HSBC GLOBAL MARKETS DEC 2011
Sterling’s uncertain future
Looking back at the financial markets over the past and the Greek drama quickly escalated into a full-blown
twelve months it has been so eventful it is difficult to debt crisis as confidence began to crumble. By now,
recall all the highs and lows. It has been a tough year, the ECB had been forced into regular buying of excess
not as traumatic as 2008 or 2009, but certainly not as Italian and Spanish bonds to combat fragile demand
positive as we might have hoped for. from international investors.
One thing that does stand this year apart has been the A fundamental shift
sheer range of factors that have influenced market
conditions; natural disasters, major geopolitical events, This search by investors for safety and liquidity, rather
government elections, central bank interventions and than profitable returns, sparked a new record high for
international credit agencies have all played a part. gold and a crash in equities markets as ‘risk-off’
became the dominant force. The UK FTSE-100 index of
Never a dull moment leading shares lost more than 15% of its value in just
four weeks. On the foreign exchange markets, Sterling
The financial markets certainly started the year in a fell by more than 10 cents against the US dollar from
positive mood. Despite the economic disruptions from over $1.65 to under $1.55 in a matter of weeks.
the heavy snowfall, in January the FTSE-100 hit the
6,000 mark for the first time since June 2008. Indeed, The final three months of the year have been
the balance of economic data in the first quarter was dominated by the “Grand Plan” by Eurozone leaders to
suggesting that the severe policy medicine was combat the region’s debt crisis. The initial proposals
beginning to stimulate global activity. unveiled in October, which included a voluntary 50%
default on private sector holdings of Greek debt and a
Markets were being driven by the prospect of higher €1 trillion rescue fund, lacked the sufficient detail the
interest rates in the UK and Europe, while Eurozone markets were looking for.
leaders agreed to increase the lending capacity of the
EFSF rescue package to €440 billion. In the US there By the end of the month, Greece and Italy had joined
was growing speculation that improvements in the US Ireland and Portugal to the list of countries with newly
jobs market would prompt an end to the Fed’s elected governments this year. Politics was becoming
Quantitative Easing programme. the new economics as closer fiscal (taxation and public
spending policies) integration between Eurozone
Into the second quarter and we did indeed have the countries was becoming a reality.
first hike of rates by the ECB which helped the euro
reach its 2011 high against the US dollar of $1.49. Investors remain cautious and the euro is still suffering
However, the mood was darkened by the €80bn bail- from the uncertainty generated by a partial solution to
out of Portugal and the drawn-out Federal budget crisis the Eurozone debt crisis and the threat of further
which narrowly avoided a shut down of US downgrades by the international credit ratings agencies.
government services.
Against this backdrop of a softening in global growth
By the third quarter, stresses in bond markets had prospects the Bank of England announced a £75 billion
begun to intensify with the Greek government forced extension to the Quantitative Easing (QE) programme
to pay international investors more than 15% to raise and the ECB swiftly reversed its previous interest rate
funds. Nevertheless, the wider Eurozone economy was hikes.
thought to be in reasonable shape by the ECB who
pressed ahead with a second rise in interest rates, Many emerging market economies, including China,
while US politicians agreed a tentative deal to cut their have shifted their monetary policy from tightening to
deficit by $2.5 trillion over ten years. easing as growth (not inflation) has become the major
concern for 2012.
The US agreement, however, wasn’t enough to
prevent the US economy losing its AAA credit rating
Published by HSBC Global Markets,
Corporate and Commercial Sales
How does Sterling’s volatility impact your business?
1.70
GBP/USD
1.65
1.60
1.55
1.50
1.45
1.40
Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11
Source: Thomson Financial Datastream
Formulate an FX strategy To simply assume that Sterling will continue to trade within as
narrow a range as we have seen in the past twelve months is a
Despite all the significant events that took place in 2011, the dangerous assumption to make. Sterling’s recent stability seems
currency markets have appeared relatively settled in comparison to lie in its position between the US dollar and the euro.
to other assets. It would seem that the frequent switching of However, it has taken a specific set of market conditions for this
investors between ‘risk appetite on’ and ‘risk appetite off’ has trend to manifest and history suggests that the pound’s stability
meant that many currency pairs, including Sterling, have not is unlikely to prove permanent.
broken out into a decisive direction.
According to the latest Reuters poll, the UK’s top 50 economists
How then do we make sense of all that happened in 2011 and 12 month forecasts in December 2011 for GBP/USD range from
what can we learn from it heading into 2012? Perhaps the most $1.38 to $1.77 while GBP/EUR range from €1.04 to €1.30. An
important notion to consider is actually not to draw any firm effective FX strategy should always protect a business against
conclusions as to what the future may bring. As they rightly say an adverse move in rates but also have the flexibility to allow a
in financial markets, and even on this accompanying disclaimer, business to benefit when a favourable move in rates occurs.
past performance is not a reliable indicator of future performance.
Get your FX strategy right and you don’t have to second guess
This can be difficult advice to take as human nature tends to the next big event to hit the markets. For further details on how
push us towards hindsight; the inclination to see events that HSBC can help, please contact your local relationship manager.
have already occurred as being more predictable than they were
before they took place. To keep an open mind is important
because typically at this time of year many UK businesses that
trade internationally will be formulating opinions and strategies
about 2012, including their foreign exchange requirements.
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