| No longer in the naughty chair |
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| Written by Gary Howes |
| Friday, 19 June 2009 07:45 |
A look at a resurgent sterling by Mark Deans, Dealing Manager at Moneycorp.  For 18 months or more sterling was confined to the naughty chair. The punishment started when Northern Rock went bust and it continued through to January this year. The details of the accusations were many and varied, but the punch-lines were consistent: Britain's economy is in a hole. The government is spending money it doesn't have and can't borrow. The recession in Britain will be deeper and longer than that of any of its peer group. It was a convincing story, especially once the International Monetary Fund began singing from the same hymn sheet and the Organisation for Economic Co-operation and Development started humming the tune as well. Investors were having doubts about the situation as early as December last year. They had the opportunity to push sterling below €1 on New Year's Eve and they shrank from their duty. Three weeks later they had the pound on the ropes again, at its weakest against the US dollar in nearly a quarter of a century. Again they flinched. Had they spotted something to make them nervous about selling sterling lower? You bet they had. They were beginning to see the glaring hole in the theory and they saw it ever more clearly as April and May came and went. The economic data simply did not support the argument that Britain's economy was fundamentally in more trouble than that of other major countries. For three months on the trot, Purchasing Managers' Indices (PMIs) from Euroland and the United States lagged the equivalent UK index. The PMI aims to distil companies' collective hopes and fears into a number somewhere on a scale of 0-100. Below 50, companies on average are doing less business than before. Above 50, things are looking up. For the services sector in Britain the May PMI, released in early June, was in the expansion zone at 51.7. The equivalent figures for Euroland and the States were 44.8 and 44.0. For those who maintain that PMIs represent opinion, not scientific fact, there were other figures to persuade them. Data for March – the latest month with a full set of figures – showed industrial production in Britain falling by 0.3%, while the Eurozone and the United states declined by 1.4% and 1.5% respectively. Unemployment in Britain is 7.1% and rising – but so it is elsewhere. In Spain it is 17.4% and in Germany 8.2%. Euroland as a whole has 9.2% of its workforce idle and 8.9% of Americans are looking for a job. Nobody can tell where the major economies will head next. The current recovery in sentiment could easily burst if unemployment continues to rise – which it almost certainly will. House prices are going down more slowly, but they are still going down. No politician worth his salt is talking about "green shoots". There is also the political sword of Damocles hanging over the British Prime Minister and his retinue. When it looked possible that Mr Brown would be forced out of office by his own team, the pound took a bath. It has since recovered, but the risk is clear: political uncertainty is bad for sterling. Nevertheless, the pound has since made a full recovery of those losses, breaking above the resistance that had kept it below €1.16 since December and challenging seven-month highs against the US dollar, the yen and the Swiss franc. Its future looks more promising now than it has since the early part of 2007. Is that a guarantee of future success for sterling? Not at all. This is foreign exchange we are talking about; that strange world where a Korean missile test or a Japanese ministerial resignation can turn everything on its head in an instant. Domestic surprises are of course far more potentially disturbing for the pound. If you need predictability, buy yesterday's newspaper. If you need protection against FX movements, hedge your exposure. Buyers of foreign currencies are, in the case of most currencies, as well-placed now as they have been all year. Compared with last year's exchange rates, the current market prices are, of course, not looking too clever. Even so, given the chance to buy dollars and euros at or near the year's high, who amongst us would have dismissed the opportunity three months ago? The pound shows every sign of wanting to go further, but it will not be a one-way street. There will be setbacks and surprises and disappointments. If you are a buyer of foreign currency, it might be wise to place a stop order that will protect you from the unexpected. If you are a buyer of sterling who has failed to take advantage of its lifetime lows to lock in a decent fix for your receivables, bad luck, but do not give up hope. There is almost certain to be a setback. 
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