Q&A: What the falling pound means for you

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Due to the high volume of questions we were unable to answer all individually, but tried to ensure that all major themes were covered

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Which currencies do you see as being strong throughout the next year? R.Howsam, Redcar

JH: In the short term, the US dollar will likely continue to outperform as the world continues to scramble for a safe haven. Further out, we see structural problems for the USD due to its chronic twin deficit problem. The same goes for the pound, which could outperform EUR and CHF in the next two or three quarters, but which has similar long term issues. One of our favorites this year is the Norwegian Krone, which has no fiscal or current account problem at all and plenty of cash in its oil fund to sail safely through this turmoil.

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Can I make money from the falling pound by betting that it will continue to slide? If so, how can I do it? Fern Smith, Ealing, London

JH: Online retail currency trading banks are easy to find and opening an account is usually possible within hours if you want to get started trading. Just beware of the temptations of employing too much leverage and know that the currency market, while one of the world’s largest and most liquid, is dominated by professionals and is a ”zero sum game” meaning that investors and traders only make money when someone else loses it.

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I am a Buyer for a small retail business in the UK. Ninety per cent of our shop-stock is bought in Euros & Dollars (Euros being 80% of this). We tend to pay our invoices after 90 days of receiving the goods. We are not in a liquid enough position to buy currency upfront - unless it was frequent, small amounts, within a few days of when required: and if there was a real incentive to do so. What advise would you offer to stop the pain of the current exchange rates, which mean that we cannot make any margin currently. Thanks, MP, UK

JH: The last cycle of GBP strengthening is fortunately helping you out and the wind may be at your back in terms of your sterling exposure over the next few quarters. But if you want to hedge your exposure, it is easy to do so at a retail-oriented FX bank. Some also offer options of any duration, so even if an investor doesn’t want to buy/sell pounds to lock in forward rates (which can be done at any leverage - usually up to 100:1, though employing that kind of leverage is more like playing the lottery. The idea is that anticipated exposure can be hedged with only a fraction of the capital up front) that investor could also choose to buy an option to prevent sterling weakness from further eroding margins, though of course a premium is paid for the privelige.

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What is your prediction for the sterling / euro exchange rate over the next three months? R Crawford Clarke, West Sussex

JH: Over the next three months, sterling could appreciate towards 0.8500 and possibly even a bit lower versus the Euro, as the vulnerabilities of the Euroaone in this recession have not yet been fully realized and as the UK could bottom more quickly than the Eurozone due to the huge negative momentum it has already ”achieved”.

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When do you think BoE will print money and will we know that, or will it be done secretly? Best Regards, Giampaolo Bertoni, Rugby

JH: The Bank is already taking steps in this direction as it moves toward the outright purchase of assets and injection of funds into the banking system (known as ”quantitative easing”(QE) despite its being de facto money printing). Although the BOE sounded some notes of caution today about nontraditional moves like QE as it hopes that the interest rate cut thus far and the weaker pound will serve as a powerful stimulus, we suspect that the magnitude of losses in the banking sector will eventually require a further move into nontraditional monetary policy by later this year.

It can’t be done very secretly, so we will know about it, even if it the government will inevitably try to obfuscate what is really deally going on with all manner of slick-sounding jargon and acronyms.

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Last year I bought a property in the US, when £1=$1.98, and converted the US Dollar mortgage into sterling at that rate. Now that the rate has dropped I am considering swapping the loan back into dollars to crystallise the fall in the exchange rates. Is that a good idea? Charles Coleman, Isle of man

JH: I think that sounds like a fine idea, as I see little to no room for further appreciation of the USD over sterling in the near or medium term.

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Where do you see the pound headed in the next two years? I’m faced with a decision to take my salary in 50 per cent dollars and 50 per cent pounds or in 50 per cent dollars and 50 per cent euros. The catch is that my company buys my entire two-year salary in that currency when I make my decision as to how I would like to be paid. I therefore lock-in the current rate. I was wondering if you could shed some light on the decision that I have to make. Colin, California

JH: I actually think both the pound and the US dollar will enjoy their day in the sun here in the shorter term. The USD is doing well due to the endless liquidity it offers in times of turmoil, as all of the failing emerging market currencies have painfully shown and as the world scrambles to raise funds to pay off its US dollar based obligations.

