UK unemployment data poor, improvements are badly needed

Data today revealed that the UK unemployment rate has risen to 8.4%. Fewer jobless claimants emerged than expected, with only 1,200 claiming as opposed to  the 9,100 expected. This is scant consolation however, UK unemployment is at its worst level in seventeen years. So, what can the UK government do about it?

There are many measures than can and should be taken to address the UK’s chronic unemployment situation. Most obviously, the Bank of England should ramp up its quantitative easing programme, particularly with inflation likely to ease this year. This should hopefully increase bank lending and enable the private sector, specifically SME’s to pick up the slack that the public spending cuts are leaving in the job market.

We need to make the UK a more hospitable environment for employers, which means lowering and simplifying taxation and cutting out over-regulation, though the government’s hands are tied to large extent by EU law.

For the longer-term, youth unemployment needs to be looked at, which means improving the UK’s education system. It is widely accepted that we need to equip young people with the skills, training and experience that will make them essential to UK businesses moving forward.

Investment in infrastructure is another major opportunity, whether this is funded by cheap UK borrowing in the debt markets or preferably by attracting foreign investment; relations with China are building in particular. There could be huge job creation if projects in sectors such as energy and transport (e.g. high speed rail) could be initiated. House building was the driver of job-creation in the recovery from the Great Depression in the 1930's and this could be replicated; housing in London in particular is a real problem.

Unfortunately, the fate of the UK’s unemployed could well be out of domestic hands – so much depends on events in the eurozone. The risks of a financial collapse and European recession are growing every month. No amount of bold and creative measures to boost UK employment will be successful if the worst case scenario comes to fruition in the eurozone.

Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.

The Tobin Tax: Will they, Won’t they?

Yesterday, the European Parliament (EP) voted to pass the Tobin Tax, otherwise known as the Robin Hood Tax. The tax proposal represents a 0.05% levy on all financial transaction passing through the EU and it is estimated that it will raise €200bn annually. Whilst the EP may have backed the proposals, the measure will not come into force until it is passed by national legislatures. Herein lies the main obstacle...

Is it a good idea? Well in theory it’s certainly a nice idea. Banks would barely notice the impact of the levy and it would reduce exchange rate volatility caused by short-termism, but the fund could also be used to ease global poverty and the effects of climate change. 

However, although the tax is appealing the pitfalls are glaring. The tax is likely to have the damaging effect of reducing liquidity in the FX markets as speculative investors would turn elsewhere. The EU wants to press ahead with EU-wide coordination of the levy if a worldwide tax proves too difficult to attain (as surely it will). However, in light of this the tax would simply be unenforceable as EU financial centres would be a far less attractive place for banks to do business. Inevitably major institutions would relocate en-masse to more tax-friendly centres, taking with them a vital source of income for the EU. 

Nonetheless, France and Germany are right behind the tax, and accuse the UK of “dragging its feet” on the issue. London is the global financial centre of the world and Britain’s economy is heavily reliant on the financial services industry. Banks relocating is a heated enough debate as it is so can we blame George Osborne & Co for balking at the prospect of adding yet another tax?  

It seems highly likely that, despite the renewed energy the EU is putting behind it, the Tobin Tax will not gain the widespread approval that such a measure requires. Whilst so-called “banker bashing” is an excellent way for political leaders to bolster their own popularity, the Tobin Tax reeks of over-ambition and impracticality. And as for “banker bashing,” don’t be fooled by the label of “Robin Hood Tax,” the burden that the tax will impose on the banks will, as ever, simply be passed on to the consumer, so be careful what you wish for…

Richard Driver

Analyst – Caxton FX

For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.

The euro hovers before Portugal’s bond auction tomorrow

Sterling remains near its four month high against the floundering euro as the debt crisis continues to undermine the single currency.

The euro has managed to claw back a few points against the pound; however the pair have remained within a fifty pip range and near the four month high. The general opinion within the market seems to be for GBP to make further gains against the seventeen nation currency. Focus is fixed firmly on Portugal’s bond auction tomorrow. The question as to whether the more indebted nations within the EU can raise money is keeping EUR very much on the back foot. If the Portuguese do not manage to raise the necessary funds from the debt market, they will be forced to turn to the EU and IMF for financial aid.

Further bond auctions on Thursday for Spain and Italy could set the tone for the next few months, despite China and Japan’s rescue efforts.

In other news, it is bonus season for many city institutions and rumours are rife. JP Morgan are reported to be sharing £4.2billion between their 11,000 staff in London, the question of how big the bonus pool is at RBS is making politician’s blood boil and now Barclay’s is finding its name in the tabloids crosshair. Why? Well, the points outlined are based around the use of Cayman Island bank accounts to minimise the amount of tax paid in the UK and US. Which financial institution doesn’t? Surely we should revere a bank that made it through the financial crisis without needing to be bailed out? Surely we should take notes on the fact they came through the bad times having picked up some of the best bits of some failing companies? And, surely Bob Diamond deserves his £8million far more than Stephen Hester deserves his £2.5million?

If you have any strong views on bankers bonuses or currency related questions please feel free to make a comment.

