Weak exports and gloomy credit agency assessment put Sterling under more pressure

News - Funds

Written by Ray Clancy

Wednesday, 10 March 2010 09:19

Surprisingly weak export figures and credit rating agency’s poor assessment of UK economic outlook combined yesterday to undermine Sterling.

Figures published yesterday showed that the UK trade deficit widened by one billion pounds, more than had been expected in January.

‘These figures have come as quite a shock to the markets. With sterling as weak as it is, it had been hoped that the increased competitiveness of UK exports would have supported a rebalancing of the deficit. It isn't a marginal widening either, at £8 billion, this is the deepest trade imbalance that the UK has recorded since January 2009 and will simply snowball the negative sentiment already focused on the economy,’ said Duncan Higgins, senior analyst at Caxton FX.

‘The figures also serve to show that UK is still far too reliant on imports. The Bank of England may be extolling the benefits of a weak pound, but clearly the greater cost of importing goods is offsetting any positives,’ he added.

In reaction to the news, Sterling dropped sharply against the major currencies. Adding to the problems for the UK, Fitch, the credit rating agency, announced that Britain’s sovereign credit profile has deteriorated. Along with France, and Spain, Fitch said that among the larger triple A nations, the UK fiscal situation is most at risk, which has consequently added to Sterling’s downward spiral.

With a UK election imminent, it is inevitable that Sterling will become the focus of attention in the foreign exchange markets, according to Stuart Frost, co-fund manager of the Threadneedle Absolute Return Bond Fund.

‘However, what is probably different to past periods of Sterling pressure is the lack of isolation. After all, past sell offs in Sterling occurred when there were clear cut alternatives, such as the US dollar or the Euro. But the Euro has struggled of late with its own set of problems and the US dollar is only just on the turn after a period of excessive weakness,’ he explained.

‘Sterling has particularly suffered recently against commodity currencies such as the Australian Dollar with the probability that GBP/AUD could soon fall as low as 1.50, effectively a halving of the value from the high at 3.00 in 2001. That is quite a story considering the fact that the Australians have just raised rates to further enhance the attraction of their currency whilst this option currently seems a far off prospect for the British authorities. All of this underlines a geographic shift in economic activity that even the Euro will not be immune to,’ he added.

According to Goldman Sachs, Sterling’s drop last week to the lowest level in 10 months against the Dollar may help the UK economy recover faster than the Euro-zone. Concerns that the UK elections may result in the first minority government since 1974 has contributed heavily to Sterling’s decline since December.

‘People are very bearish on the UK, probably more than they should be. The Euro is clearly in its biggest crisis since it started, so it'’ kind of strange that it’s overvalued,’ said Erik Nielson, chief European economist at Goldman Sachs