Winlock Currency News – 2021

With the pandemic, Asian freight issues and material cost increases causing havoc over the last 18 months, not much attention has been paid to exchange rates. So to prepare you for 2022, here is our review of the major currency issues affecting our industry.

US Dollar

Ignoring the period of panic in March 2020 when Covid and Brexit combined to trash sterling for a short time, the $: £ rate has been relatively stable. It rose slowly from $1.25 to $1.35 in the second half of 2020 and for almost all of 2021 it has been in the range of $1.35-$1.40. This is an improvement of approx. 4% over the last 2 years, which has helped to offset some of the cost increases on Asian products, although to put this in context, it doesn’t even go halfway to covering the extra sea freight costs we have seen in 2021. The last thing we all need is for sterling to bomb again and add to our ever-increasing costs.

At the moment the currency markets are expecting UK interest rates to rise, and the recent failure of the Monetary Policy Committee to increase base rates took a couple of US cents off the sterling rate in November. Looking ahead to next year sterling is close to its traditional “floor” of $1.40 so the downside should be limited, especially when the size of the US Budget deficit is factored in as this could worry investors for the longer term. