Letter from the UK #3
Publicerad: 21 december 2018, 13:23
Politics should not have a significant influence on the currency market, it should be the underlying performance of the economy, however in the current climate this has not been the case. Across Europe we have seen a significant amount of political instability; riots in France, no government in Sweden, UK government under unprecedented pressure over Brexit and in Italy the government waging war with Brussels over fiscal policy.
Ämnen i artikeln:Jonathan Lye
Politics should not have a significant influence on the currency market, it should be the underlying performance of the economy, however in the current climate this has not been the case. Across Europe we have seen a significant amount of political instability; riots in France, no government in Sweden, UK government under unprecedented pressure over Brexit and in Italy the government waging war with Brussels over fiscal policy. As a reminder, it seems so long ago now, when we came into 2018 we were facing Italian elections (March) and Swedish elections (Sept) both with the potential to cause surprises. In addition to this we have had Brexit ongoing in the UK and global political turbulence. The conclusion at the start of the year as that 2018 would be another year of volatility in FX markets. Looking at three currencies SEK, NOK and GBP against the euro we will see what the impact has been.
Starting with EUR:SEK; the current spot rate is approximately 10.2430, which represents a 3.1% weakening over the last year and a 4.2% weakening since 1st January 2018. Keeping the currency weak against the euro has been one of the Riksbanks objectives however one of the predominant causes of weakness has been the Swedish election and the fear of the Swedish Democrats gaining power. The currency has however strengthened since the inconclusive election, despite or perhaps because it has not been possible for any party to form a government. The November publication of GDP figures showed a 0.2% contraction of GDP in the 2nd quarter this did however represent a 1.3% growth on the 2nd quarter the previous year. Despite the news on the economy the Riksbank raised rates at the December meeting and SEK continued the strengthening trend that has been set since the election in September. This was the expectation of the interest rate market which priced in a rise in the near-term rate in December. Over the course of the last year SEK has traded in the 9.7458 to 10.7291 which is a 10% move between trough and peak which is the largest in the last 5 years.
EUR:GBP opened the year at 0.8885 and is currently at 0.8991 showing a weakening of 1.2% this increases to 2.1% if you look back a full12 months. The peak to trough in EUR:GBP has been a move of 5.5% which is relatively benign compared with the last 5 years where the largest move was 22% in 2016. This is all in the context of an economy that continues to underwhelm and the uncertainty associated with Brexit the ebbs and flows of which are clearly evident in the more significant moves over the course of the year. It is hard to say that the UK currently has a functioning government in the light of the postponement of the recent vote on the exit package from the EU and no confidence vote in the Prime Minster. Since these two events GBP has strengthened approximately 1%.
EUR:NOK has been relatively tranquil compared with the first two currencies with a strengthening of 1.1% over the past 12 month which is 0.3% since Jan 2018. The trough to peak of 9.3867 to 9.9939 is a range of 6.5% which is the lowest over the last 5 years. Norway implemented a rate rise on the 20th September, with the next announcement due on the 24th Jan. The currency strengthened after the September announcement. The Norwegian economy is heavily influenced by the price of Oil which also impacts the currency. Brent Crude has fallen from $85.89 to $56.86 since early October which led to a weakening of the currency. Unlike both the UK and Sweden it has a functioning government, albeit a minority propped up by the Christian Democrats. Economic growth picked up in October according to data released in early December however this has not been reflected in the EUR:NOK exchange rate.
Currency is about timing and this is clearly evident in the difference between the year on year and peak to trough moves of the three currencies above. Timing is not always in an investor’s control so being aware of the potential impact of currency moves at the outset of an investment can be the difference between making the expected returns and falling short despite good investment returns in the base currency. This is particularly important in the current environment where good economic performance is not the only driver of a strong currency. Finally as a look forward to 2019, despite the lower number of major national elections on the horizon it is likely that political events will continue to be a key influence to market volatility as a result of unpredictable behaviour of politicians and subsequent interpretation by the market.
Wishing you all a Happy Christmas and a prosperous New Year.
Auxilium Financial Risk Management