Pound Overvalued Complaint of Minister Cable Denied by History

While U.K. Business Secretary Vince Cable complained the pound is overvalued, historical trends signal there’ll be few barriers to further gains for a currency powered by the developed world’s fastest-growing economy.

Sterling had its biggest weekly advance in more than three months against the dollar even after sliding today as a report showed construction unexpectedly contracted. The currency was buoyed this week as the International Monetary Fund said the economy would outpace all of its Group-of-Seven peers this year.

Speaking at his Liberal Democrats party’s annual conference in Glasgow, Scotland, on Oct. 5, Cable said sterling was too strong by as much as 15 percent on a trade-weighted basis and stifling the nation’s exports. A Deutsche Bank AG gauge showing sterling 19 percent below its high from 2007 before the outbreak of the global financial crisis sparked a selloff.

“It’s very difficult for politicians to say the pound is overvalued,” said Jane Foley, senior foreign-exchange strategist at Rabobank International in London. “Sterling is much weaker against the euro than it was going into the financial crisis and if we look at it against the dollar, quite frankly it’s not too different from its long-term ranges.”

Sterling fell 0.4 percent to $1.6046 at 5:03 p.m. London time, pushing its two-day drop to 0.8 percent. It’s 0.5 percent stronger than its close on Oct. 3, the biggest weekly advance since the five days through July 4.

IMF Estimate

The pound was little changed against the euro. While the IMF estimates there is as much as a 40 percent risk of a third recession since 2008 in the euro area, the common currency is still about 17 percent stronger against sterling today than it was before the outbreak of the financial crisis. A euro cost 78.73 pence today, up from 67.37 pence on the last trading day of 2006.

Sterling will probably appreciate to 76 pence in the next year and stay around $1.60, Foley said.

The U.K. currency has risen against most of its 16 major peers in the past month, with gains ranging from a 0.3 percent advance against the Taiwanese dollar and 4 percent versus the Brazilian real. It’s the best performer in the past year among 10 developed-nation currencies tracked in Bloomberg Correlation-Weighted Currency Indexes, with a 7.2 percent increase.

“Arguably, the pound is overvalued by 10 to 15 percent on a trade-weighted basis,” Cable told a side meeting of the conference on Oct. 5. “This feeds back into monetary policy. It is a significant problem that we can’t directly address.”

Data Releases

U.K. house prices grew at the slowest pace in 10 months in September, Acadata and LSL Property Services said today, before the release of Office for National Statistics data showing construction output shrank by 3.9 percent in August from July, compared with the median prediction of stagnation in a Bloomberg news survey. That has added to other reports showing parts of Britain’s economy, including industrial production and retail sales, are slowing.

“Some firms are telling us that the rise in sterling is hitting their overseas business, particularly in the manufacturing sector,” John Cridland, director general of the Confederation of British Industry, said in an e-mail on Oct. 8. “So far though, the appreciation of sterling is impacting mainly on companies’ margins, rather than diminishing volumes.”

Pound Weakness

The Deutsche Bank gauge, which measures sterling against currencies including the euro, dollar and yen, was at 83.63 today, a gain of about 3 percent since Dec. 31. That’s 19 percent weaker than it’s high in January 2007, before a slide that took it to as low as 69.62 at the end of 2008 amid an intensification of the financial crisis.

Cable’s view is not endorsed by the country’s major business organizations.

“I don’t think you can argue that its overvalued but neither do I think a drop will make things better,” said David Kern, chief economist at the British Chambers of Commerce in London. “The pound had fallen some 25 percent between 2007 and 2009 and although it’s come back a bit it’s still much lower than it was. The issues facing exporters aren’t necessarily going to be solved by a weaker pound.”

U.K. government 10-year bonds rose for a fifth day, posting a third week of gains. The yield fell five basis points, or 0.05 percentage point, to 2.22 percent after reaching 2.19 percent yesterday, the least since June 19, 2013. The 2.75 percent gilt due September 2024 climbed 0.41, or 4.10 pounds per 1,000-pound face amount, to 104.72.

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