure. On December 10th, a euro was worth .8035 EURGBP (FXB, FXE). Since then, the euro has appreciated to a high of .8387 today. This is a large move for two neighboring currencies in the last month. How much of this is repatriation of the scared money that sought a safe haven? Granted, the British economy is not performing, but neither is the eurozone. According to the latest Commitment of Traders (NYSE:COT) report, speculators were still long the pound, but we suspect they are heading for the exits and pressuring the pound.

There is no point fading a market when it is racing to the sky, but looking at the weekly chart, there is an area where the market traded for several months. We will be watching next week for an opportunity to short this pair.

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.