Special Report
Volatile currency markets have only added to the financial despair of companies trading across borders. This special report offers advice to Finance Directors on how to hedge against this volatility.
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Sterling: looking back at the year so far |
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| Special Reports | |
| Written by Mark Deans, Dealing Manager at Moneycorp | |
| Thursday, 04 June 2009 | |
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The best strategy is a 50% hedge of any currency exposure combined with a readiness to cherry-pick the peaks or troughs. If it isn't one thing it's another. For as long as investors could remember they had been struggling with the financial crisis, the credit crunch, the global recession and all the baggage that went with them. There was not exactly light at the end of the tunnel, but at least the darkness seemed to be stabilising.Things were getting worse more slowly. So what popped up from nowhere? Swine flu. There is never a good time to have a pandemic: For one to appear just as the world was trying to get its economic act together was particularly vexing. The risk was clear. A serious global threat to life would result in physical and psychological barriers to commerce and activity. Not just tourism would be affected. Travel to and from affected areas would be cut to a minimum in order to limit the spread of the virus. Confidence would take another hit and shoppers would stay at home behind closed doors. There would be a further slowdown in the global economy and recession would become depression. A decimated global population would depress demand for decades. That was the case for apocalypse soon. The optimistic view, and one to which the financial markets tried to cleave, was that governments were better-placed to distribute vaccinations and medicines than ever before. Rapid and co-ordinated action would snuff out the virus in an instant. Whatever the outcome, investors had to deal with a virus rather more deadly than the Millennium Bug. Back in the macroscopic world, the news was getting slowly better. Correction – slightly less bad. Despite the numerous predictions from the International Monetary Fund and others, that Britain's recession would be the deepest and longest of all, the economic data has yet to confirm the accusation. Industrial production in Britain has fallen less than in Euroland, the United States or Japan. Unemployment here is lower than it is in Germany, the Eurozone and the States. The fourth quarter contraction in Britain's GDP was exactly the same as that of the US and the Eurozone. None of the data could be described as good but, so far anyway, it was not as bad as the doomsters predicted. Sterling was wobbling along, doing no great harm to anyone, when the belated budget day came around. For a decade, the budget speech in the House of Commons was a ho-hum sort of event, predictable and predictably dull. You knew it was going to be more of the same, so there was no reason to pay too much attention. This year's offering was a different matter. With the economy in the slough of despond, tax revenues tumbling and bail-outs booming, the Chancellor had to do something to bridge the gap. He could raise taxes, reduce spending or mortgage the grandchildren. Mr Darling chose to do all three and it did not go down at all well. Investors naturally assumed that the Chancellor's numbers had been swerved to suit his case. Thus, growth and taxation would fall short of his projections while spending and borrowing would overshoot. Given that the official numbers did not look too clever to start with, the cynically-adjusted ones looked pretty awful. The longer Mr Darling talked, the lower sterling went. Investors did not fancy the idea of mopping up the £200+ billion of gilts on sale this year. Nor were they any keener on the idea of a combination of tax and NICS that would extract 61% of their marginal income. To add insult to injury the Daily Telegraph ran a scare story that Mr Darling's budget could cost Britain its AAA credit rating. Although there was no substance to the allegation, some of the mud stuck and for the following week sterling found everything a bit of a struggle. But the good old pound soldiers on, grimly clinging to its status as a more valuable currency than the euro and repeatedly revisiting the level at which it was trading against the dollar five months ago. There is plenty of movement but so far this year it has gone nowhere against other major currencies. The speculator George Soros said early in the year that sterling would "continue to fluctuate" and he has been spot on with his forecast. An exchange rate that moves a lot and goes nowhere is a mixed blessing to people and firms with currency exposure. On the one hand it offers regular opportunities to buy the dips or sell the peaks, minimising costs or maximising revenues. On the other, it provides just as many chances to be panicked into wrongly-timed trades, selling the dips and buying the peaks. The best strategy is a 50% hedge of any currency exposure combined with a readiness to cherry-pick the peaks or troughs as they occur. After all, there is bound to be more fluctuation. |
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