Smart Currency Exchange's Nick Ryder gives us his predictions for the year ahead.
This time last year we warned that the biggest issue for the global economy in 2011 would be the worsening debt crisis in the eurozone and this has certainly been the case. Little did anyone know though how the shockwaves of this would impact on major economies.
Whilst 2008 was about bank debts, 2011 was the year of sovereign debt and this is set to continue into 2012. Markets rallied in 2009 once banks had been freed of their toxic debts and underwritten by their governments. However, like in 2007-8, market scrutiny in the last year has focused on countries and their ability to repay their debts. Bond markets have hounded the ‘peripheral’ countries of the eurozone and caused the successive resignations of two Prime Ministers in
It has been another rollercoaster of a year for sterling. The pound started the year well against the euro, hitting a high of €1.2070/£1 in early January but quickly fell off and spent much of the rest of the year languishing in the mid-teens against the single currency – even hitting a low of €1.1040/£1 in the summer as market confidence in the UK’s recovery in the face of austerity waned. Against the US dollar, sterling has ranged between a high of $1.6740/£1 to a low of $1.5270/£1.
When compared to 2007-08, sterling’s performance in 2011 could almost be seen as flat. Whilst sterling has not dropped off a cliff like it did at the beginning of the credit crisis, it has remained extremely volatile within the range that it has traded in and this has (as ever) been incredibly problematic for companies dealing in other currencies.
For a medium-sized business importing $500,000 worth of goods from
Where next for sterling?
David Cameron’s veto of a revised European treaty has attracted widespread criticism from his own Deputy Prime Minister and other europhiles. However, the move could yet be seen to be a stroke of genius. With the euro saga getting worse and worse, the move to keep the toxicity of the region at arm’s length feels like a smart one. Head of the IMF Christine Lagarde referred to a ‘lost decade’ that is likely to hit
There is also an increasing likelihood that we will see some form of euro break up, with
Against the US dollar, the resurgence of the US dollar as a safe haven currency in the past few months has meant that sterling has struggled. Massive intervention in the currency markets by the central banks of Switzerland and Japan has meant that the more traditional options of using the Swiss franc or Japanese yen as a holding currency when markets are volatile has been taken away.
This has left the US dollar as the only option and with huge market concerns over the impact of the euro debt crisis; capital has flowed from sterling into the US dollar as investors look for safety. As a result, many analysts feel that we could see sterling return to exchange rates in the $1.40s against the US dollar.
What should you do to protect yourself? Putting a currency strategy in place is key. Use forward contracts to secure rates of exchange and speak to a currency specialist about the best way forward over the next 12 months.
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