Pound prospects looking good

This year’s northern hemisphere vintage is still on the vine but importers and producers are finalising their Christmas prices and promotions with the big retailers and soon their focus will turn to 2011.

Before then, however, they will seek to work out what will happen to sterling in the next few months and how to plan ahead accordingly.

Since May the pound has risen by 10% against the US dollar and by about 5% against the euro and both the Australian and New Zealand dollars.

This may seem strange in the context of predictions of dire times ahead, but investors can weigh Britain’s prospects more accurately than almost any other major country’s.

The election is over, the coalition government has set out its plans and the latest economic figures offer mild hope that recovery, although slow, is taking place.

Compare that with the fears that America’s economy is faltering and that the eurozone has failed to fully address its problems. Against that backdrop, sterling has become comparatively attractive.

That is not to say that the pound is strong at today’s $1.56 and €1.21. It was worth $1.70 a year ago and topped $2.10 in late 2007.

Equally, while the UK currency is almost at the top of a 12-month range against the euro (it was €1.23 in mid July), it has recovered comparatively strongly from the dismal €1.05 towards the end of last year. But in early 2007, it was worth €1.52.

The question now is whether this upward trend will continue and help to ease the downward pressure on margins many importers have been forced to bear.

The answer, economists agree, will not reflect so much how Britain does, but more how other countries fare. And they come up with some surprising answers.

Despite spluttering, America’s recovery is predicted to pick up speed toward the end of this year; by contrast, the Euro-zone is tipped to be heading further into trouble. Capital Economics, the respected forecasting house, believes that the euro will plummet to parity against the dollar during 2011.

That will be bad news indeed for continental producers and exporters. The American market is the world’s largest, but price increases to compensate for the diminishing return from a stronger dollar over there will be difficult to implement.

This will hurt companies such as Pernod Ricard, Rémy Cointreau and Davide Campari. Conversely, Beam Global, Bacardi and Constellation Brands will benefit from dollar strength in their export markets.

Those that account in sterling, such as Diageo, will be less badly affected, but they will still face problems as the pound weakens against the strengthening dollar, which is tipped to settle at about $1.40 later this year and stay there throughout 2011.

Meanwhile, if the prediction is correct and the euro falls to parity against the dollar, the corollary is that the euro could fall €1.40 against sterling in 2011, further compounding the problems for the continentals.

If you are into hedging, hold the dollar but sell the euro.

Finance on Friday, 13.08.2010