Just when we thought it was safe to go back in the water the Greece debacle has blown up once again. Greek debt has been on a truly epic journey recently and now ten year yields have moved from circa 7.5% to 8.9%. 2 year debt is now over 10%.
Oddly enough the UK’s debt position is actually slightly worse than Greece’s yet UK Gilts are stuck around the 4% level.
There are many reasons for this disparity but they generally boil down to the fact that the UK has the freedom to adjust interest rates, currency levels, run inflation risks etc. These are options which are not available to the Southern European states.
Unfortunately, of course, the long term prognosis for the UK is that:
- Inflation rates are going to have to spike much higher
- The Pound’s value will have to plummet, or
- The UK will actually have to do something about the massive accumulation of debt, not just about the annual deficit.
This is not good news for the UK. Having said all this, UK equity markets are holding up and the US markets are at recent highs. But if you are trading then the CFD FX markets are the place to be at the moment, particularly with the Euro continuing to weaken.
In reality, I am quite surprised that the Euro is still so high. It is still significantly over valued on a cost basis versus every other major currency in the online CFDs markets. Longer term Euro sellers will be looking for a move towards $1.2450/$1.2500. However the hard pressed buyers will also be taking some comfort from the fact that the currency does seem to have quite a few supporters. With all the bad news you might have thought the price would have fallen far further.
Of course one of the things supporting the Euro spread trading markets is that most other leading nations are also in a spot of bother. We are not arguing about which currency is the strongest but which is the weakest.
As an example, Japanese GDP/Debt levels are now far in excess of 200% and with the Japanese experiencing deflation this total is increasing in real terms year on year.
With a rapidly aging population it is very difficult to see how they are going to extract themselves from this problem. Whilst the problems are currently containable, the future looks grim indeed.
The Yen may also be quite over-valued and, even though they are still a heavily trade surplus nation, the Japanese desperately need a weaker currency. Maybe we will see a long term battle to the bottom as the major currencies fight to lower their relative value.