July 16 (Bloomberg) -- Paul McCairn says the pound’s appreciation to a more than 3 1/2-year high against the euro is cutting profit at the machinery manufacturer his father set up near Birmingham, England, in 1984.
“We’ve got about 30,000 pounds ($46,884) of stock sitting in a warehouse in Paris and I am watching that stock fall in value,” McCairn, managing director of Bri-Mac Engineering Ltd., which sells about 45 percent of the bearing housings it produces abroad, said in a telephone interview on July 13. “It makes the U.K. product, our product, less competitive and less attractive for the French and the Germans to buy.”
Even with the U.K. in its first double-dip recession since 1975, exports to Europe falling and the Bank of England adding to the supply of sterling by injecting 375 billion pounds of stimulus, the pound rose 3.2 percent the past six months. That’s the best performance in a basket of 10 developed-nation currencies tracked by Bloomberg and including the euro and yen.
The strength of the pound, boosted by investors seeking refuge from the turmoil in the euro area, is frustrating Prime Minister David Cameron’s plan to turn the economy around.
“I don’t think the pound is going to weaken,” Shinji Kunibe, who helps manage the equivalent of $69 billion as chief money manager for fixed income at Nissay Asset Management Corp. in Tokyo, said in a July 11 interview. Britain “is receiving funds fleeing the euro. The U.K is a preferred haven,” he said.
The pound strengthened 0.3 percent to 78.43 pence per euro at 12:27 p.m. New York time and reached 78.32 pence, the strongest level since Oct. 31, 2008. It advanced 0.9 percent last week. Sterling rose 0.3 percent to $1.5628 after climbing 0.5 percent last week.
Investors seeking an alternative to euro-denominated assets pushed 10-year gilt yields to a record low of 1.439 percent on June 1. The rate fell five basis points to 1.50 percent today.
Sterling is 4.8 percent too expensive against the euro, a reversal from 2.1 percent undervalued at the end of 2011, according to Organization for Economic Cooperation and Development data based on purchasing power. It’s 2.6 percent overvalued versus the dollar, the gauge shows.
“Hopes of an export-led recovery are likely to be disappointed by the rise of the pound and the further weakening in the euro-zone economy, which is the U.K.’s biggest export market,” Vicky Redwood, a London-based economist at Capital Economics Ltd., said in a July 13 phone interview. Trade “is likely to be a drag” for the next 12 to 18 months, she said.
U.K. exports to Germany declined 2.3 percent in the three months through May, compared with the same period a year ago, Office for National Statistics data showed last week. Sales to France fell 9.1 percent and those to Italy dropped 20 percent.
Britain’s gross domestic product contracted 0.2 percent in the three months through June, the National Institute of Economic and Social Research estimated on July 10, the third-straight quarterly decline. The country emerged from the previous recession in 2009.
GDP will increase 0.1 percent this year, while the euro region shrinks 0.4 percent, according to economist estimates compiled by Bloomberg.
Capital Economics, founded by former adviser to the U.K. Treasury Roger Bootle, forecasts the pound will appreciate to 75.76 pence per euro by year end and 71.43 by December 2013, Redwood said.
A level stronger than 76.92 pence per euro would “set some alarm bells ringing” Kulwant Singh, the finance director of Delcam Plc, a Birmingham, U.K.-based exporter of software for businesses, said in a phone interview on July 11.
The firm, which employs 560 people and sends 45 percent of its products to Europe, will be under pressure as the pound strengthens toward that level, he said. Singh forecasts Delcam stands to lose 200,000 pounds the rest of this year when it converts sales equivalent to 12 million pounds back to sterling.
Sterling has failed to slide amid Bank of England Governor Mervyn King’s bond-buying program as European Central Bank President Mario Draghi and Federal Reserve Chairman Ben S. Bernanke also eased monetary policy to stimulate their economies.
The pound rose 2.5 percent versus the euro since July 4, the day before British policy makers increased the target for their asset-purchase program by 50 billion pounds, and the ECB also cut its benchmark interest rate by 0.25 percentage point to a record-low 0.75 percent. The Fed said on June 20 it would extend to year end its program of selling short-term debt and using the proceeds to buy long-term bonds.
An intensification of Europe’s debt turmoil may undermine the pound, according to Valentin Marinov, London-based head of European Group of 10 currency strategy at Citigroup Inc.
That’s because sterling’s value in the foreign-exchange market is becoming more closely tied to the euro’s. The 90-day rolling correlation between the euro’s and the pound’s moves against the dollar strengthened to 0.74 this month, the highest in almost four months. A reading of 1 would signal the assets moved in lockstep.
“Sterling will struggle to decouple from the euro in a meaningful way,” Marinov, who was the most-accurate forecaster of the euro-pound exchange rate in a second-quarter Bloomberg survey, said on July 9.
Citigroup estimates the pound will trade at 80 pence per euro and $1.52 by year end, according to data compiled by Bloomberg, as the Bank of England expands its bond purchases to 500 billion pounds.
Small and medium-sized business such as Bri-Mac account for 59 percent of U.K. employment, according to a government report published in February. The nation’s jobless rate was at 8.2 percent in the three months through April, the ninth time in a row it exceeded 8 percent.
McCairn said he and his wife, who own the business and employ 12 people, rely on exports to boost Bri-Mac’s earnings.
“The pound’s rise against the euro is knocking us,” McCairn said. “This time last year I wasn’t looking at it every day. In the last six weeks, it’s been moving away from us and we have to be more careful.”
Chancellor of the Exchequer George Osborne visited Bri-Mac in July 2010 as part of the government’s campaign to jumpstart regional companies.
“Lots of small family businesses like mine have had to start exporting to find other markets and that’s bringing other pressures,” McCairn said. “I don’t think the government is doing enough.”
Cameron’s coalition government has suffered politically for prioritizing deficit-reduction plans while the Bank of England moves to stimulate growth.
The prime minister fell behind Labour Party leader Ed Miliband in public approval for the first time, according to a ComRes Ltd. poll for the Independent on Sunday and Sunday Mirror newspapers published on May 20. His favorability rating dropped seven percentage points from the previous month to minus 28, while Miliband’s climbed 12 points to minus 19.
Speaking at a press conference today in Birmingham, Cameron said that more needs to be done to shift the economy away from its reliance on government spending and that the coalition is “absolutely committed” to achieving it.
“We’ve got an incredibly active industrial policy,” he said. “We really want to see this economy rebalanced. It’s hard and painstaking work when you are recovering from economic problems as hard as they have been, but it’s absolutely vital.”
The International Monetary Fund cut its growth forecasts for the U.K. economy today. GDP will increase 0.2 percent this year and 1.4 percent in 2013, the Washington-based lender said in a report published today. That compares with forecasts of 0.8 percent and 2 percent published in April.
“The BOE has tried to weaken the pound as much as it can but now we are moving from cheap valuations to more fair valuations for sterling,” Sebastien Galy, a senior foreign-exchange strategist at Societe Generale SA in New York, said in a July 10 interview.
The central bank has “tried to revive the manufacturing sector by basically printing money and making the pound as unappealing as possible,” he said. “Since the euro is even less appealing the pound is being driven higher and that is a process that the BOE can’t really control.”
-- With assistance from Masaki Kondo in Singapore and Andrew Atkinson in London. Editors: Philip Revzin, Paul Dobson
To contact the editor responsible for this story: Daniel Tilles at firstname.lastname@example.org.