Sterling is on a roll. But will it last?
I'm not endowed with the gift of prophecy, but I do know that what goes down is physically capable of coming up again, and that is now starting to happen to the pound.
In the dark days of January, when the pound bought €1.11, I put my head on the block by claiming sterling isn't going to remain a burned-out basket case forever. In fact, I boldly predicted that the pound will rebound.
Cannily, I didn't say when. Or against which currencies.
What goes down...
It took a couple of months, but the pound is now on a steady upward trajectory against the euro. It started creeping up in early April, from €1.12 at the start of the month to €1.17 when the nation went to the polls on 6 May, and recently hit €1.21.
That's an increase of 9%, clawing back a sizeable chunk of the 25% fall in value against the euro since the start of the credit crunch.
My powers of foresight sadly didn't extend to the GBP/USD currency pairing (aka cable). The pound stood at $1.61 in January but the rate has since fallen to just $1.47, a drop of nearly 9%. But it has rallied from a low of $1.42 in late May.
Pounds and pips
So what is driving this recovery? The prime factor is euro weakness. Currency traders have noticed that the UK has several advantages over the eurozone.
First, we don't share the same currency as Greece. Second, we don't have to set our interest rates to please German central bankers. Third, we can gleefully debauch our currency by printing more of it, and nobody can stop us.
The recent leg of the stock market slide has also helped the pound against the euro. I noticed that every time markets panicked about sovereign debt and sold off shares, the pound squeezed a few more pips out of the euro.
Momentum investing
Several other factors have shifted in our favour. We now have a steady-ish government coalition, and freespending former-PM Gordon Brown has no part in it.
The Tories are the senior partners, and unlike Labour, they have a deep-rooted ideological commitment to shrink the state (and they aren't funded by the public sector unions). This suggests they will be tough on state spending, and tough on the causes of state spending, which makes credit markets happy.
Even Monday's report from the Office for Budget Responsibility lifted the pound, even though it was a mixed bag. Traders ignored the bad news, that the economy will grow more slowly than expected, and celebrated the good news instead, that the deficit will decline at a faster rate.
Sterling even rose against the dollar, by two cents. That's what happens when you get positive momentum behind a currency: all the red lights suddenly turn green.
Emergency powers
It will be interesting to see what next week's emergency budget will do for sterling. If Chancellor George Osborne impresses the markets with tough spending cuts and tax rises, safeguarding our AAA status and reassuring the bond markets, the pound could rise further.
Unless, that is, markets think he has gone too far, and start fretting that his fiscal zealousness will jeopardise the recovery. You never know which currency markets are going to leap.
But given that Europe's €750bn rescue package for Club Med debtors is just a sticking plaster, you have got to expect the pound to gain more ground on the euro.
And if markets start to get edgy about the $12 trillion debt mountain now building in the US, the pound could even pick up against the dollar as well.
Krone groan
A pound rebound is good news for me, because as I've confessed before, I am embarrassingly exposed to the mighty Norwegian krone, (which is why I pay obsessively close attention to currency movements). Luckily, the krone is loosely pegged to the euro, and £1 now banks me 9.5 NOK against a low of 8.8 NOK a few months back.
But it isn't good news for British exporters. Currency devaluation was the Bank of England's secret weapon in the battle to save the British economy, but now the Europeans have got their hands on it.
And it isn't great news for UK investors either. With three-quarters the FTSE 100 earnings generated overseas, their value may fall when converted back into sterling.
Unlucky Jim
If you agree with me that the pound is likely to gain more ground on the euro, and want to bring home any profits from European funds or property, you might think about repatriating your money sooner or later. If you are shifting money overseas, or buying foreign stocks, funds or property, you could hang on to see if the pound strengthens further.
That's what I'm doing, delaying sending any further payments to Norway in the hope of getting a better rate after a feisty emergency budget (not to mention the next eurozone wobble). This is a risky strategy, of course, because currency shifts are just as hard to time as markets.
As for the dollar, I'm glad I can sit that one out, although I can see the pound gaining a bit more traction.
Recent events suggest investor Jim Rogers was a bit presumptuous when he rudely claimed in January 2009 that sterling is "finished" (a claim he repeated as recently as March).
The pound is still down, but it is no longer out. Although another bout of quantitative easing, which could happen later this year if inflation eases, could slap it (and me) back down again.
More from Harvey Jones:
> Harvey holds sterling, Norwegian krone, $150 in cash, €7 and 21 Swedish krona.
> Claim your FREE financial guides -- The Motley Fool has teamed up with a number of partners to offer our users free financial guides on topics such as tax planning, funds, foreign exchange and much, much more. Click here to download your reports today!
