Pound continues to fall in early Asian trade as crisis looms for Truss

The market sell-off following the announcement of the UK government’s financial plan has extended into a new week, putting pressure on the former administration of Liz Truss.

Kwasi Kwarteng’s all-out on tax cuts and more borrowing to stimulate the economy sparked a fierce and damaging review from investors on Friday sending UK assets plunging. . Seems undisturbed by the response, Prime Minister this weekend pledges more tax cuts.

As markets reopened in Asia on Monday, the decline showed little sign of abating, as the pound is believed to have fallen to a 37-year low against the dollar. If the path continues to deepen as traders continue to deliver their real-time judgments this week, the sell-off risks moving beyond the short-term embarrassment to the government into a recession. Deeper crises may require a swift policy response.

With the pound sliding as much as 0.9% below $1.08 on Sunday night, the opening of the gilded market at 8am on Monday will also be among the highlights.

“With widespread spending without fiscal resources and monetary policy inadequate to offset inflationary impulses, the currency is likely to continue to weaken.” Goldman Sachs Analysts including Kamakshya Trivedi wrote in a note to clients on Friday.

In a sign of the historic severity of Friday’s sell-off, the pound was at a stage set for a worse day against the dollar since its post-recession crash. Brexit vote in 2016. Finally, the 3.6% drop was the seventh worst. in the past 50 years. At the same time, government bond yields spiked, to record levels for some maturities, as investors chastised the Prime Minister for dash no regrets for growth.

If sustained, the yield move would significantly increase borrowing costs by the additional £400 billion ($434 billion) that the Resolution Fund estimates is needed over the next five years to fund the plan, it added. is an interest bill that has already skyrocketed. – high inflation and Bank of England rate of increase.

Market movements this week can have a huge impact. The Telegraph reported on Saturday that Truss will face a rebellion from Tory supporters against her tax cuts if the pound falls to par with the dollar. Meanwhile, some markets have called for urgent BOE action to stem the tide, an act unprecedented in modern times that risks adding to the sense of panic.

Former BOE official, Adam Posen said on Twitter that he expects Bailey to “say publicly in the middle of the week that if GBP falls, go up.” He also mentioned the possibility of Treasury intervention to support the pound on Sunday before opening, but others shown that Britain’s foreign exchange reserves are only a fraction of those of Japan, which pursued a similar policy last week.

If the holiday weekend brings calm and moves start to pick up again on Monday, that will give Truss and Kwarteng time to try to get the agenda back on track. That would increase the importance of the Tory Party Conference early next month, now in danger of turning from the coronation of the new government into an opportunity to restore already battered credibility.

However, the outlook from many in the market is still far off. Last week’s turmoil led to more predictions, including from former US Treasury Secretary Lawrence Summers, that the pound would fall below its dollar parity. Bloomberg’s options pricing model now shows a one in four chance the pound will hit $1 in the next six months, up from 14% on Thursday.

Others are expressing concern about the UK’s debt future. Worryingly, the central bank’s support through quantitative easing, once the savior of gilts, has now been reversed by officials seeking to cover up the price rise. escape.

“The gold-plated market is adjusting to a seismic shift in the fiscal landscape and huge supply-demand outlook,” HSBC analysts wrote in a note on Friday. “Such a large-scale loan repayment comes at the same time that the BOE is also turning from a buyer to a seller of bonds, and – more importantly – other investors are increasingly concerned about fiscal credibility.” of Great Britain”.

Following Kwarteng’s speech on Friday, the pound fell sharply, 10-year debt yields jumped more than 30 basis points to 3.83% and five-year bond yields jumped to a record 51 basis points.

Meanwhile, traders fully value the 120 basis points of an additional rate hike from the BOE at the November 3 meeting – more than double the move announced on Thursday, bringing interest rate to 2.25%. According to Trevor Pugh, head of inter-dealer brokerage and dealer desks at Tradition Ltd.

After the event, the new Prime Minister denied investors were panicking, telling the Financial Times that “the market is always moving – it is very important to stay calm and focus on the long-term strategy”.

For now, the market’s view of that strategy looks fuzzy.

ING’s Antoine Bouvet and Chris Turner wrote on Friday: “Unless something can be done to address these fiscal concerns, or the economy shows some surprisingly strong growth data, there’s no doubt that there’s going to be some surprisingly strong growth data.” It looks like investors will continue to steer clear of the pound. “Due to our bias towards an overvalued dollar, we think the market may undervalue the parity opportunity.”

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