Tom Hampton
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.

The dollar continues to strengthen

Investors continue to unwind their short positions in the greenback today with the US currency up across the board following on from Fridays positive employment data.

Solid non-farm payroll data and renewed concerns over the debt crisis in the eurozone have contributed to the descent of EUR/USD which is down one cent on the day, currently trading at $1.3930.
With most, if not all questions answered about another round of monetary easing in the US, the market is now able to bring the euro’s problems back to the foreground. Data suggesting that the Spanish economy is reaching stagflation, Irish and Spanish bonds hitting record highs against their German counterparts, and a scare over liquidity issues for a major Spanish bank (see last paragraph) have all helped to suppress the single currency.

The ‘buck’ has maintained its positive run against sterling as well, however the effects are muted as the pound continues its run on the euro, currently trading around €1.1580. GBP did manage to hit a peak of $1.6288 on Thursday, however the dollar has inched its way back to $1.6145.

Apart from the BoE Inflation Report on Wednesday, this week is fairly light on market moving announcements. Expect to see more problems exposed in the EU though; it is about time the truth came out.

In other news, I reported a potential ‘run’ on a major Spanish bank that was having liquidity problems. It turns out that these reports were unsubstantiated. The truth of the situation is this; a large queue formed outside a BBVA branch in Madrid. The people in said queue were in fact waiting to be issued with their numbers for a 10k run. BBVA had sponsored the runners out of the kindness of their corporate hearts, however this was misconstrued as a potential liquidity problem and BBVA’s share price fell by 2%....... Things really are that jumpy in the PIGS at the moment!

Tom Hampton

Analyst – Caxton FX

G20 hails a result for minnows

The US dollar has been sold across the board today as the G20 meeting over the weekend came to the agreement to shun competitive currency devaluation.

At the meeting in South Korea (nicely timed for corporate hospitality at the grand prix), a surprise deal was struck to give emerging nations a bigger voice in the IMF, recognising the power shift away from the traditional West. This recognition of a new ‘world order’ could be exacerbated by the dichotomy of what will happen over the next twelve months. As stated before, it is the developing nations of the East and South America that will be the driving engines to pull the world economy through these dark days. Whereas, the established West (US, EU and UK) languishes in their own self-pity and inability to compete. Action needs to be taken, but will extra monetary stimulus be enough to answer the West’s prayers? Governments need to help prop up private enterprise, after all it is these companies and their employees that pay the taxes.

In other news, sterling has hit a 7 month low against the euro today on concerns that the Bank of England may be veering towards more monetary easing to revive the flagging economy. However, if the rate of inflation stay at 3% or higher, can Mervyn and the boys really ‘print’ more money and artificially inflate the economy?

‘Hard road leads to a better future’

Just one of the chancellor’s quotes from today’s government spending review. The market seems to believe it does lead to a brighter future as sterling remains within range of where it was before George Osborne opened his mouth.

Despite the pound’s seesaw journey during this afternoon’s session in parliament, it has come out relatively unscathed. This either suggests that the market believes in what the government had to say, or, more likely, has already priced in the potential adverse affects (the other suggestion is that the review had little of any real substance!). The truth is probably somewhere in the grey middle. Most of the spending cuts had been accounted for. However, the crocodiles teeth I have been tracing for the UK currency against its peers on my screen for the past 2 hours tell a different story. If it was all priced in why was there so much volatility?

The truth is this: the next 18 months can go one of two ways. The bleakest view is for most of the west to suffer a double dip. A dire Q4 could put the UK back in recession with stubbornly high inflation and plenty of SME’s going under. It would be a long and slow road to recovery led by the east and a weak UK currency to try and boost exports.

The second scenario would be for the west to narrowly avoid recession with some economies following Japan into stagflation. The recovery would be led by the east (again), the UK’s austerity measures gain traction and market confidence grows, bringing foreign investment and inflates sterling.

Either way, we will see a series of troughs and peaks before we are out of the woods. With the government cutting costs to the tune of £81billion and a VAT hike on the horizon, the UK will be looking to private business to pull us through. The banks need to start lending again, however, with a banking levy on the cards, how likely is that?

Tom Hampton
Analyst – Caxton FX

Kiwi trades mixed ahead of Wednesday's rate announcement

The New Zealand dollar strengthened against the pound over the weekend following the release of British GDP data on Friday. However, the pound is recovering lost ground this morning, as speculation grows that the Reserve Bank of New Zealand will cut interest rates aggressively when they meet on Wednesday. Many analysts are suggesting the central bank will cut rates by a full 1%.

Sterling / Dollar hits 23 year low

The pound has lost further ground against the dollar today, sinking to a fresh 23-year low as data showed the UK economy shrank at its fastest pace since 1980 and confirmed Britain had fallen into recession for the first time in nearly 20 years.

UK gross domestic product shrank 1.5 percent in the three months to December, more than forecasts for a 1.2 percent decline. It was the largest quarterly drop since the second quarter of 1980.

Sterling has already dropped about eight percent against the dollar since the start of the week, amid widespread concerns about the British banking system and the government's growing debt.