High UK Interest Rate Problems
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High UK Interest Rate Problems

High UK Interest Rate Problems


Trading Features / Strategies from Simon Denham of Capital Spreads.

The Sterling / Euro spread is now at €1.1649-€1.1653. That means that against our major trading partner, whose currency has also dropped alarmingly, we are over 20% off from the average levels from prior to 2008.

Much of the Sterling drop has been in the last few weeks. Without the prop of high interest rates (a prop manufactured by our central bank over the last 10 years) the pound is now seen by virtually every trader as an easy sell.

High interest rates, and the corresponding high exchange rate, have meant that manufacturing (generally) in the UK has been fighting a losing battle against the rest of the world for years. Now that this artificial support has been kicked away (years too late), we survey a landscape of retail services, support services, financial services. In short, a myriad of ‘services’ but without any manufacturing or exporting base on which to ground it.


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The problem with a totally service based economy is that without external impetus it is essentially eating itself as money goes round and round in an ever diminishing circle. Small countries with big neighbours can afford to go down this road but I fear that the UK economy will be in a truly dire situation before the ‘turning point’ is reached. Now that the rest of the world is not adding the required growth, as they themselves slip into negative growth, the huge state apparatus built by ‘Our Gordon’ will suck the life out of what remains of the private sector.

We might foresee an environment where the Treasury in a desperate attempt to keep State employees in work will issue huge slugs of debt. With interest rates possibly falling to 2 maybe 1% it might be thought to be a good time to be borrowing “for the future”. Unfortunately investors are not always this gullible. It would not surprise me to see a very steep 1 to 5 year yield curve with 3 month money down at 3% but five year money at 5%.

Public Sector debt levels are reaching very unnerving levels and the usual trick of this government in offloading debt into ‘off balance sheet’ vehicles continues. Nationwide and RBS are issuing 2 and 3 years AAA 100% UK Treasury guaranteed debt at some 60-80 pips over UK Gilts. Please can somebody tell me why an investor would buy a 3yr Gilt at 2.99% when he could get the same credit risk with 80 pips more from a Government Guaranteed Bank debt? The debt is merely guaranteed by the state but is not actually recorded as a state liability. A ‘not so clever’ trick, but one that will keep the numbers down.



The above comments do not constitute investment advice and neither Capital Spreads nor Clean Financial accept any responsibility for any use that may be made of them.


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Article provided / approved by Capital Spreads which is a trading name of London Capital Group Ltd which is authorised and regulated by the Financial Services Authority (FSA), FSA Register number 182110.

'High UK Interest Rate Problems' edited by DB, updated 14-Nov-08



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