HSBC warns of hot money exodus from Britain under 'siege'
By Ambrose Evans-Pritchard
Last Updated: 10:35pm BST 05/10/2007
HSBC, Britain's biggest bank, has warned that Britain faces a stark "de-rating" by investors in coming months as growth slows and funds begin to lose confidence in the country's economic management, triggering a mass exodus of "hot money" from the City.
"Sterling's outlook is increasingly taking a turn for the worse. A deeper downward move against a broad range of currencies is on the horizon," said the bank in a new report, "Kingdom Under Siege".It expects the pound to fall from around $2.04 to $1.76 against the dollar over the next eighteen months, even though the dollar itself is in danger of losing its status as the world's "anchor currency".
David Bloom, HSBC's head of currency research, said signs that the Bank of England's monetary framework was "starting to fray at the edges" had begun to unsettle investors, tarnishing the City's reputation. Both the Northern Rock debacle and the decision by the Monetary Policy Committee to overrule the Governor in setting interest rates have inflicted damage.
"If further problems beset either the Bank of England or policymakers in the UK, the situation could turn from mildly negative to a lot more serious," he said.
The pound as been held aloft by inflows of "short-term" money chasing yield. British interest rates of 5.75pc are much higher than levels in Europe.
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It has been the darling of the yen "carry trade", drawing in speculative flows from investors in Japan and funds able to borrow at near-zero rates in Tokyo to take advantage of the 5pc interest rate spread. These flows are likely reverse abruptly as the UK economy slows and the housing market tips over, heralding lower interest rates.
The report said sterling would soon slip out of the G-10's top trio of high-yield currencies. "This could have dramatic consequences: the "hot money' flow that supported sterling could leave suddenly," said Mr Bloom.
Hot money deposits in Britain have ballooned fourfold in a decade to £4,000bn. "What we have is an enormous liability. People have been very happy to park their money in Britain because of the high interest-rate culture and the country's reputation for sound management, but if you start to unpick that, it can go very fast. These investors are fickle," he said.
HSBC believes that Bank of England will have to begin cutting rates by early next year, with growth falling to 1.7pc for 2008 as a whole and a high risk that Alistair Darling will break his prudent rules in his maiden year as Chancellor.
The loss of the interest prop comes just as the merger and acquisition flows into Britain start to dry up. There are no longer any big deals on the horizon, such as Ferrovial's takeover of BAA. Indeed, there has already been a net outflow in recent months as UK groups become net buyers in Europe. "Sterling's loss of M&A support is a dramatic reversal of fortune," said the report.
HSBC believes the big winners over coming months are likely to the emerging market currencies, especially oil and commodity producers facing inflationary pressures. Many are under pressure to break their dollar pegs.
"There is no doubt the market has moved into dollar hating territory and ther are very good reason for this. It is no longer the sole global price setter for commodities. The role of the US dollar as an anchor currency is being eroded," said HSBC.
Last Updated: 10:35pm BST 05/10/2007
HSBC, Britain's biggest bank, has warned that Britain faces a stark "de-rating" by investors in coming months as growth slows and funds begin to lose confidence in the country's economic management, triggering a mass exodus of "hot money" from the City.
"Sterling's outlook is increasingly taking a turn for the worse. A deeper downward move against a broad range of currencies is on the horizon," said the bank in a new report, "Kingdom Under Siege".It expects the pound to fall from around $2.04 to $1.76 against the dollar over the next eighteen months, even though the dollar itself is in danger of losing its status as the world's "anchor currency".
David Bloom, HSBC's head of currency research, said signs that the Bank of England's monetary framework was "starting to fray at the edges" had begun to unsettle investors, tarnishing the City's reputation. Both the Northern Rock debacle and the decision by the Monetary Policy Committee to overrule the Governor in setting interest rates have inflicted damage.
"If further problems beset either the Bank of England or policymakers in the UK, the situation could turn from mildly negative to a lot more serious," he said.
The pound as been held aloft by inflows of "short-term" money chasing yield. British interest rates of 5.75pc are much higher than levels in Europe.
advertisement
It has been the darling of the yen "carry trade", drawing in speculative flows from investors in Japan and funds able to borrow at near-zero rates in Tokyo to take advantage of the 5pc interest rate spread. These flows are likely reverse abruptly as the UK economy slows and the housing market tips over, heralding lower interest rates.
The report said sterling would soon slip out of the G-10's top trio of high-yield currencies. "This could have dramatic consequences: the "hot money' flow that supported sterling could leave suddenly," said Mr Bloom.
Hot money deposits in Britain have ballooned fourfold in a decade to £4,000bn. "What we have is an enormous liability. People have been very happy to park their money in Britain because of the high interest-rate culture and the country's reputation for sound management, but if you start to unpick that, it can go very fast. These investors are fickle," he said.
HSBC believes that Bank of England will have to begin cutting rates by early next year, with growth falling to 1.7pc for 2008 as a whole and a high risk that Alistair Darling will break his prudent rules in his maiden year as Chancellor.
The loss of the interest prop comes just as the merger and acquisition flows into Britain start to dry up. There are no longer any big deals on the horizon, such as Ferrovial's takeover of BAA. Indeed, there has already been a net outflow in recent months as UK groups become net buyers in Europe. "Sterling's loss of M&A support is a dramatic reversal of fortune," said the report.
HSBC believes the big winners over coming months are likely to the emerging market currencies, especially oil and commodity producers facing inflationary pressures. Many are under pressure to break their dollar pegs.
"There is no doubt the market has moved into dollar hating territory and ther are very good reason for this. It is no longer the sole global price setter for commodities. The role of the US dollar as an anchor currency is being eroded," said HSBC.
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