Sterling outpaces euro on limited China exposure

LONDON: Sterling rose against the euro on Wednesday, with some investors viewing Britain’s currency as a safe haven given the country’s relatively limited trade exposure to China.

Traders said the global market focus on an economic slowdown in China is likely to impact sterling less than commodity currencies like the Australian and New Zealand dollars. Imports from China account for just 8.7 per cent of Britain’s total, while the share of its exports to China is even lower.

The pound was flat against the dollar with investors unsure about the timing of expected increases in both British and US interest rates.

Money markets have pushed out the timing for a Bank of England (BoE) hike to around the third quarter of next year compared with early 2016 when the central bank published its quarterly inflation report three weeks ago.

Fears of a global slowdown have intensified in recent days after China devalued its currency and data pointed to further signs of weakness. These factors have deepened a sell-off in Chinese stocks and triggered volatility in global stock markets.

“We remain cautious of the global growth outlook and, on balance, believe that interest rate increases, both in the US and here in the UK, are further off than consensus has hitherto believed,” British fund manager Neil Woodford, of Woodford Investment Management, wrote in a blog.

“With respect to the UK, where growth has been comparatively strong globally, we worry about the unbalanced nature of that growth,” he added, pointing to a disproportionate rise in consumer spending and a growing balance of payments deficit.

Sterling was 0.2pc higher against the euro at 73.24 pence per euro, having hit a three-month low of 74.21 on Monday when it lost more than 2pc, its biggest fall since 2009.

Against the dollar, sterling was flat at $1.5678 while against its trade-weighted currency basket it was slightly lower at 92.8 Trade-weighted sterling hit a 7-year high of 94.80 last week, supported by comments this month from BoE Governor Mark Carney that the decision to raise rates would likely come into “sharper relief” at the turn of the year.

Published in Dawn, August 27th, 2015

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