While the pound has been punished for good reason (fiscal profligacy even when times were good, an overleveraged consumer, a housing bubble, it’s main export was financial services and no sector has been harder hit...the list goes on), it got outrageously cheap over the last few months and is still cheap despite the latest strengthening. For the next twelve months I would prefer pounds over Euros and be happy to receive dollars, especially if I was based out of the US.

Longer term, I think both the US dollar and the pound face serious threats if fiscal discipline is not reestablished soon. Its stature as the world’s reserve currency will suffer a demise eventually.

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I have a daughter living and working in Sydney and regret not having forward purchased Australian dollars in the middle of 2008 when the rate was 2.5 to the pound. During our two month stay over Christmas and New Year each visit to the cash point escalated costs dramatically. The rate is now nearer Aus $2 to £.

Anticipating a similar winter trip each year and the possibility of renting a holiday flat for up to 3 months, do you recommend acquiring Aus $ at an agreed fixed exchange rate now or wait and see what transpires with any sterling recovery between now and say November 2009? Would the advice be similar if considering future property purchase out there? Many thanks, David Reynolds, Haslemere, Surrey, UK

JH: GBP has become very cheap - though at today’s prices, we are seeing a pretty sharp recovery after the Bank of England meeting (it has now recovered about 10 per cent against a basket of major currencies). The BOE is showing a bit of caution in its consideration of non-traditional monetary policy measure, like the outright printing of money which is obfuscated with the term ”quantitative easing”.

I think the GBP may do relatively well in the near term as it overshot to the weak side late last year. It could appreciate another several percent against most currencies, including the Australian dollar, so you might find better levels to start hedging your potential exposure. The Australian Dollar’s outlook will be highly dependent on signs of a Chinese recovery and commodity demand from the Asian mainland as well as the risk appetite in equities in general.

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Like the million or so other British living in the Eurozone most of our capital is still in sterling in the UK. We are currently suffering a double whammy as the level of our investments has fallen and the exchange rate for transferring into euros against us.

Should we continue to ’hold on’ (transferring only the minimum of capital from sterling into euros) in the hope the exchange rate can only get better? Or are we exposing ourselves to even greater risks of a pound that could collapse further?

In the longer term, should we transfer all of our capital into the eurozone, so that at least we can achieve stability in our future income? Adrian Fox, Breil, France

JH:

The Euro faces very serious challenges in this cycle of economic weakness due to the stresses created by the Eurozone framework itself: a patchwork of national finance ministries trying to coordinate policy with a central bank that is independent and strives to create a one-size-fits-all policy.

The strong EUR has put enormous negative pressure on the the current account deficit countries like Greece, Spain and Italy and is killing their competitiveness. At the same time, the crisis is testing the generosity of surplus nations like Germany, which are showing reluctance to bail out club Med. Thus, the Euro is becoming somewhat of an albatross and I think there is further room for it to fall vs. the pound, which overshot to the weak side in recent months.

Still, the longer term prospects for the pound are not rosy for fiscal and current account reasons, so eventually one might look to hedge pound exposure if the market starts showing too much confidence in its prospects.

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John Hardy’s experience

Originally from Texas John Hardy graduated from University of Texas at Austin (graduated with high honors). Today, John is Head of Forex Strategy for Saxo Bank where he has worked since 2002.

John has developed a broad following from his popular and often quoted daily Forex Market Update column, received by Saxo Bank clients and partners, the press and sales traders. John is a regular guest and commentator on television networks, including CNBC, CNBC Arabia and Bloomberg.

Outside of his column and media appearances, John generates trading ideas to profit from swings in the market on a 1-5 day time horizon. He also writes regular ad-hoc commentary focusing on the major currencies, Central Bank policies, macro-economic trends and other developments and is one of the authors of the Saxo Bank Yearly Outlooks and 10 Outrageous Predictions.