March 12, 2013, 11:01 AM
Time to Buy the Pound
By Nicholas Hastings
Now is a good time to have second thoughts about selling sterling.
The pound has been hammered since the start of the year.
Fears of a triple-dip recession, expectations of more quantitative easing from the Bank of England, the loss of the U.K.’s triple-A credit rating and a decline in the pound’s safe-haven status have all played their part in pushing sterling down nearly 10% against the dollar.
At times sterling has not only been hurt by the U.K.’s own problems, it has also suffered because of the country’s proximity to the never-ending tribulations of the euro zone.
Another reminder of the problems the U.K. faces came on Tuesday with the release of data showing that industrial production fell 1.2% in January from December. This was much worse than the small 0.1% increase that had been expected and left sterling hurtling down to a new low since June 2010.
All the same, there are good reasons to expect that the pound could be coming to the end of this downward trend.
A nasty 1.5% fall in January’s manufacturing output was offset by a 1.5% rise in December’s production.
Also, other areas of the U.K. economy may have started to pick up since then, raising hopes that the U.K. will avoid the triple-dip recession that so many fear.
Take house prices; for the most part, prices are still stagnating, but surveys suggest optimism is growing, especially since the government’s Funding for Lending Scheme, which provides banks with cheap funding, appears to be finally trickling down to ground level.
In his latest research on the U.K. economy, James Knightley of ING Financial Markets pointed to recent comments by Pete Redfern, chief executive of Taylor Wimpey, one of the U.K.’s largest house builders.
“There is no doubt that the market is better, mortgages are more available, they are generally more affordable. The availability of 95% mortgages and the pricing of them is improving. Customers are more upbeat,” Mr. Redfern said.
Rightmove also points to more housing market activity, reporting that online property searches on its website rose 20% on the year to hit an all-time high in January.
Given the close correlation of the housing market to U.K. consumer confidence, this should all bode well for a recovery.
“A pickup in housing market activity more generally tends to lead retail sales activity and associated services, including building work. As such, in amongst the gloom surrounding the U.K. economy, there are bits of positive news,” ING’s Mr. Knightley said.
Any suggestion that these improvements will continue could have a sterling-positive impact on both the U.K.’s monetary and fiscal policies.
In the case of monetary policy, current expectations of more quantitative easing by the Bank of England could start to recede. As Citibank argues in its daily note to clients, “It seems that the Bank of England is still undecided on the need for more QE.”
The bank is hardly likely to rush into another program of asset purchases if it expects the economy to start picking up on its own.
Of equal importance for the pound is next week’s budget.
Although Treasury chief George Osborne has insisted that he won’t back away from fiscal discipline, chances are that the political reality of an election in 2015 will force him to provide at least some stimulus for growth.
Citibank reckons that delaying some of the fiscal austerity previously planned for this year and next could contribute as much 2% to gross domestic product over two years.
Given that sterling has already fallen sharply this year, chances are that U.K. exporters will eventually start to benefit too, adding to hopes that both domestic and export demand is starting to rise.
For sterling, this can only be good news, bringing an end to its well-earned reputation as one of the worst performing of the major currencies so far this year.
