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Piling on the Pounds?
2006 saw Sterling put through its paces in the foreign exchange markets, but how far will your Pounds stretch in 2007? Moneycorp give us their view
This article has been compiled for Emigrate2 by Moneycorp, a leading foreign exchange company.
It would be an exaggeration to say that the Pound looked good throughout 2006. There were times when its behaviour came perilously close to that of a blind sheep on a cliff-top. Fortunately it pulled through and finished the year ahead on most fronts. In the first two weeks of 2007 it received another boost. The Monetary Policy Committee surprised most analysts with a quarter per cent hike in interest rates, the third in six months, which brought UK interest rates level with the States.
Interest rates were the defining feature of last year. Most exchange rate movements were the result, one way or another, of changes to interest rates. Sometimes it was because of actual rate changes, on other occasions it was a change in investors' expectations that drove currency prices. In Sterling's case the on-off anticipation of higher rates was crystallised in August when, after a year with no change, the MPC took the bank rate up to 4.75 per cent. After that it was more a matter of when, rather than whether, rates would go up again. For the US Dollar the boot was on the other foot. For more than two years US interest rates had been inching steadily higher. Starting from a low of 1 per cent in May 2004 the federal funds rate had reached 4.5 per cent by the beginning of 2006. Investors knew that there was not much further to go. The last hurrah came in June when the rate hit 5.25 per cent and the Fed hinted that it was done, at least for the foreseeable future. During the course of a year the Pound had risen from $1.72 to a December high of over $1.98, a 15 per cent increase. Over the turn of the year the Dollar staged a minor recovery but it still left the Pound within shouting distance of thirty-year highs.
Canada, too, was initially pursuing a tighter monetary policy. The Bank of Canada raised its target for the Overnight Rate four times but, like the States, came to halt in early summer. Since May the Canadian official rate has stood at 4.25 per cent. It is since May also that the Pound has registered most of the year's gains against the Loonie, 12.5 of a total 13.5 per cent.
The Aussie and Kiwi Dollars both fell back against the Pound but did so in very different ways. The Reserve Bank of New Zealand's Official Cash Rate remained unchanged at 7.25 per cent throughout 2006. With one of the highest returns in the developed world that should have meant steady demand and a strong Kiwi. The problem was that investors looked repeatedly for interest rate cuts in the early part of the year. They didn't happen but that made no difference to the exodus of investment cash. The Pound started 2006 at NZ$2.50 and touched $3.05 in the summer months, a gain of 22 per cent. When renewed inflationary pressures killed any immediate risk of lower interest rates the money flowed back in and the Kiwi recovered. The Pound gave back 10 per cent to the Kiwi in the second half of the year to begin 2007 close to $2.75. The debate is now whether the RBNZ may even have to raise rates this year.
That same question is being asked in Australia. Three rate hikes took the Cash Rate Target from 5 to 6.25 per cent. It was confidently believed at the end of 2006 that rates had peaked but that assumption was thrown into doubt by some strong economic data in January. Nobody is writing off the possibility that Aussie rates will move higher in early 2007. Sterling is almost 7 per cent ahead on the year but those gains were made prior to last June. For the last six months the Aussie and the Pound have been observing a truce with the exchange rate stuck mostly between $2.43 and $2.53.
While other central banks were playing their interest rate cards in quarter per cent increments the South African Reserve Bank was playing Top Trumps. The SARB's key Repo Rate was steady at 7 per cent for the first half of the year and was then raised four times on the trot to put it at a stonking 9 per cent by December. The jury is out on what may come next but another half per cent rise cannot be ruled out. The performance of the Rand roughly mirrored its changing yield. Sterling rose 36 per cent from R11 to R15 in the first nine months of the year and has fallen back since then.
Looking ahead to 2007, the newly discovered fire in the MPC's belly could mean another good year for the Pound. As long as the interest rate carrot can be dangled in front of currency investors they will be reluctant to turn their backs on Sterling. There will be competition from the even higher yielding currencies such as the Kiwi and the Rand but the Pound starts the New Year in good shape.
This feature was compiled by Moneycorp.
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