Sterling could win from London’s Olympic success

FX360

HOSTING the Olympics is an honour for both the city and the country where it is held. One of the major benefits is the financial investment – sporting facilities are built or upgraded, public transport is overhauled, and businesses flock to the area. But what happens after the stadiums empty and the medals are handed out? Do the Olympic Games have a lasting economic boost, or is a hangover more likely?

Recent history tells us that the economic effect of the Games lasts at least a few months after the world leaves. Based on the value of the host country’s currency against the US dollar, at least three months after the closing ceremony, the effect can be potent. Excluding Beijing, as China pegs its currency to the US dollar, Vancouver, Turin and Athens all saw their currencies appreciate. The euro gained significantly in the months after the Games in Turin and Athens, while the Canadian dollar surged initially, only to fall off that pace, after Canada hosted in Vancouver.

However, this has not always been the case. If we were to look back further than the last three Games, a different story emerges. The values of the US dollar, Australian dollar, and Japanese yen show that the post-Olympic hangover can be significant. These currencies lost value, and only the Australian dollar returned to positive territory before the three months were over.

Obviously, some of the gains or losses had nothing to do with the Olympic Games and were more influenced by governmental activity or inactivity. But the recent divergence is interesting. Over the last eight years, currency trading by retail traders has grown exponentially, as has access to information.

Plus, those countries that lost value after the Games are often viewed as “safe haven currencies”, while those that gained are viewed as “risk on” currencies.

What are the implications for the London Games? If the recent trend continues, then we can expect to see pound sterling gain between 100 and 1,100 pips in the next three months. Politically though, the Bank of England hasn’t done much to lift the spirits of sterling bulls, with its talk of more conciliatory action via interest rate cuts or additional quantitative easing. Plus, the influence of the Olympics is much more significant in smaller countries. London is a much more important city monetarily, as well as culturally, to the UK than Salt Lake City will ever be to the US.

Therefore, we could start to eliminate some of the “less vital to their total economy” venues like Salt Lake City, Nagano, Turin, and Athens. This leaves us only Sydney and Vancouver to use as comparisons. Each gained only about 100 pips on the dollar, three months after the party left town, but took different routes to that point.

Also bear in mind that currencies often move based on backward-looking information. This could be as true of any Olympic effect as for information like GDP, employment data or consumer confidence indices. So it makes sense that, in our highly connected world, any positive developments from hosting the Olympic Games will be felt for months afterward, as the data points from the event are calculated.

Plus, pound sterling falls into the same category as the euro, Canadian dollar, and Australian dollar as a currency that benefits when traders are looking to take on risk.

The Olympic hangover could be mild. In fact, the sterling-dollar pair may gain ground over the next few months, as the data begins to tell the story of a successfully held Olympic Games.