Bank of England Governor Mervyn King Confirms Weak Pound Strategy

Sep.25.09 | About: iPath GBP/USD (GBB)

That rebalancing of the UK economy that I have been talking about for about 10 years, is very necessary. I think the fall in the exchange rate that we have seen will be helpful to that process but there’s no doubt that what we need to see now is a shift of resources into net exports – whether directly or in producing things that compete with imports that help to reduce the trade deficit… – Governor of the Bank of England, Mervyn King (JournalLive: September 24, 2009)

This quote is from an interview JournalLive conducted with Governor King. While media outlets gleaned headlines about growth and the U.K.’s banking sector, the words I quoted above caught my attention and the attention of currency traders. These words alone sent the pound hurtling downward overnight against all major currencies. I have been fortunate enough to have insisted on a short bias against the pound for the past 10 days. The previous night’s release of the minutes of the last meeting of the Monetary Policy Committee did not bring new information regarding the potential for negative interest rates. However, I concluded that the pound remains a short given the apparent bias of the Committee to find reasons to maintain easy monetary policy. I used the small bounce in the Pound following the release of the minutes to scale up a fresh short position.

Given Wednesday night’s extensive move downward, I have chosen to lock in profits and close all short positions. Until the tone from the Bank of England changes, my bias will remain bearish on the pound. I will look to fade any bounce in the currency.

While Governor King has been promoting an export-led economic strategy for ten years, only the recent global economic crisis has finally given the central bank the cover to devalue its currency in an effort to drive exports. China is also key to this strategy:

One of the underlying causes of the financial crisis were the imbalances in the world economy and I think, looking forward, it’s quite important that China and other Asian countries reduce their surpluses and we reduce our deficits.

If Asian exporters ever get serious about developing consumption-driven domestic economies (or at least less export-driven), the process of transformation will take many years, if not decades. The infrastructure and culture built around exporting and saving is quite strong. In the meantime the wrangling over these current account imbalances amongst the world’s major economies is bound to get nasty. Earlier this year, the G20 pledged to avoid competitive devaluation of currencies, but it seems to me that this process is already well underway with cross-Atlantic partners the United Kingdom and the United States leading the charge and the Swiss struggling to keep up.

(I mainly do short-term trades in forex. Ino.com demonstrates how to make money slowly but surely in forex using monthly timeframes).

Be careful out there.

Full disclosure: no positions