Market action this morning was focussed on the friendless pound as it hit 31 year lows against the US dollar with cable plummeting through 1.28, a technical level opening up for a possible further drop to 1.22. Against the euro, sterling is close to visiting the lows of 2011 with some market makers expecting an attempt on 0.90 and the all-time low for the pound around 0.95 last seen in 2009.
Fears for a tough Brexit are the reason with some big tickets going through the market. But in reality sterling has been weakening since mid-2015 and is now down 23% against the euro and 19% against the US dollar, as measured by the spot rate over that period. Indeed the fall in sterling has accelerated since the 23rd June referendum but it was down over 8% against the greenback from the end of June 2015 to end March 2016 and 11% against the euro.
What investors seem to miss, the FT especially, is the weakness of sterling against other major currencies. For instance the renminbi - with all the fears of devaluation and the weakness of around 2.5% versus the US dollar (which is always quoted on a spot basis), on a total return basis you get paid to hold the Chinese currency; a positive 0.85% year to date.
In sterling terms the numbers are even more dramatic as the renminbi spot rate is up 12.21% against the pound this year, but if we add the carry you are being paid to buy the renminbi your return this year from sterling is 16.3%. Over time this carry makes a big difference for an investor, the renminbi is up 24.5% from end June 2014 against sterling but if we add in the carry that return from a sterling base is 36.75% or 1.36% per month over the 27 month period.
Most readers know we are big proponents of Net Foreign Assets (NFA) and the effect this measure has on currencies over the longer term, the higher a country’s NFA score the more its currency should appreciate against a currency with a lowly NFA score. With sterling forecast to become a two star country by 2020, should there be no changes to the country's balance sheet in the intermittent period, the path of sterling against more wealthy countries looks to be one of continued weakness. Of course what helps is you get paid to buy other currencies which assists in offsetting the volatility which we all know is a characteristic of the currency market.