Brighter outlook for sterling in 2011

Brighter outlook for sterling in 2011 as global currencies face reality check


If the Bank of England raises rates in 2011 sterling will strengthen.


Currency wars may have been a recurring theme in 2010, but as quantitative easing and spiralling debt crises roll into the New Year, here are some predictions for 2011.


Fighting currency talk hit the headlines in 2010, with Barack Obama taking an uncharacteristic jibe at China’s currency policy this year, while China joined Germany in criticising of America’s money printing policy.


But while commodity currencies won the battles of 2010, with the Australian dollar up 16.5pc against sterling over just 10 months to A$1.5195 and the Canadian dollar up 10pc to C$1.5453, it was safe havens like the dollar, yen and Swiss franc that won the war.


Despite ongoing US economic worries and further quantitative easing on the cards for 2011, the dollar’s status as the haven of all safe havens continued, as investors threw away the rulebook and rushed to the greenback.


Glenn Uniacke, senior dealer at Moneycorp says that since the beginning of the crisis, “a ‘bigger is better’ attitude is what we’ve seen. So despite their relatively weakening economies, we’ve seen the dollar, the yen, the euro prosper.”


Mr Uniacke predicts the dollar to be “the best of a bad bunch” in 2011, ending the year at $1.40 against sterling compared with $1.54 today, with much of its strength seen during the first half.


Clive Lennox, managing partner at Clear Currency says increasing inflationary pressures on the Bank of England to turn ifs into whens on interest rate rises will come to a head in 2011, “and should that happen you should see flows of currency coming back into sterling, and an increase in its value.”


Mr Lennox predicts sterling will end 2011 at $1.65 against the dollar.


Jeremy Cook, chief economist at foreign exchange brokers at World First, predicts sterling will end 2011 at $1.74 against the dollar, saying weak US data and low confidence levels mean strong economic growth for the US is “a long and distant memory.”


Euro troubles suggest brighter outlook for sterling
The 2010 European debt crisis that started with Greece, ended with Ireland, and posed questions for other nations, has put pressure on the euro, with some even questioning its future.


Most predictions see the euro in tact but weaker in 2011. Mr Cook predicts a “fairly conservative” euro estimate of €1.28 against sterling in 2011, with “the euro to remain on the back foot throughout next year.”


Barcap, which said in December that sterling will be the strongest currency of 2011, also expects the euro to fall from its current level of €1.1668 to €1.282 by the end of 2011.


On the euro debt crisis, Barcap says the contagion should not spread to larger economies such as Spain, as long as problems are addressed quickly.

Barcap says Spain’s “fiscal situation appears manageable. It has a large deficit but a lower debt/GDP ratio than Germany, and the government’s plans appear sufficiently aggressive to bring about sustainability fairly smoothly (as long as market prices do not move too aggressively against it).”


Barcap also recently noted the mixed fortunes of sterling and the yen following the financial crisis. Two years ago £1 bought more than Y200, But as the crisis unfolded, the yen was seen as a safe haven, and £1 buys just Y125.98 today.


But Barcap says of the two currencies, sterling appears more attractive. It feels “the UK is getting its house in order and, though it will be a difficult process, the restructuring of the economy is likely to bring about some appreciation of the currency. Japan, by contrast, seems to have returned to being mired in deflation and may face a prolonged period of weak growth."


This sentiment is shared by Mr Cook who predicts £1 will be worth Y153.00 by the end of 2011, due to “a predicted pick up in risky assets in 2011, the yen will likely be sold by currency traders looking for carry trade plays elsewhere.”


Elsewhere, traders expect the Swiss Franc, another safe haven, to fall.


Mr Lennox says the country may devalue its currency once again “in an attempt to make sure that its export market remains competitive in the international environment,” and predicts £1 will buy SFr155.80 by the end of 2011, up from SFr145.19 at the end of this year.


He also singled-out the Australian dollar as “the evergreen currency of 2010, because it just gets stronger and stronger, so you’d be a fool to bet against it in 2011.”


Mr Uniacke shares this sentiment, and though he says the currency is currently "over-buoyed" and China, its main trade partner, may be down-playing its inflation figures, he also says China "will keep on growing, and its key international partner in terms of the commodity need is Australia, so they’re going to do reasonably well next year.”


He also holds hope for sterling over the next 24 months, and tips it as "a star waiting to happen, because it’s one of the few major currencies that is categorically undervalued against virtually everything else, without there being anything material behind it – after all, the banks are still trading..."

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