What Next for Sterling?

This week saw the Bank of England’s (BoE) minutes cause something of a stir as the possibility of further quantitative easing (QE) in the face of further economic weakness was placed back on the agenda. In fairness to the BoE, it has consistently had its fingers on the pulse of the credit crunch. It is a shame that the European Central Bank (ECB) has been the opposite, preferring a policy for the strong economies and not the weakest. The monetary bases in Europe have been squeezed over the past year, which simply perpetuates the problems of the peripheral countries. For sterling and gilts the response was instant, resulting in a sharp fall in the currency and a drop in yields. However, the weakness in sterling is at different levels within its basket, as I demonstrated last week in my comments about its value against the euro. In times of worldwide economic weakness, every currency wishes to be moving lower in order to gain an exporting edge, which can be a problem for treasurers.

Therefore it’s worth looking at some of the cross rates. Two stand out in terms of weakness – the Swiss franc and Singapore dollar. This pair is often overlooked, but with such divergent dynamics from an economic prospective, it acts as a lead barometer to sterling overall. This last week has seen new all-time lows and, by my measurements, is far from oversold. Against the Swiss franc it has also made new lows, but for different reasons. I noted in a previous post the dangers of assuming that that the Swiss franc is a one-way street to strength.

Figure 1: Sterling/Singapore Dollar

Source: CQG

 

 

Figure 2: Sterling/Swiss Franc

Source: CQG

The purple line in Figure 2 shows points where price is overextended.

Figure 3: Sterling/US Dollar

Source: CQG

Against the US dollar the picture is more mixed as both countries have the flexibility in implementing more QE and weakening their currency. In my view, if a new crisis develops, sterling will be become a safe haven currency, purely because it is not in the euro.

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