It was only a week ago that the Fed raised interest rates by 75 basis points and a day later when the Bank of England followed suit and also raised their rates by 50 basis points and announced quantitative tightening. Well, yesterday the Pound suffered a historic 'flash crash' to new historic lows, sending Gilts (English treasuries) rates higher by 1.45% in the highest monthly jump in rates since at least 1979. The turmoil was caused by new Prime Minister Truss's budget which hands out 45 Billion Pounds in tax cuts to the wealthy while adding 72 billion Pounds of debt.
Inflation is at double digit, 40 year highs in England, a tune the entire world is now familiar with. Along with the flash crash, this has spooked investors away from the Pound, forcing Gilt rates higher which then in turn mean higher borrowing costs for the government. It doesn't make much sense to be handing out free money when the cost of borrowing that money creeps higher, leaving tax payers on the hook, of course.
This would explain why the U.S. dollar has gained so much strength when yesterday, the U.S. Dollar Index hit 114.188 . At present the dollar is flying high at 112.74 and there's some talk it will go to 120 and possibly even higher as weakening currency holders around the world panic and run to exchange for dollars, exacerbating the situation even more.
Last week, the Japanese Yen cratered to 25 year lows, forcing the Bank of Japan to intervene and sell off some of its U.S. Treasuries to buy back its own currency in an effort to stave off further decline in the Yen. While it worked for a few short days, it appears the Yen is again losing ground as of this morning.
Since about 5 o'clock this morning, the CAD vs USD has gained more than a penny. The CAD was at .7889 on September 13 and fell to a low of .7228 just this morning before rallying to .7344 against the USD, right about the same time the Bank of England capitulated and announced they were going back to quantitative easing.
The Canadian dollar was last in the 80 cent range on April 22 and was on a steady decline along with every other currency around the world vs the USD but has held its own ground while other major currencies, including those from the third (Japan) and fifth (Great Britain) largest economies in the world are at historic lows. Is there a safe haven flight to the Canadian Dollar happening in tandem with the USD? If so, what are its implications in the long run?
Looking at gold, it's not surprising to see it go on tear this morning, dropping to below $1620 before suddenly rallying as soon as the news from the Bank of England echoed around the world, to where it now sits at $1660 per ounce. Silver had briefly dropped to just below $18 before it too rallied back to $18.92 and appears poised to climb above $19.
Along with geopolitical tensions from Russia / Ukraine and China / Taiwan, we are now facing the Nordstream 1 and 2 gas leaks in the Baltic Sea. It's much too obvious this was an act of sabotage. For what purpose, is anyone's guess. Nevertheless, it is sure to ratchet things up a notch or two as the blame game begins.
Now's a good time to stock up on dry and canned goods and jugs of water, just in case things go south even further. It looks like we're in for a hell of a winter so it's better to be safe and prepared. I've heard that tuna will get much more expensive because the ships use diesel. While at Costco this morning, I made sure to buy a six pack of canned tuna, just in case.
Check out some of my other posts...
What a week! Central banks continue to raise rates.
Getting ready for the coming cold, cold winter.
Getting ready for the coming food shortage.
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