Newsletter article

Currency Report - October 2013

Croatia has been having a tricky time recently on the financial front. Ratings agency Fitch cut the country's long-term rating to BB+, one tier below investment grade and one step into the "junk" zone. All three of the major agencies now have similar ratings for Croatian sovereign debt, which are on a par with those of Portugal and Hungary. Fitch cited "a structurally weak growth outlook" and falling tax revenues as two of the reasons for its decision. Looking on the bright side though, Croatia's troubled public finances have caused HRT, the national broadcaster, to pull out of next year's Eurovision Song Contest.

The rating downgrade by Fitch will have contributed to the relative softness of the kuna in the last couple of months. From an eight-month high of 7.44 to the euro in early July the currency has weakened to 7.61, a level it last saw in early 2005. The kuna is down by -6.7% from its long-term high in late 2008. Against sterling it is roughly in the middle of the last 12 months' range

In the great scheme of things though, a decline of less than 7% against the euro over the space of five years is not on its own a reason to panic about the Croatian currency. Indeed, for property investors it is a welcome opportunity to pick up Croatian real estate at an unusually attractive exchange rate. It is possible, of course, that the kuna could weaken even further and that the central bank could shade its secret EUR/HRK target range to reflect the new reality. But the history of the kuna's movements in the last ten years suggests it will eventually return to its comfort zone around 7.5kn to €1 and that it will continue to be the sterling/euro price that acts as the main driver for sterling against the kuna.

And for the last month and a half the pound has been doing well against the euro. After a drubbing at the beginning of the year sterling has found its feet, partly as a result of greater clarity about the Bank of England's monetary policy but mostly because the UK has delivered a series of upbeat economic data. Unemployment is falling (though perhaps not in the way some economists would prefer to see) and companies are reporting increased business across the board. Whilst there is still a lively debate about whether Britain's economy is truly out of the wood, it is undoubtedly closer to the edge of it than was the case six months ago.

It is almost impossible to imagine the pound continuing to gain ground at the pace it did in August and early September. Nevertheless, it is far more difficult to be obsessively bearish about sterling than it was at the beginning of the year.

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