Newsletter article

Currency Report - February 2013

Tourists go to Croatia for different reasons. Sometimes they are drawn by the sparkling Adriatic, with others it is the tranquillity of the mountain waterfalls and mists. For one Belgian woman it was a black box. Having set her GPS navigator for an 80m trip she left home to meet her friend at Brussel-Noord Station. Two days and 1,450km later it dawned on her that she might have taken a wrong turn. A helpful Zagreb policeman confirmed this suspicion.

Sterling might have taken a wrong turn too, at least from the point of view of sterling-based expats and holidaymakers. Six months ago one British pound would have bought 9.4 kuna. Today you would struggle to get 9.0kn.

The kuna itself is not to blame; it is actually a touch weaker against its main yardstick, the euro. Having strengthened to 7.4kn = €1 in mid-September the kuna has retreated beyond 7.5. But sterling has had a bumpy and uncomfortable ride downhill against the euro, falling ten euro cents (-8.6%) from its peak last July. Sterling's decay has accelerated since the turn of the year, with a -3% loss in the first three weeks of January.

It must be tempting for sterling's supporters to complain that it's all so unfair. Most of the UK economic data have been better (or at least less bad) than those from Euroland. Britain still has three AAA credit ratings. The UK economy probably shrank by less in the fourth quarter of 2012 than those of Germany and Euroland. So what's the beef?

But moaning won't get sterling anywhere. For the moment it is out of favour because the euro is the FX world's poster child. It looked a month ago as though sentiment towards the single European currency had turned a corner and so it looks now. Investors have switched from scepticism to blind faith in no time at all. Will Greece leave the euro? Don't be absurd! The change of heart means that nobody cares any longer about the supposed safe-haven qualities of the pound. At the same time they worry that negative fourth quarter growth and the government's minimal progress on narrowing the deficit could result in a downgrade of the triple-A rating sooner rather than later. To top it all, the swelling anti-European rhetoric in Westminster raises a genuine concern that Britain could vote itself out of the European Union in a fit of pique about human rights and straight bananas.

In truth, the pasting that sterling has received since the turn of the year looks overdone, as does the euphoric assumption that there is no possibility of another financial crisis in Euroland ever again. But currency moves such as this one are almost invariably overdone. It looks as though sterling will have to have two or three more euro cents lopped off its value before reality sets in.

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