The currency exchange rate
Time to revisit an old friend this week, the exchange rate. Long term sufferers of my monthly missives will possibly recall that in my dim and distant past I used to be an international banker, and for part of that time a foreign exchange dealer. It was so long ago that we used to have exotic currencies such as the French Franc; Italian Lire, and even the Deutschmark. Heady days indeed! By the time I escaped from the banking world in 2002 these currencies were dead or, perhaps more accurately, held in a cryogenic state, ready to be reheated if need be. The exchange rate between Sterling and the new super-currency, the Euro, was in the mid 1.60s in 2002, and had declined to the mid 1.50s when I finally got to France in 2003. By the time I bought property here in 2004, I averaged 1.45.
The trend was set, but few people were prepared for it. During the financial meltdown in 2007 and 2008 ‘la merde a vraiment frappé le ventilateur’, and the pound plummeted almost to parity with the Euro by the end of 2008. In 2009 I stupidly agreed to start a weekly column for an internet magazine, giving my predictions for the week to come. I struggled with this millstone for nearly three years. My basic message was that large F/X movements like this are always exaggerated. Parity was plainly nonsense, and the pound ought to recover to between 1.25 and 1.30. It takes some ingenuity to deliver this basic message 130 times, and in 2012, with the pound at 1.25, I called it a day. I still remember the sense of relief when I realised I wouldn’t have to sit down at 4pm on any more Fridays to write about why the previous week’s forecast had been so wrong.
It was a good time to stop, as the rate fell again during the second half of 2012 to 1.15 before slowly resuming its upward trend. Interested parties, and by that I mean all expats, probably didn’t take too much notice as we clawed our way back up through 1.20s and on to 1.25 once more. Then, at the start of November last year, a big market move started, and people began to sit up and take notice. Two months later, and as I write, we are at a shade under 1.35. So what is going on?
Politics and economics are of course the answers. They govern supply and demand, which is the final arbiter of the exchange rate. Germany, the powerhouse of Europe, now has a stagnating economy, and Greece, not the powerhouse of Europe, is stirring up political trouble. None of this bodes well for the Euro. So we can all sit back and relax. The pound is heading back to 1.60. Hundreds of thousands of Brits will be pouring into France waving their new cheap wads of Euro, buying up all the property in sight and sending up the values of our houses at the same time.
Does anyone really think that? I certainly don’t. There is no such thing as a safe bet in the currency markets. You must never forget Murphy’s law. Whenever you really want something to happen, Murphy’s law dictates that the opposite will occur.
I think that we are approaching the time when we need to think about selling Sterling. I don’t think we’re there yet, but we need to be careful. We live, after all, in the Euro zone, and thus most of the money we spend is Euros. We may have pensions or indeed other income in Sterling, but that won’t buy your morning croissant. Until you change it into Euro; it is largely useless while you live here. Of course there is nothing you can do about your UK State pension, if you are in receipt of that princely sum. You will just have to be savvy about when and how you convert it. You can however do a great deal with an occupational pension, and you can do a great deal with your savings and investments. There is no better time than now to take a long hard look at your UK pension pot. Savings and investments held in non-French tax efficient bonds are a nonsense. Come and talk to me about them now!
For years now The Spectrum IFA Group have been advising clients on pensions and investments and I have been keen to point out that clients who have Sterling assets do not need to convert them to Euro to make use of the products available to them outside the UK. Those clients who have transferred their assets in Sterling are most probably quite pleased that they did not convert, but what about now? What if we hit 1.40, or 1.45? For my money the only way is down from there, back to my preferred levels. If we do get to 1.40, I will certainly be looking long and hard at my Sterling funds, with my finger hovering over the deal button.