The pound versus commodity currencies
Commodity-linked currencies such as the rand and Australian, New Zealand and Canadian dollars have, for some time, been regarded as a safe haven of currencies.
In the past they moved in line with the price of oil and other natural resources, because of their economies' large focus on exporting these goods. Historically the pound has battled against these currencies; it enjoyed supremacy against all of them back in 2008 but fell dramatically from grace two years later.
In 2013 a new currency story is unfolding. In the past few months, the pound has made rapid gains against all four currencies: up 17 per cent to 1.6878, 13 per cent to 2.0057, 6 per cent to 1.6117 respectively against the Australian, New Zealand and Canadian dollars and up 19 per cent to 16.1274 versus the Rand.
As the latest currency movements play out, could we see the pound strengthen to its glory days of 2008? Crucially, what does it mean for anyone emigrating to these countries, or for those who are currently working in the UK that need to repatriate their salary or transfer money for their mortgage or pension?
Is this really a sustainable recovery for the pound?
Some of the foundation of the pound’s recent resurgence can be attributed to improved economic data from the UK. The UK managed to avoid a triple dip recession, while an uplift in data reduced the likelihood of the Bank of England resorting to further bouts of quantitative easing (QE). All eyes will be on the central bank as Mark Carney begins his stewardship in July to see if he chooses to steer the good ship Britannia in a different direction to the Monetary Policy Committee under the outgoing Mervyn King.
There are, of course, internal factors affecting the commodity currencies too. Concerns abound Australia’s economic outlook precipitating recent interest rate cuts. New Zealand has suffered at the hands of drought, while domestic unrest and strikes blight South Africa.
Domestic issues have also coincided with an economic slowdown in China, which played a big part in the strengthening of all of these currencies as the country became a greater global force and increased its demand for importing commodities. With the slowdown we are seeing and as the clamour for commodities falls so do their prices, resulting in obvious repercussions for commodity exporting countries.
Another influence in the recent move is a direct result of the economic recovery in the US. Each of the commodity currencies, in particular the Australian dollar, has strengthened as a result of the ‘carry trade’. A trade of this nature sees an investor borrow a low-yielding currency or asset and convert it to a higher-yielding one. Since 2008 there has been an enormous amount of cheap money pumped into the financial system through central banks’ monetary easing programmes. The one overseen by the US Federal Reserve has been the largest of all central banks’ and, therefore, the indication that it could begin tapering QE, a feeling reinforced by Bernanke’s comments at the FOMC meeting in mid-June, began an unwinding of these positions.
House price indicators are improving although question marks remain on retail sales, an important component of UK Gross Domestic Product (GDP). July will be a key month in shaping the immediate future with Carney’s ascension and the first reading of the Q2 GDP.
Protecting against currency fluctuations
For anyone looking to take advantage of current rates but who does not have all of their funds available, a forward contract is one way to hedge currency exposure. This solution enables one to lock in to a rate of exchange up to 12 months in advance providing certainty for those interested in formalising a specific budget. The same tool could be used to fix a monthly salary, enabling you to know exactly how many dollars or rand your pounds will equate to for the months ahead. The key is to make sure you are always looking longer term and are able to adapt to the changing market..
In continuing uncertain times and with so many factors in play, it is hard to predict with any certainty the speed and longevity of the pound’s recovery. In the interim, do all you can to mitigate risk so you don’t lose out to adverse currency swings.
Nat Davison is a currency specialist at Global Reach Partners