Thursday 26 March 2015

Sterling: still not overvalued

Here's a chart of GBP vs a basket of other major currencies from 2009 onwards.

Clearly, it fell rather dramatically for three years from late 2007 to late 2010, then it scraped along the bottom for two years, but inevitably it has now climbed back a bit to be six per cent lower than its long run average*; there's no reason it wouldn't go back to that long run average over the next year or two.

That all depends on whether the other countries' economic policies are more or less stupid than ours, chances are they will all be equally stupid.

* Because of of subtle difference between harmonic and mathematical averages, the long run average for GBP is actually 0.96, not 1.0.


Bayard said...

"chances are they will all be equally stupid."

Don't underrate the British, I'm sure we can be stupider than everyone else if we put our minds to it.

Lola said...

As I have suggested before, you really should add in a line for gold. I acknowledge that it may be difficult to find the data. There is a site called you could try. The point of this is that I know that all currencies have declined in 'purchasing power' against gold. Such a chart is a salutory warning about fiat currencies. allows you to plot gold against various other things.

Mark Wadsworth said...

B, the grass is not always greener and I think we've run out of stupid things to do for the time being. The Yanks did QE, we did QE and now the ECB is doing QE.

L, I know, but that is not what this is about. It is about measuring (paper) currencies against each other.

Bayard said...

"I think we've run out of stupid things to do for the time being."

I wouldn't bet on it. Our politicians are very clever at being stupid. Just wait until the election's out of the way and there's a fresh lot in with a whole bunch of new monumentally stupid ideas they are dying to try out.

Dinero said...

Do you have any relections on why Sterling is not effected by the trade deficit of recent times.In that it for example contradicts analysis of the Friedman type.

Lola said...

MW. Yep. I know what you are doing. It just adds an illuminating dimension to the discussion if you add in gold.

FWIW I think it is pointless to hedge currencies in well diversified investments over a longish time. Overall the fluctuations even out.

But, that only works when all currencies are funny money. If say Russia or China decided to make their currencies gold convertible (probably for economic warfare reasons) then all best would be off.

Anonymous said...

Following on from Dinero's comment, it would be a bleak outlook for exporters if sterling was to appreciate from its current levels.
We gained precious little from that last devaluation and the last I heard, our productivity sucks of late so a sterling rise would be adding austerity via currency appreciation.

Random said...

Currencies are non convertible, L
The pound sterling is a closed currency zone.
If you swap pounds for dollars, someone is on the opposite end of the deal swapping dollars from pounds or the price changes until that happens.
There are no "market makers" as such, pure supply and demand.
Central banks can print money and swap to hold their currency down, but not up unless they have forex reserves. This is how the German central bank forced the UK out of the ERM by refusing to print and buy pounds and not honouring their agreement to fixed exchange rates in 1992.

Lola said...

"This is how the German central bank forced the UK out of the ERM by refusing to print and buy pounds and not honouring their agreement to fixed exchange rates in 1992." Just run that past me again?

Random said...

The British Pound was on an overvalued fixed exchange rate.
The Germans had far more DM than the speculators. They could have purchased pounds using printed DM until Soros and his ilk stopped.
All central banks can push their currency down by printed money but pushing up is limited by forex reserves.

Random said...

