My new husband and I are heading to Canada next month and when we got married at the start of September a number of generous well-wishers gave us Canadian dollars to take on our travels. At the time they perhaps didn’t realise how generous they were being. Since our wedding day the British pound has fallen 5% compared to the Canadian dollar to hit an all time low. The cash we were kindly given in sterling is looking increasingly frail with each passing day.
The pound’s precipitous fall comes as Britain’s new chancellor Kwasi Kwarteng (who has been in the job for two days fewer than I have been married) unveiled historic tax cuts in a bid to help spur spending and get Britain’s economy back on track. On Friday, traders rushed to sell their sterling in favour of safe haven US dollars on mounting concerns that these tax cuts and the proposed borrowing will stretch Britain’s bank balance to the limit. The fact that the new government’s mini-budget came just one day after the Bank of England hiked interest rates in an attempt to curb surging inflation did nothing to help credibility. Economists and traders from Asia to the US are questioning the sense of Britain’s economic policy.
That leaves Britons and their businesses in a troubling position, especially as inflationary pressures bite. The cost of goods and services is climbing at the same time that the value of the pound is falling, making goods imported from overseas even more expensive. Many businesses have said that they will pass on these higher costs to their consumers, but higher prices mean higher inflation - compounding the problem. It’s little wonder the domestic-focused small and mid-cap markets have had a terrible 2022.
But all is not lost. For companies that rely on international business for a big portion of their earnings, falling sterling rates can be a good thing, especially if those businesses book most of their costs in pounds.
This explains why the internationally focused FTSE 100 has held up relatively well in recent months and is unlikely to be badly affected by the continued downward pressure on the pound. Weakness in the UK’s main market index in the last few days can therefore at least…
