Now we are all currency trading experts

[caption id=”attachment_754" align=”aligncenter” width=”640"]

"Facsimile de un billete de banco de cinco libras esterlinas" by Fondo Antiguo de la Biblioteca de la Universidad de Sevilla https://flic.kr/p/7fhv5k

“Facsimile de un billete de banco de cinco libras esterlinas” by Fondo Antiguo de la Biblioteca de la Universidad de Sevilla https://flic.kr/p/7fhv5k[/caption]

I was minding my own business on Facebook the other day when one of my friends made a crack about her trip to Spain being more expensive because of Brexit. One of her friends, with the anger of the frustrated Brexiter, explained that the currency was only returning to its long term average.

That doesn’t seem right.

I thought. But maybe it is. So I resolved to see whether it really was.

The exchange rate

I kind of know what the exchange rate is. It’s the amount of another currency I can buy for a pound (for I am British). People tell me the pound has fallen which means, effectively, I can buy less of another currency for my pound.

There is a market in currency (the Foreign Exchange or FOREX market) and when people on the news (or on Facebook) talk about the pound weakening they are talking about the what a pound can buy in the FOREX market.

The value of the pound

There are, somewhat inconveniently, many currencies and the amount of each currency that the pound will buy varies. So often we talk about “the pound falling against the Euro” (£1 will buy fewer Euros) or “strengthening against the Dollar” (£1 will buy more dollars.

Thankfully for those of us who do not wish to become foreign exchange traders, the Bank of England provides a handy summary of the value of the pound against all currencies. (Currencies from countries we do more trading with count more in this index).

This is available in a handy file going back to January 1980. In this dataset the exchange rate in January 2005 was set as 100 so if the exchange rate is higher it will be bigger than 100, if lower it will be lower.

https://docs.google.com/spreadsheets/d/e/2PACX-1vTNUGs6lD8FIuwNMsSOZgKYE2WSiYfP1SvzMY0SDD-DUGd7bK3C5s9supj873WCVoadMf1lgDVy710z/pubchart?oid=1491702831&format=interactive

Which certainly does make it look like the pound is at a very low level. In fact it seems to be at a similar level to 1993 which was when I graduated and I rather remember being a pretty tough time economically (not for me the impact of the demographic time bomb). More recently the pound was at a similar level in 2008. That was definitely a bad year.

So if the pound is returning to a historic norm, it is a norm that coincided with struggling economies.

Does a weak pound matter?

Broadly speaking a weak pound is good for people (or businesses) selling things from the UK to people (or businesses abroad). So it makes the UK a cheaper tourist destination, helps exports and encourages foreigners to invest in the country. It increases the cost of importing things, makes a UK holiday abroad more expensive and discourages UK companies investing abroad. There’s a nice guide on economicshelp.org.

Overall (that guide suggests) prices will increase with a lower pound.

That’s one consequence of the Brexit vote: we are all experts on currency trading now.