"Lamont clearly blamed the Germans for the crisis and the President of the Bundesbank, Helmut Schlesinger in particular. The behaviour of the Bundesbank brought back memories of the famous Emminger Letter, written by the then President Otmar Emminger
to Gernman Chancellor Helmut Schmidt on November 16, 1978 (Emminger, 1978). As an aside, the Finance Minister at the time, Hans Matthöfer, a West German trade unionist, described Otmar Emminger as a “miserable know-it-all” (Der Spiegel, 2011). The letter – entitled ‘Stellungnahme des Zentralbankrats zum künftigen EWS’ (‘Statements of the council of the central bank on the future EMS’) – sought to confirm an “agreement” (“eine Einigung”) between the Bank and the Federal Government such that membership of the proposed EMS would provide allow for an “opting out” (“Aussetzung”) of the Bundesbank’s responsibility to support other exchange rates if “internal monetary stability is threatened” (“die innere Geldwertstabilität bedroht wird”). Helmut Schmidt annotated the letter with a lower case ‘r’, shorthand for ‘richtig’ or (correct) to signify agreement. In other words, if the Bundesbank thought that it would be undermining its anti-inflation approach by selling Deutsche Marks in order to purchase weaker currencies as part of its intervention obligations under the EMS this agrement allowed it to simply renege and let the other nation lose reserves and enter crisis.
When Schmidt appeared before the Bundesbank Council on November 30, 1978 to discuss the terms of the letter (that is, to seek the approval of the Bundesbank of Germany’s decision to enter the EMS in 1979) he told the Council in relation to the opt out terms that no formal agreement could be made but a ‘secret’ informal arrangement was understood (Deutsche Bundesbank, 1978, translation via
… I have quite severe misgivings about a written specification of this sort, a written specification of the possibility of an at least temporary release from the intervention. Let us first of all assume that it appeared tomorrow in a French or Italian newspaper. What accusations would the newspapers then make in editorials against their own Government who got themselves mixed up with such a dodgy promise with the Germans. A Government which promised them to intervene in the framework of certain rules of the game, but internally put in writing its intention to be able to do otherwise if need be. In the matter itself I agree with you, gentlemen, but I deem it out of the question to write that down."
The EMU fell apart and was a forewarning of the euro.

Lola said...

Random. Impressive (inside?) knowledge.
Really just reinforcing my very low opinion of central banks and fiat money.
We are being stitched up.

Mark Wadsworth said...

Din, why is sterling not affected by permanent trade deficit?

Good question. But why should it be? As Tim Worstall keeps saying "A deficit on the current account must mean a surplus on the capital account".

Why is a fancy way of saying, when foreigners take control of UK assets, that is effectively an export from the UK.

Remember - half of what Thatcher privatised now belongs to foreign companies (usually state owned ones), foreigners own lots of UK land, UK businesses etc.

Or China and Japan now own a quarter of all US govt bonds in issue* and they know, deep down, that they will never get their money back but are too embarrassed to admit it.

* Govt bonds owned by the govt itself don't count as 'in issue' as far as I am concerned.

Random said...

"they know, deep down, that they will never get their money back"
They will "get their money back" when they import more than they export to the UK.
Similarly in the Eurozone, the Greeks will have to pay back the Germans in real goods and services - fetta cheese, olives, tourism, etc.
The Chinese, Japanese, etc are diverting resources slowly to domestic production. Japan have a trade deficit now
The thing to remember Mark, is the ideal situation is the ideal situation is to be in current account surplus and trade deficit.

Lola said...

@R When you get into debt and can't pay it people come and take your stuff. Chinese taking away the Rover factory for example. But that is not the same as paying back your debts. MW is right, the actual cash is gone.

Random said...

How would they do this though? Will they invade?
I pretty much agree with MW too, but I don't think of it as much as "not getting their money back." China has grown strongly and can now shift the surplus production to domestic sources.

Physiocrat said...

Sterling is well up on the Swedish krona due to the Swedish government's even stupider policies.

Parity purchasing power works out that everything you buy in Sweden with a UK credit card is 20% off.

Dinero said...

> Mark

Why should it ? -

A constant trade deficit results in a low demand for the currency of the importer.
The importer is boosting the demand for foreign currency on the forex.
But as this does not affect sterling the actual situation must be more complex.
I don't see why a trade deficit entails a capital account surplus, a trade deficit means you are buying things and not selling things. Foreign exchange dealers end up with sterling deposits and short on foreign money. Or aternatively foreigners take custody of sterling deposits.So which is it are importers paid in there own currency or are thay paid in Sterling.
I'm not sure that gilts are part of the capital account but yes demand for gilts would boost sterling accordingly.

Mark Wadsworth said...

Phys, well that's good for you at least.

Din: "the actual situation must be more complex"

Correct. While the trade deficit is clearly one factor, it is only one factor of many.

Random said...
Now a good time to buy euro?
Draghi and the market think QE inflationary when in fact it is not and the interest income lost is deflationary.
It is gonna hurt the eurozone export surplus when the euro strengthens quickly.
What do you think Mark?

Mark Wadsworth said...

R, I have no idea but I have just posted the long term EUR chart and you can make up your own mind :-)