All economic forecasts predict a gradual fall in sterling. No matter what the ups and downs, a United Kingdom shut out of its most important trading partner for goods and services, the EU, is prone to suffer tremendous economic losses, no matter how much the European Union will suffer too and no matter how relaxed UK consumers may feel about it. The pound will fall accordingly.
Whenever pundits see a ‘soft’ Brexit as a possible outcome, the pound will rise. Whenever the hard facts shine through, the pound will fall.
So generally speaking, the British pound is a currency more likely to fall than to rise. Yet this comes with a caveat: nobody can ever say so for sure. It is crystal ball gazing, card reading, pure guesswork. And you may lose some value, but you will not lose your savings: as the UK is printing its own currency it will never run out of it. No matter how bad, it is safe for your savings. The pound may only be worth much less than you would have expected at the time.
According to the Bank of International Settlements, currencies are traded worldwide to the tune of at least five trillion dollars per day.
Participants in this market are all kinds of financial institutions – currency traders working for banks, hedge funds, speed-trading platforms, central banks, corporations or governments.
Most of these trades are speculative, meaning that these guys do not have any actual need for the currencies they are buying other than speculation. They believe that within a few milliseconds, or within the timespan of a few hours, they will turn a profit.
Banks have to clear their open positions when they stop trading: no ‘open’ positions are kept overnight. They have to make sure that when they leave their desk, all speculative positions are closed. The risk of running a currency position uncontrolled would be too high for even a hard-nosed trader. And despite that, many traders have bet against the bank and lost. Remember Barings Bank?
If your life interests and all your spending take place in euro, you should stick with euro rather than with the British pound
It is always a zero-sum game: those who lose their bets bolster the gains of those who were right. To predict currency movements more than a few hours ahead is well-nigh impossible. To do so correctly over a longer time span has roulette probabilities.
Imagine what might happen to the British pound if Theresa May should openly declare that any economic pain suffered from stopping EU immigration is a price worth paying (we may not hear her saying so, but this may well be her thinking). Or what would happen to the US dollar if the Chinese government were to report that its banking system was close to collapse. Or if Germany declared that they would rather opt out of the euro and go for the old Deutsche Mark instead. Currency markets would go bonkers. There is no way a human could ever be so clairvoyant as to predict it.
Currency markets are like that: they are inherently unpredictable. Anybody who tells you otherwise is mistaken. Therefore, the question of what to do with one’s Sterling needs clarification.
If you are not a speculative trader but a rather more pedestrian saver, the question in which currency you’d wish to hold your savings will depend entirely upon where you live. If you have a pied-a-terre in London paid for with a sterling mortgage, it may well make sense to keep the equivalent savings in British pounds. Likewise, if you have children to support in British universities, or if you run an open account at Harrods.
But if your life interests and all your spending take place in euro, you should stick with euro rather than with the British pound, no matter what nominal returns beckon on the horizon.
The time may come when you will wish to draw down money but in terms of the exchange rate it may be the wrong time altogether. The pound may be deep in the red and you would have to suffer massive losses. Or maybe not. But the unpredictable, inherent risk will be without financial reward to you.
In my experience, this is not a risk worth taking. Many people in Iceland, Poland, Hungary and Austria took out loans in foreign currencies at the time. They had mortgages in Swiss francs, or Japanese yen even, sold to them by brokers and bankers promising low interest rates. Their interest payments were very low indeed.
But they soon came to realise, to their dismay at payback time, that the currencies had moved and they were all indebted way beyond their means.
What is true for bank loans is equally true for savings: when exchange rates move, all your optimistic expectations may falter. Therefore, if your life expenses are denominated in euros, your savings should be in euro too. Everything else is gambling with the odds against you.
Please send in any queries, concerns or ideas that you would like Andreas Weitzer to discuss in his fortnightly column to: editor@timesofmalta.com – Subject: Personal Finance.
Andreas Weitzer is an independent journalist based in Malta. He reports on the economy, politics and finance.