Sterling - the currency everybody loves to hate
Tuesday 30th March 2010
By Mike Jones
Tristan Hanson, manager of asset allocation and strategy at Ashburton, considers the future for sterling.
He said: "Sterling has become the currency everybody loves to hate. Many would argue with good reason. Most commentators are only too willing to highlight a grim UK future, economically and politically. In our view, however, now is not the time to turn bearish on the pound.
"Asset prices typically bottom when the news is bad, sentiment extremely negative and valuations compelling. Foreign exchange markets are no different, although subject to greater noise and larger swings than many asset classes.
"What might suggest we are close to a low? Sentiment is clearly awful, a view supported by the extreme negative positioning against the pound evidenced in futures markets. The pound's valuation in purchasing power terms is also rock-bottom by post-war standards when measured against a basket of currencies - equivalent to the levels reached during the 1970s when Britain was forced to turn to the IMF. It is worth noting that the pound has suffered a greater devaluation than during the ERM crisis, at a time when other countries face serious issues too (as the recent Greek turmoil highlights).
"Predicting short-term moves in currency markets is typically a futile exercise. They are typically dominated by noise and excessive attention to near-term events - the vast amount of collective energy wasted on worrying about a looming election is a case in point. Especially when there is widespread public consensus that the one burning issue - the budget deficit - needs to be addressed over the medium-to long-term.
"Investors would be much better off trying to determine likely medium-term trends. In our view, the pound is unlikely to fall much further against a broad basket of developed market currencies over the next two to three years, and could rebound significantly. We will know the catalyst for the change in trend only after the event.
"As Paul McCulley of PIMCO so presciently remarked, investors have 'very little patience and a very big imagination'. It may be that things in Britain - and in particular its currency - are not as bad as most currently think.”
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