“First, I have the ability to imagine configurations of the world different from today and really believe it can happen. Second, I stay rational and disciplined under pressure.”
For the British pound: Things might point higher, but they scream lower.
In reality, it is difficult to find correlations in any tradable time-frames when considering current account deficits for developed world nations.
Especially those who are able to print their own currency.
But I do think the current account matters in terms of relativity. And I do agree with UK Chancellor George Osborne that it does say a lot about the quality of growth within an economy.
The UK current account deficit is the highest among the Group of Seven nations and getting worse, even as optimism about the UK economy seems to be growing. Is the current account problem a ticking time-bomb for the British pound?
Here is the UK Current Account Deficit compared to that in the US, from 2004 through today – these are actual levels show in the graph below:
The key point: the US current account deficit has been improving for the last seven years. And just yesterday it was reported the US quarterly trade deficit was the smallest in 14 years. As a percentage of US GDP, it has fallen to 1.9%.
Yet the UK current account has been deteriorating for the last five-and-a-half years. Thank you, credit crunch.
It now stands at over 5% of UK GDP. And it suggests a much greater portion of UK growth has been credit-driven (housing) compared with US growth. (Yes, I realize it’s hard to imagine; but that seems to be what the relative stats are telling us.)
The current account as a percentage of GDP is a statistic we’ve been following for a while. And despite the lack of near-term correlation between it and currency values, there does seem to be a longer-term correlation between the US current account and the path of the dollar.
Back in 2008 we forecasted the US current account would go positive as a result of the credit crunch. I think more than a few people laughed at us then. (Oh well – we are getting used to that by now.) In fact, the current account, as it relates to the change in the global-macro landscape, was a major rationale for our forecast that the US dollar was in a multi-year bull market.
So what does this relatively nasty looking current account deficit in the UK mean for the British pound-US dollar exchange rate?
1) If the UK starts to make progress on exports and 2) if there isn’t a major risk event in the global credit markets that would further expose the UK growth driver and 3) there isn’t a flight to the world’s deepest capital markets (i.e. the US) on a geopolitical event, then it likely means very little.
But that’s not our bet ...
It’s not looking too good for the pound right now.