Newsletter article

Currency Report - June 2013

With only days to go now before Croatia accedes to the European Union the two daily flights between Zagreb and Brussels will be operating at close to maximum capacity. Neven Mimica, Croatia's deputy prime minister, was on the 06:20 earlier this week on his way to an interview with MEPs as his country's nominee for the job of consumer policy commissioner.

National bank governor Boris Vujcic had a choice of three flights when he flew to London on the same day to attend a central bankers' gathering. He said in a speech there that, as far

Croatia's membership of the single currency is concerned, the sooner it happens the better. "I always quote the Bob Dylan song 'When you ain't got nothing, you got nothing to lose'. If you don't have independent monetary policy what are you going to lose by entering into the monetary union?"

That is the rub for Mr Vujcic under the current setup. His bank cannot run an independent monetary policy because the kuna must shadow the euro and Croatian banks are heavily involved in the euro. To keep the kuna steady against the euro requires Croatian monetary policy to be aligned with Frankfurt's decisions. Aligning Croatian policy with Frankfurt not only keeps the kuna steady against the euro but also encourages banks to migrate their assets and liabilities into the single currency in anticipation of the euro becoming legal tender. Mr Vujcic looks forward to the day that happens.

Until then the value of the kuna against the euro will vary, but not by much. The sterling/kuna exchange rate is not an identical twin to the sterling/euro rate but only a mother could tell them apart.

Neither has moved far in the last month. The pound is down by around one euro cent. All of that damage took place within the space of 48 hours in the second half of May as a result of unwelcome UK economic data. Inflation and retail sales both fell more sharply than expected. Lower sales would be likely to encourage the Monetary Policy Committee to embark on another round of asset purchases (otherwise known as quantitative easing) and lower inflation would give the MPC more scope to make that decision.

Things have moved on since then and the pound has recovered by more than a cent from its lows. The latest figures show that in the manufacturing and services sectors of Britain's economy activity is growing while similar firms in Euroland are doing less business. Whilst that is not to say Britain's economic woes are behind her or that sterling/euro will be heading for the stars, it does make a further round of asset purchases less likely and that, in turn, increases the appeal of the pound to investor.

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