Investments  

Sterling resilience is surprising markets

Jamie Niven, senior fund manager at Candriam, says the longer-term growth outlook for the UK relative to the US will start to impact currencies. 

As a fixed income investor, Niven presently has exposure to the long end of the gilt market – that is, bonds with a longer time to maturity. Such assets typically do best when an economy is struggling.

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He says: “I think if you look at the long-term, the terminal interest rate in the US is higher than in the UK [the terminal rate of interest in an economy is the level needed to ensure it's neither too low to be causing inflation, nor too high to be impeding growth].

"With the Eurozone, there is hardly any growth, it’s really anaemic, whereas in the US it is really strong, and the UK is probably somewhere in between. I think the bad news is mostly priced into the euro at the current levels, but I would be short sterling relative to the euro, in terms of the dollar – a lot will depend on the outcome of the election.” 

Jonathan Webb, of C8 Hedge, says the recent volatility associated with sterling and other currencies is something investors are likely to have to get used to. 

He says: “The decade after the financial crisis was unusual in currency markets, because interest rates were virtually zero everywhere, there was no carry, so not much happened. But now, although rates are likely to be coming down everywhere, there are differentials between different economies, and that creates more opportunity, but also more volatility.”   

Webb does, however, feel the normal levels of volatility associated with currencies has been amplified in the UK by market speculation around the outcome of the forthcoming Budget. 

He says the government “lost control of the messaging”, which created a fervour of speculation that increased the level of volatility around the pound. But Webb feels the government have more recently reassured markets and he expects this to mean the level of volatility normalises once the Budget is over with. 

Beauchamp says: “Since early August the average daily range has risen to the highs seen in January and February, a reflection of the rapidly-changing situation on the inflation and Budget fronts. Volatility has dropped off over the past two weeks, but traders continue to endure a choppy period compared to the slumber of June and July.”

While few FT Adviser readers are investing directly in currencies in search of returns, the outlook for the pound relative to peer currencies impacts most portfolios, and the outcomes for most clients in the years to come.