The run on sterling

A couple of readers have emailed me on the topic of currencies, and whether they should diversify out of GBP. Always remembering that your guess is as good as mine when gazing into the future, and that I am not offering investment advice (cont. page 94), let's look at GBP against a basket of other currencies since 1990:To sum up, if you're thinking about diversifying out of GBP, you've left it a bit late - GBP has already lost 25% of its value in the last year-and-a-half. I have no idea how much further it will fall, but I personally doubt that it's got much further to go.

But let's jump in a time machine back to 1995/96, the last time that GBP was clearly undervalued*. If your 'home' currency was anything but GBP, you could have made a 25% profit in two years by buying GBP in 1996 and bailing out in 1998. And what would have been the best strategy in 1998? The answer is, sell GBP and buy JPY:
Then in 2000 you should have banked a 30% profit on your JPY and bought EUR:
With the right timing, you could have made another 20% on top of the interest you are earning in the years to 2004. Things were then quite dull and uneventful for three years, but whatever currency you were in for those three years, the strategy in 2007 would have been to buy JPY again (see second chart) and make over 30% in the space of a year.

Which brings us back to today's date. If you subscribe to my theory that currencies always revert to the mean, the two currencies that appear most likely to be undervalued* are GBP (trading at 83% of its long run average value) and AUD (trading at 88% of its long run average, up from a seven-year low of 82% that it reached at the end of October).**

Alternatively, if you believe that GBP can genuinely go into free fall, like the Zimbabwean Dollar, by all means ignore everything I've said and diversify out of GBP.

* Currencies are neither 'strong' nor 'weak'; they are either overvalued or undervalued.

** As luck would have it, I shifted out of JPY and into AUD at the end of October, which has since clawed its way back from 39 pence to 44 pence. Sweet.

Just for completeness, here are the charts for USD and CHF:You can make up your own mind about whether USD will continue to rise, but CHF seems to be at the very top of its trading range, and I wouldn't bother: