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Collinson FX: Sept 30 - Bank of England puts finger in the dyke

by Collinson FX 29 Sep 2022 03:21 PDT 29 September 2022
Doyle Sails RNZYS Winter Series - July 9, 2022 © Richard Gladwell -

September 30: Bank of England puts finger in the dyke

The intervention into the UK Bond Market triggered a broad rally in yields, equities and non-reserve currencies. The Bank of England reversal of QT (back to QE), in an effort to combat the reckless unfunded UK Government’s fiscal spendathon mini-budget, kept bond yields lower but is a finger in the dyke. This will only lead to higher inflation and reverses the ant-inflation measures that had been employed for the last six months. The Bank of England will be forced to fund the fiscal excesses, thus facilitating another inflation explosion and the expanding the cost-of-living crises. US Bond Yields also drifted lower, but the US Dollar rebounded, with the EUR falling back below 0.9700, while the GBP dipped below 1.0800.

Inflation remains the big problem haunting Central banks across the Western world and these banks need to continue rate rises and heavy reductions in liquidity to win the war. German CPI reached double figures, while EU inflation data is expected to confirm a number fast approaching 10%. US PCE will be released tonight and this will be a big market indicator. US Q2 GDP contracted 0.6%, confirming the US ‘technical recession’, despite the semantics. The resurgent reserve pushed the commodity currencies lower once again, with the AUD crashing back to 0.6450, while the NZD plunged to 0.5650.

Energy remains at the heart of the inflation crises and the sabotage of the Nordstream pipelines will only exasperate this and add to the de-industrialisation of Germany.

September 29: Bank of England mounts rescue bid

The Bank of England was forced to intervene in the markets, following the release of the ludicrous unfunded stimulus mini-budget from the new British PM and Chancellor, which crashed the UK Pound and blew up the UK Bond Market. The crazies running Britain thought it would be a good idea to fix the economic crises, by employing the very same tactics, that caused it? The massive expansion of spending through tax cuts and energy subsidies were completely unfunded and triggered an explosion in UK Gilts and the GBP collapsed to record lows (1.0370). The Bank of England has been forced to intervene, by reversing the sale of bonds (QT) and adding QE through the purchase of long-dated Gilts. They will also need to raise interest rates again, which is all highly inflationary, the main problem they are tasked with solving. UK gilts responded and yields retreated, while the GBP rallied back to 1.0900, but this is only temporary and may trigger ‘Hyper-Inflation’.

The impact of the Bank of England intervention spread across the Atlantic and US Bond Yields also eased, as did the US Dollar. The EUR jumped to trade above 0.9970, despite a collapse in German Consumer Confidence, while the Yen held below 145.00. The BOE news overshadowed the other big news of the day, the sabotage of Nord-Stream 1 & 2 Baltic gas lines, cutting off gas supplies to Germany. This is a calamity for German business and the German people, coming into winter and will mean extreme pain will be spread uniformly across the whole country. This is effectively de-industrialising the engine room of Europe and will further deepen the energy crises and the recession.

The bounce in markets was widespread and included commodities and equities. The plunging reserve allowed the AUD to regain 0.6500, while the NZD looked to regain 0.5700. One thing is for certain, market volatility will continue.

September 28: Market turmoil continues

Market turmoil continued overnight, with Bond Yields surging in the US and UK, sending warning signals.

US 10 Year Bond Yields surged towards 4%, while UK Gilt 10 years raced towards 4.5%. The collapse in the Bond Markets has been hastened by the pace in interest rate rises, which is the Central Banks answer to raging inflation. Monetary policy has been focused around funding fiscal deficits and debt, which has driven the inflation crises. There has been no shift in the US or UK fiscal policy, in fact they have doubled down, with massive increases in spending and no funding proposals. Deficits are the problem, but now debt becomes a major problem, as interest rate rises consume an ever larger chunk of the budget. US M2 has completely blown out over the last two years, so this inflationary crises should come a no surprise. Treasurers and Central Bankers are the problem.

The market turmoil has hit the currency markets, with the US dollar spiralling upwards. The EUR has traded down to 0.9550, while the Bank of Japan has had to make a rare intervention in the Yen. The UK Mini-Budget was an unfunded disaster and has seen a major blowout in the UK Gilt market and the currency. The GBP hit all-time lows of 1.0370 and may well test parity in this meltdown. The markets will have political consequences and we are seeing this already in Italy and Sweden.

Commodity currencies are not immune to the rampant reserve currency, with the AUD heading towards 0.6400, while the NZD may well test 0.5600. The prospect of a global recession is not great for commodity demand. Look for market movers today in the form of German inflation numbers and US GDP data.

September 27: A US Dollar story

Markets are tumbling into more turmoil, following a year of upheaval, as deficit/debt fiscal recklessness is causing massive inflation and market turbulence.

The UK Mini-Budget was the latest example of economic incompetence, releasing a budget that massively increases deficits and has no way of paying for it. Markets are awake to this, with UK Gilts spiralling, while the GBP collapsed to record lows (1.0370). Italy has just elected a new Government, which may have plans to climb out of economic black hole, but it is very deep and dark?

The Bank of Japan admitted to intervention, for the first time in 24 years, which is an attempt to address the collapse in the currency. The surging US Dollar and rising interest rates globally are hurting the Yen, while the BOJ has refused to recognise inflationary pressures and maintain negative interest rates. Can the Central Bank stand against the markets? The EUR is also suffering, plunging to 0.9550, approaching all-time record lows. This is a melt-down.

Recessionary fears and the rising reserve have also crushed the commodity currencies, with the AUD falling to 0.6440, while the NZD plunged to 0.5630. This is a bit of a US Dollar story, as the cross rates reflect the reserve surge, but underlines the market turmoil.

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