Threadneedle: Outlook for Sterling
Stuart Frost, co-fund manager of the Threadneedle Absolute Return Bond Fund, comments on the outlook for Sterling: "With a UK election imminent, it is inevitable that Sterling will become the focus of attention in the foreign exchange markets.
"However, what is probably different to past periods of Sterling pressure, is the lack of isolation. After all, past sell offs in Sterling occurred when there were clear cut alternatives, such as the US dollar or the Euro (Deutsche mark). But the Euro has struggled of late with its own set of problems and the US dollar is only just on the turn after a period of excessive weakness. The Chinese Renminbi would be an alternative, but such is China's reluctance to move in the face of economic reality that it is not compellingly attractive.
"Sterling has particularly suffered recently against commodity currencies such as the Australian Dollar with the probability that GBP/AUD could soon fall as low as 1.50, effectively a halving of the value from the high at 3.00 in 2001. That is quite a story considering the fact that yesterday the Australians raised rates to further enhance the attraction of their currency whilst this option currently seems a far off prospect for the British authorities. All of this underlines a geographic shift in economic activity that even the euro will not be immune to.
"There are benefits to having a weak currency, with exports being extremely competitive and FTSE companies an attractive investment for foreign investors willing to take on Sterling exposure. This year the recovery in the US dollar has been a key factor in Sterling weakness, along with the PIGS debt situation in Europe and the uncertainty over the UK election.
"Markets don't like uncertainty and consequently Sterling is likely to wobble further, but unlike previous occasions of excessive Sterling weakness, there is comfort in one simple fact, "we are not alone", so with a post election rally very possible, we would not write off Sterling completely. Against the Euro, Sterling has been relatively stable between 0.85 and 0.95, having seen much of that weakness 14 months ago. Interestingly currency weakness has not impacted on the FTSE, UK exporters are benefiting more so than any European country. The stability in FTSE probably says the UK equity market is looking past the UK election and that may help Sterling in the long run, but not enough to see a complete reversal of fortune."