Deutsche Bank says risk of pound crisis growing as Truss becomes Chancellor

A Deutsche Bank banner is printed in front of Germany’s share price index, the DAX board, at the stock exchange in Frankfurt, Germany, September 30, 2016.


Follow the news that Liz Truss will become the new prime minister of Britain, Deutsche Bank Policy announcements in the coming weeks will be crucial if the UK is to avoid extreme macroeconomic events, particularly the balance of payments crisis.

Truss won the race to succeed Boris Johnson as leader of the ruling Conservative Party on Monday, following a protracted showdown with former Finance Minister Rishi Sunak. Truss received 81,326 votes from Conservative members, while Sunak received 60,399.

The pound was partly higher against the dollar on Monday afternoon, trading just under $1.15, but Deutsche Bank FX Strategist Shreyas Gopal warned that the risk of the currency should not be underestimated. a “pound crisis”.

“With the current account deficit already at a record, the pound’s large capital inflow demand is supported by improving investor confidence and falling inflation expectations. However, the opposite is happening. out,” Deutsche Bank said in a note on Monday.

“The UK is suffering from the highest inflation rates in the G10 and a weakening growth outlook. Bank of EnglandHis mandate could lead to an even larger increase in inflation expectations and – at the extreme – the emergence of fiscal dominance. “

Truss has placed the Bank of England and its Governor Andrew Bailey firmly in her leadership campaign, blaming the central bank for letting inflation rise to a 40-year high and is said to be watching Review the Bank’s mandate.

Rycroft: Truss has 'only day' to come up with a solution to the energy crisis

She also proposed scrapping the Northern Ireland protocol, a key part of the post-Brexit withdrawal agreement between the UK and the European Union, a move likely to prompt retaliation from the bloc.

Gopal thinks the added uncertainty about trade policy will continue to cloud the macroeconomic picture and dampen investor confidence.

“The risk premium for UK pullets has increased, coinciding with unusually large outflows. If investor confidence is further eroded, this move could turn into a disaster. a self-fulfilling balance of payments crisis whereby foreigners would refuse to finance the UK’s external deficit,” he said. .

Deutsche Bank estimates that the commercial pound – a measure of the value of the pound against the most important chosen currencies for international trade – would have to fall another 15% to bring the UK’s deficit England on the 10-year average.

“A balance of payments funding crisis sounds extreme, but it’s not unprecedented: a combination of aggressive fiscal spending, a severe energy shock and a falling pound. eventually led to the UK resorting to an IMF loan in the mid-1970s. Gopal said.

“Today, the UK retains some key lines of defense against a sudden stop, but we are concerned that the risks are growing.”

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