Join our community of smart investors

You are NOT the weakest link

In a world of extremes sterling looks surprisingly robust
March 13, 2018

Life today is polarised, the many versus the few, massive debt and derisory interest rates, ballooning house prices and stock markets, pathetic pay rises despite record employment. The list might also note an ageing population and decreasing fertility rates, reduced infant mortality and improved educational attainment. In FX markets, some countries are battling with overvalued currencies, others happily allowing theirs to devalue.

The Japanese have fought these secular trends for nigh on three decades, yet their currency is still seen as a safe haven. Britain tends to have the opposite problem, inflation threatening to get out of control, immigration more recently swelling the population to a record high, and employment at its highest ever – and one of the highest in the G20.

Yet the press keeps telling us that our currency is worthless and will go to the dogs; that it’s a one-way bet and that the economy will be on its knees once Brexit kicks in. Hold on a minute. Sterling’s risen by a not inconsiderable 13 per cent against the US dollar since Donald Trump started the day job, outpacing Anglophone nations and most European currencies, except the euro, Czech koruna and Hungarian forint. Today cable’s chart looks slightly bullish, trading under the mean regression at $1.4250, with the possibility of hitting the psychological $1.5000 this year.

 

Against the euro, it’s weak, hovering at 88p per single currency unit, having never reached parity even at the height of the financial crisis a decade ago. The Swedish krona is in a similar situation, trading above the psychological 10 per euro for the first time since 2009, which was the only time it has done so.  We had warned you this might be the case 18 months ago, and today’s charts look no brighter for Scandis. Caused in part by a Riksbank key rate of minus 50 basis points, a Stockholm property market that looks like it’s just burst, and banking issues regarding eurozone rules, a pop up to 11 is easy and a new record high at 12 kronor per euro a possibility.

 

Another laggard is the Canadian dollar, up a paltry 3 per cent against its US counterpart since January 2017, courtesy of an unhelpful southern neighbour, trade wars and the potential collapse of the North Atlantic Free Trade Agreement (Nafta). Today the technical picture is complex and unclear, holding at its long-term mean regression of C$1.2600 per greenback, halfway between its weakest (C$1.6180) in 2002 and strongest ever (C$0.9050) in 2007. Like the UK, Canada will probably face the daunting task of negotiating trade treaties in an environment of subdued commodity prices. Avoid.

 

This month some started worrying that the Hong Kong dollar is trading through the peg that’s held since 1984. Keep an eye out, but at less than 2 per cent weaker than a year ago, and considering the Hong Kong Monetary Authority’s track record, this is not one to bet against.

 

The weakest link among G20 countries is Turkey, where an 8 per cent devaluation against the US dollar over the period we are studying is again something I warned about when first taking over this column in July 2014. The Turkish lira had just hit 3 per pound, equivalent to 2.10 to the US dollar. It hit its weakest ever in November last year at 3.98 and looks to weaken further.