/ 14 June 2010

Sterling is the currency to watch

Angus Murray, CEO at Castlestone Management, says the rand-to-dollar rate is correctly priced in the range around R7,50/$.

This is due to the link to commodities which are priced in US dollars. Even if the dollar weakens against the pound, the ZAR/USD rate should hold steady.

Castlestone expects the pound to strengthen and when it does, the rand could fall back to R13/GBP. The current rate of R11,50/GBP reflects a 13% appreciation against the pound since last September which is exactly the same percentage the dollar appreciated against the pound in the same period.

Murray believes that it is now time for the pound to recover. Unlike Europe, the UK has already put all its bad news behind it including the effective nationalisation of Northern Rock, the financial crisis and a hung Parliament. The UK government has also started aggressively cutting its spending and dealing with the country’s growing deficit and its “mini” budget which will be released on June 22 is expected to deal with deficit through further cuts and higher taxes.

Murray believes the UK economy will start to recover, driven by a stronger exporting sector which is a direct result of weak currency. The bad news is now all priced into the currency and barring any further economic shocks or own goals by UK authorities, we should see some strength from sterling.

What this means to investors
Murray says traditionally South Africans invest in the pound and the euro. Because of the weakness of the pound against the dollar, many South African investors with sterling-based portfolios invested in gold exchange traded funds (ETF) to hedge against the weak pound. Due to the appreciation of the dollar and the gold price, these investors saw returns of up to 40%. However Murray now warns that it is time to take profits and sell out of these ETF’s and switch back into pounds.

Murray recommends South African’s look at investing into pounds and continue to avoid the euro as the eurozone has not put its economic woes behind it and there could still be more nasty surprises.