Newsletter article

Currency Report - August 2013

Fancy a Forcebook UltraPhone 40? It has, among other features, a 4" screen, a 1GHz processor and dual Sim capability. Croatia's HG Spot Informatika is producing it and the media headline reads; "First smartphone made in Croatia". That description is not strictly accurate; the instrument is actually manufactured in China, as are most of today's handsets. But the design and production development took place in Croatia and it can be yours for a modest 498.99 kn.

Today that translates to €55.30. A month ago it would have been equivalent to €55.80 and two months ago €54.80, the average of those two prices being €55.30. In the run-up to Croatia joining the European Union the value of the kuna moved higher; since then it has subsided to its comfort zone in the vicinity of 7.5 kn to €1. The first month of EU membership has brought no surprises for the kuna. Indeed it would have been a surprise if there had been a surprise. Having shadowed the single currency for several years from outside the union, it should be easier for it to do so today from within.

Euro zone residents with a financial interest in Croatia therefore have little to fear from the EUR/HRK exchange rate because it so steady. British residents, however, are at risk to the fluctuations of sterling against the euro. If they had only been watching the exchange rate for the last six months they might conclude there was nothing of which to be frightened. During that time the pound has remained between €1.19 and €1.14, a range of just ±2%. But folk with only slighter longer memories will recall that exactly a year ago a pound would have bought €1.28. Since then it has lost 10% of its euro value.

It is no coincidence that it was also almost exactly a year ago that Mario Draghi, the president of the European Central Bank, made his landmark promise that he would do "whatever it takes" to preserve the euro. Those words had a profound impact on investors that has not faded with the passage of time. Even those with long-term doubts about the viability of the single European currency are confident that the ECB will hold it together in the short term.

That is not to suggest a mantra of "euro good, sterling bad" but investors are clearly more comfortable embracing a currency sponsored by Germany and the ECB than one which might, at any moment, be subject to another round of quantitative easing by the Bank of England. The likelihood of such a move is certainly less than it was before news that the pace of UK economic growth had doubled in the second quarter of the year but it cannot yet be ruled out and, because of that, investors still cannot quite bring themselves to trust the pound.

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