Pound Value Shrinks as U.K. Deficit Balloons

Includes: FXB, GBB
by: Ralph Shell

Aside from some high readings in Britain's inflation rates, most of the economic numbers had shown a slow, but continuing pattern of recovery. Unfortunately this trend ended today as a report slyly called the Public Sector Net Borrowing, but is really a measurement of the U.K. budget deficit, ballooned to a record high. It had been predicted by the experts the November borrowings would amount to £16.8B, but the £22.8B was a shocker.

The Telegraph reported:

"The figure, which excludes financial interventions by the Government, was a marked increase on the £17.4bn a year earlier and beat the previous highest monthly borrowing record of £21.1bn in December 2009, according to the official figures.

Total public borrowing for the year to date now stands at £104.4bn, the ONS said, creeping closer to the Government's target of £149B for the financial year."

So far the minor economic recovery has failed to produce an increase in tax revenue, and government spending is up over 10% from last year. Net debt is now £863.1B and represents a monthly record, 58% of the GDP, according to The Telegraph. Moving toward the new year with an expansion of the austerity measures, and an increase in the VAT tax, forex traders are rightly concerned with the pound's ability to maintain value against other currencies.

Another cause for concern about the future of the pound might be the fragile alliance between the Conservatives and the Liberal Democrats who rule, by virtue of their coalition. A loose lipped Lib-Dem member currently serving as Business Secretary named Vince Cable, bragged that he could bring the government down. This was part of a dispute with Rupert Murdoch, a partial owner of Sky Broadcasting. He said,

“You may wonder what is happening with the Murdoch press," Mr. Cable said. “I have declared war on Mr. Murdoch and I think we’re going to win."

The Business Secretary also disclosed his private animosity toward Rupert Murdoch, the chairman and chief executive of News Corporation (NASDAQ:NWS)."

Murdoch is no stranger to criticism and has survived, as evidenced by the Obama team's complaints about Fox News. Both PM Cameron and Lib-Dem leader Clegg are embarrassed by the loquacious Cable who may end up being the loser in this little skirmish. This incident does illustrate the potentially fragile nature of the current coalition.

Currently the pound is slumping into new low territory, the lowest since mid September, at 1.5570. The quiet trade, even as we print new lows, suggests an absence of spec participation. In the futures market, it was reported that at the end of yesterday's trade, the open interest was only 71k contracts. Contract this to the SF, a much smaller country, where there is 44k open and the A$, 112k with open.

On December 14, we suggested selling the GBP/USD on a return to the 1.60 handle. Next day the pair made a feeble attempt to rally but failed to reach our sell level. It is always frustrating to have correctly analyzed the market, and watch it go your way when you did not do the trade. But the flip side is doing a trade at any price, and then get taken out by some random market volatility is no fun either.

Our view remains unchanged, bearish on the GBP, and we still wish to be a seller on a rally, perhaps back in the 1.5570 area. The MACD has given us a bearish signal but we are hoping some market surprise in a thin market will give us a better selling opportunity. Tomorrow we do get the Bank of England's MPC Notes, the Current Account number and the final British GDP q/q report. Le'ts see if one of these reports gives us a surprise rally.

Click to enlarge

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.