Currency Management

Currency Report - August 2014

Northern Ireland, Malta, Scotland, Iceland and Morocco are about to be joined by Croatia. No, it is not some new international political union, these are the countries which provide the settings for the TV series Game of Thrones. Šibenik, 60km northwest of Split, is the latest location and at the beginning of this week hundreds of people queued up there to be auditioned for parts as extras. Filming in Šibenik will take place between 18 and 23 September.

By then, if the performance of sterling against the kuna over the last four months is anything to go by, the pound will have strengthened by 2.5%. That is what it did between mid-March and mid-May and what it has done again over the last two months.

Of course, as the wealth warning on every financial product says, past performance is no guarantee of future results. Sterling has enjoyed a steady rise against the euro since March and a rather more patchy one since July last year but as it approaches the high of July 2012 it will encounter increasingly strong headwinds. That peak of two years ago is only a couple of cents above sterling's current level and just a cent short of a six-year high. There are plenty of investors, companies and individuals out there who would be delighted to sell the pound close to a six-year high (or buy the euro near a six-year low).

If the investors who have been loading up with sterling for the last year still have an appetite for more it is conceivable that they could absorb such selling and take the pound onwards and upwards. However, it is also possible that they could decide to realise the profit on their long positions by joining the sellers.

The pound's rally has been sustained by a variety of factors, including inward real estate investment flows and the UK's relatively robust economy. One of the major influences has been - and is - the expectation that sterling interest rates will soon begin to head higher, perhaps before the end of this year. A month ago the Bank of England governor said that could happen "sooner than financial markets currently expect".

However, the risk for sterling is that its rally cannot continue indefinitely on the hope value of a rate increase. Anyone with kuna or euros to buy, whether for a house purchase or monthly living expenses, should give careful consideration to taking advantage of currently-available exchange rates. The cautious approach is to hedge the exposure by fixing a price today for half the required sum. Locking into half the amount does not ensure the best price for the whole but it does guarantee not getting the worst one.

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