Good month, bad week
Sterling was not the outright winner over the last month but it did strengthen by an average of 0.8% against the other dozen most actively-traded currencies, losing out only to the South African rand and the safe-haven Swiss franc and Japanese yen. Nor was it the outright loser in the last week but it was forced to share last place with the Swedish krona and was down by an average of 0.7%.
In short, investors were optimistic about the pound in January and they are rather less so in February. Much of this is to do with the changing (or, more accurately, the unchanging) situation with Brexit negotiations.
The media’s characterisation of Theresa May’s recent policy discussions with her cabinet is arguably a little OTT: there is, after all, no war going on. Or at least there wasn’t, until the end of last week. However, investors were more than little taken aback when the EU’s chief negotiator, Michel Barnier, and Brexit minister David Davis came to verbal blows. Mr Davis accused Mr Barnier of being disrespectful and Mr Barnier said there might be no transition deal if Downing Street could not get its act together.
Monetary Policy Committee honchos Gertjan Vlieghe and Ian McCafferty both told the same story on Monday: the Bank of England’s slightly hawkish monetary policy would have to be adjusted if it began to look as though Britain might leave the EU without a transition period. They don’t expect that to happen but they do factor in the possibility.
Other things being equal, UK interest rates are going up. The BoE governor spelled that out when he delivered the bank’s quarterly Inflation Report last week. Whatever investors had been expecting previously, Bank Rate will have to move higher more quickly in response to persistently-high inflation. The most recent print was 3%, still a full percentage point above its 2% target.
The same story applies in the United States, subject to an update on inflation later this week. Government borrowing looks likely to increase appreciably over the coming decade and, if it does, interest rates will need to move higher for a whole host of reasons.
Investors view these two prospects differently. For the moment, higher UK interest rates are positive for the pound while increased government borrowing in the States is negative for the dollar.
Since autumn, investors have been optimistic that Cyril Ramaphosa will take over the reins of power in South Africa. He has been elected to leadership of the ANC party. Next stop: the presidency. Jacob Zuma is seen as the dead hand of stagnation and questionable probity. Mr Ramaphosa offers hope for the future. Since his election as ANC head in mid-December the rand has strengthened across the board, rising by 5% against the pound and by 9% against the US dollar.
After two months to digest the idea of President Ramaphosa it is possible that all the good news has been priced into the rand. When the change takes place – assuming it does – there might not be much upside left for the currency.
Sarah, Senior Account Manager at Moneycorp
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