Sterling is no shelter from the storm

WITH the downgrade of US government debt by Standard and Poor’s last week, and the ongoing turmoil in the crumbling Eurozone, George Osborne could be forgiven for feeling a little bullish in his outlook for the UK economy, referring to it as a harbour in a financial storm. In comparison with the US debt ceiling bickering and the Club Med countries kicking the financial can down the road with one bailout after another, Britain has pursued a course of spending cuts which have been looked upon favourably by the markets. Britain’s CDS rates are lower than Germany’s and following Osborne’s credible approach to addressing the fiscal deficit, Standard and Poor’s took the UK off their negative outlook, and maintained its AAA rating.

But despite this, all is not rosy in the gardens of Number 11. “The chancellor of the exchequer may say that the UK is a safe harbour during this terrible financial storm the markets are experiencing, but the fortunes for sterling don’t seem to be getting any better,” says Angus Campbell, head of sales for Capital Spreads. Yesterday saw a slew of lacklustre economic announcements with industrial and manufacturing figures all coming in under analysts’ predictions. As well as these poor figures, according to Campbell: “The UK has had to deal with downgrade after downgrade to its economic forecasts, and so foreign investors are still a little unsure as to how safe their cash would be if they were to exchange it into sterling.”

Sterling’s pretensions to the haven currency throne are quickly usurped when you look at its performance against established havens. “Real safe haven currencies such as the Swiss franc have been appreciating uncontrollably against most other currencies and the pound is no different. This year alone, sterling has given up 17 per cent to the Swissie” says Campbell (see chart, above).

But in comparison to the euro and dollar, sterling seems to be holding up much better. According to David Jones, chief market analyst for IG Index: “My view on sterling, particularly sterling-dollar, has been pretty much the same all year. Plenty of volatility with the odd run to test the $1.7000 area, but ultimately I think that because the US economy is still a bit stronger than ours, it will end up seeing the year out where we are now at $1.6300.”