The usual screaming headlines chosen to promote a point of view. As cable drops this week to its weakest ($1.2117) since March 2017, too many are extrapolating current losses ad nauseam. Boris Johnson’s personality, his serious threat of a ‘no-deal’ Brexit, his combative stance towards the powers that be in the EU, all are used to weaponise the exchange rate. He may not be causing the selling, and who knows whether he wants it, but he’s certainly not alone in seeing a weaker currency as helping exports and the economy – although not necessarily the consumer, of course.
First and foremost, the pound’s track record as a store of value is appalling. The Bank of England’s sterling index, which measures the pound against a basket of currencies, has held fairly steady around a central rate of 78.00 for five consecutive quarters, just above the record low of 73.00 achieved in December 2008. Since 2000 the biggest loss in its value was during 2007-08 as the financial crisis built, resulting in a 31 per cent cut to purchasing power. The other one was in 2015-16 over the referendum on leaving the EU; 21 per cent weaker. However, the biggest losses were faced between 1981 and 1993 – a period shaped by Margaret Thatcher’s free-market policies – when the index fell by 42 per cent.
And let’s not forget that before the two world wars one needed almost $5.0000 to buy a pound. Successive devaluations saw the exchange rate floated in the early 1970s at less than half that, $2.3900. This year cable’s down by 4 per cent against the greenback, a total 9 per cent from March’s peak at $1.3380. Now hovering just above 2017’s low at $1.1979 and the record $1.1450 on a post-referendum spike low. To put these moves in context, the Korean won lost 5 per cent against the US dollar and the Swedish krona 6 per cent.
Against the euro, at £0.9189 this week, holidays in the eurozone will be costly or cancelled; the attraction of retiring to warmer Mediterranean climes wanes on this year’s 8.5 per cent cut in value. Not quite as weak as we got to in 2017 (£0.9300 and the Brexit vote’s £0.9365), nor 2009’s £0.9400) and 2008’s record £0.9800). Lousy exchange rates for the British, but let’s face it, not much can be done about it for now – but wait to see how the other side fares.
Against the Canadian dollar, one of the few majors to have strengthened against its US counterpart, sterling’s dropped from C$1.7800 in February to C$1.6000, a perfectly round 10 per cent loss. Not quite the record low, 1985’s C$1.4575. Historically it’s a volatile cross. Closer to home, the pound’s had a bad three months recently, lopping off 14 Swiss centimes for another 10 per cent loss.
The roster of losses feels relentless and is dispiriting; on any measure one chooses, sterling is certainly very cheap by historical standards. It’s already very close to rock bottom – but might be relegated to the bargain basement; this will no doubt be blamed on Brexit. But let’s not forget that when the UK, Denmark and Ireland too, joined the EEC on 1 January 1973, cable traded at $2.5800. It has been downhill all the way since; not such a success story. More importantly, remember that foreign exchange is an overlay with two moving parts.
Charts for this piece: Sterling index, GBP/USD, EUR/GBP, GBP/CAD.
