Pound For Pound: The Great British Investment
When the British pound was reduced to the dollar on August last year, many investors became wary of investing in British currency. However, this was an isolated incident and the British pound quickly recovered its previous strength against the dollar. Investors have become far more cautious over the last few months and are staying away from purchasing any British pound, including the Euro as well as the USD. This is due to several factors that have combined to weaken the British pound to new record lows.
The strongest reason for investors being so cautious about investing in British pounds is the lack of growth in the UK economy. As reported by the Office for Budget Responsibility (OBR) last month, growth in the UK economy is predicted to remain below the average of 2% per annum that is needed in order to have a positive effect on the exchange rate. As a result, the OBR has revised its prediction, cutting its growth forecast for the UK economy to just over one percent. The current economic situation in the UK is extremely weak and is similar to the pre-recessionary conditions of 2021. One of the biggest reasons why the OBR cut its prediction for the UK economy last month is the fact that it expects a slowdown in the Chinese economy. Although there is no concrete evidence that Chinese growth is faltering, the slowing of Chinese investment in the UK is thought to have been one of the main factors behind the sudden drop in the pound.
The second biggest reason why the OBR has lowered its forecast for GDP growth in the UK is the ongoing weakness of the Euro against the pound. In recent months, the Euro has lost ground against the dollar in relation to many other major currencies, meaning that the pound has lost value against almost all major currencies. The weaker the Euro is against the pound, the more economically damaging it is for the UK economy.
This is a key problem that most traders are facing these days. A lot of trading systems tell you that one currency should be your main hedge against another. However, many traders soon realise that there are only two main factors that cause a currency to lose value against another – the strength of the economic system in the country that the currency is denominated in, and the strength of the central bank of that country. While this might appear to be a simple equation, there is more to it than meets the eye.
For example, did you know that one of the main reasons that South Africa’s real exchange rate is falling against the dollar is because the economy is in recession? The official currency of South Africa is the South African Franc and the government and central bank do not have a good understanding of what is happening in the private sector of the economy. There are many factors that have contributed to the current problems in South Africa including the global credit crunch, massive default by international banks, massive corruption and a weak economy. As a result, the South African central bank has implemented a rate that essentially charges everyone that holds a large number of bonds with it a commission that is significantly higher than the rate they would otherwise charge to those individuals holding the same amount of debt in local currency.
This commission is known as the rand duty. Many people believe that this is simply another attempt by the banks to manipulate the currency markets in their own favour. This argument falls down when you realise that if the banks did not charge this commission, then they would lose out on their profits. The implication is that if the banks were not allowed to charge this mark up, then the economy of South Africa would be fundamentally supported. In short, you would still be able to buy products at a low price and sell them at a higher price without any complications. The rand does indeed represent a great British investment: it represents an investment in the future of South Africa’s economic system and therefore its currency.
In fact, the south African rand exchange rate currently stands at around 70% above the Bank of England base rate. If you think about this fact, then you immediately understand why so many people feel that the currency value of this African country will skyrocket in the coming years. The point is that the value of the rand is likely to increase as the economy of South Africa grows significantly in the coming years. Therefore, a smart investor would do well to purchase property in this country at the moment – because the rise in value of the currency of this African country could not come any quicker.
However, this rise in the value of the africa is not without its own set of problems for those who own property there. One of the major problems is the difficulty of obtaining foreign currency to finance real estate in Africa. Many expats have been known to leave their homes in the hope that the pound will appreciate enough to enable them to send money home to their family – but in reality, they are stuck in property for almost half of their lives!