Sterling’s slump due entirely to polls

Allister Heath
POLITICS seems to have become just about the only influence on the pound in recent weeks – or so says a fascinating research note by Adam Cole of RBC Capital Markets. He plots sterling’s trade-weighted value against the Tory lead over Labour in a poll-of-polls. The trend is clear: the shrinking Tory lead is almost perfectly correlated with the weakening pound.

This is not so much because forex traders are Tory supporters, though most undoubtedly are. It is that they are scared stiff of a hung parliament and the chaos and weak government that would ensue. We need to cut spending and fast after the election; over time, a continuing over-supply of gilts would push down sterling, though this would be the least of our problems.

There can be no doubt that the pound would be worth much more in the absence of the massive budget deficit and increasing political uncertainty. The pound’s discount to purchasing power parity is currently close to 20 per cent against the euro, using the OECD’s and RBC’s estimates. Based on the same long-term fair value estimates, sterling is undervalued against every other G10 currencies with the exception of the greenback. All of this is undoubtedly good news for exporters – but it guarantees even more volatility in the days and months following the election.

So Google can be vanquished after all: Facebook grabbed 7.07 per cent of all web visits in the US last week, against 7.03 per cent for Google’s main site. It was the first time Google wasn’t ranked top since September 2007. All of which prompts several thoughts. Social networking sites are continuing their relentless rise: contrary to what critics had predicted, Facebook has successfully shrugged off privacy concerns and other fears. For all the middle class hype about Twitter, it remains miles behind. But the challenge for social networking remains unchanged: they must generate revenues to match the eyeballs. Facebook is right to be introducing PayPal pay to try and boost commerce; but the site remains a bit of a cottage industry next to the mighty Google.

As can be expected, there is a lot of guff and downright nonsense in Senator Christopher J Dodd’s proposed US banking reforms. His support for the Volker rule – a compulsory separation of proprietary trading from large universal banks – may sound superficially attractive but would not have prevented a single institution from going bust during the crunch and is therefore the wrong solution to the wrong problem.

But there are also several interesting ideas, not least a serious attempt at producing a new bankruptcy law designed specifically to allow the largest and most systemic institutions to be wound down without endangering the rest of the system. That is the most important rule change that the City and Wall Street now require. It would make the system less prone to excess risk-taking, eradicate moral hazard and allow the banking industry to regain its lost moral high ground. Dodd also wants to give shareholders more say on executive pay and electing directors. This is a good idea: extending shareholder democracy would force large institutional investors to play a larger part in corporate governance. Our politicians should take note.