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U.K. Housing Set To Implode-Pound Set To Slide
Housing in the U.K. looks to be set for the same type of implosion that has occured here in the U.S. Homeowners with variable rate mortgages are already facing increased interest rates but the problem lies with the bulk of U.K. homeowners who are sitting on a short-term (5 year) fixed rate mortgage. Standard and Poor's has released a new report that says U.K. mortgage rates will reset to a significantly higher rates over the next 12 to 18 months. According to the report, the likely scale of this wave of resets is “relatively severe by recent standards”. Because the BoE has just gone thru a rapid series of rate increases, the increase in monthly mortagage payments will the larger for borrowers coming off fixed rates. At the same time, slowing house prices and tightening lending standards mean fewer options for refinancing. Most U.K. mortgages will reset by the first half of 2008. While the report goes on to esimate that the average homeowner will see an increase of around 26% in their monthly payments, the most severe scenario sees increases rising as high as 60%. The question now is could the wider impact be felt even ahead of the wave of mortgage resets due next year? Data out on Friday showed that British consumer confidence had the lowest reading for almost two years. It's significant because the second round of interviews for the survey were conducted just days after Northern Rock fiasco. Consumer morale hasn’t been lower since December 2005. With the BoE having apparently dropped it's inflation bias and with these projections now being published for U.K. housing, the rate doves are likely to come out in full force. Many have viewed the 50 basis point cut by the fed as pre-emptory, meaning that the same type of action could be seen from the BoE as well. They have to be hoping that inflation will continue to trend down in order to be able to make the needed rate cuts. Having gone thru the experience of imploding U.S. housing and Dollar weakness, it's logical to think the same thing could happen with the Pound. Besides the emerging market (EM) currencies (Brasil, Russia, India, China aka BRIC), likely places to see the Pound weaken significantly are vs the CAD and AUD. Those economies look to be expanding on the continued demand for commodities, who's prices look to go higher due to dollar weakness and continued demand from EM's. Already, GBP/CAD has returned to the mid 2006 lows (2.0312) but is over 500 pips above the early 2006 level (1.9750), while GBP/AUD has returned to levels not seen since Sept 2005 (2.3045), matching the 1999 lows. It could head towards early 1996 lows(1.900). If the BoE looks to be dovish, GBP/NZD looks good on the expanding interest rate differentials. Current level (2.6996) could approach the late 2005 level (2.400) and head towards the first quarter 1996 low (2.100). The Pound could also be set for further declines vs the Euro. It's now sitting at the March 2006 high (.6966) and could be headed back to the early 2003 levels (.7200). Goldman Sachs sees GBP/USD falling back towards 1.88. Thanks for reading my post and please use the box on the left to vote. If you're interested in in finding out about my trade room, blog and trading primer contact [email][email protected][/email]
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