Readying for another round with the King

AS the markets look to Thursday’s Monetary Policy Committee (MPC) meeting and the possibility of Mervyn King giving the orders to fire up the printing presses once again, George Osborne voiced his support of monetary manipulation in a speech to the Conservative party conference. Saying that both he and David Cameron were “fiscal conservatives and monetary activists,” he said that “the Bank of England have their own independent judgement to make on quantitative easing (QE),” but that he would follow the procedures of his predecessor and give Treasury approval if they ask.

MONETARY CHANGE
As nineteenth-century statesman Richard Cobden put it: “I hold all idea of regulating the currency to be an absurdity.” Cobden, whose statue stands in the centre of Manchester where Osborne made his speech, added: “I would neither allow the Bank of England nor any private banks to have what is called the management of the currency.”

However we live in different times. Osborne, despite being a self-diagnosed supporter of free-markets, complemented his monetary manipulation stance with a vow to intervene in the markets and not “leave the country exposed to the whims of the international money markets.”

POWER OF THE KING
But as Osborne acknowledged, the decision to print more money lies in the hands of the governor of the Bank of England, Mervyn King, and the MPC. However, it appears that the question has become “when?” rather than “if?” King will give the go ahead.

Should QE happen, it would be the otherwise inert MPC’s first policy change since it voted to move its levels of QE to £200bn, equal to 14 per cent of GDP, in November 2009.

TRADING QE
Many expect that increased QE, by way of further asset purchases by the central bank, is more likely to happen in November – the Bank of England slashed its 2011 and 2012 full year forecasts in its August inflation report to 1.4 and 2.0 per cent respectively, and these figures will be updated in November. As MPC member Ben Broadbent said on Monday, it will not take much further weakening in the economy for the Bank of England to start up more QE.

If the measure is announced, traders should expect sizeable market movements – a QE move would be an implicit statement that the UK economy was in dire straits. Stirling would take an immediate knock, driving further flows into an already strong dollar. Expectation of a possible QE move has already started to have an effect – sterling-dollar slipped to a one-week low of $1.5490 yesterday. The month-low of $1.5325 now looms on the horizon. When the MPC moved to dump cheap money into the UK economy two years ago, it drove rates down and pushed money into equities and commodities as cash was earning nothing. Any flows into dollar-denominated commodities would likely be offset by dollar strength for UK sterling investors, but traders should look to profit from a QE induced bounce in the FTSE, as short-term positive sentiment returns to the UK equities market.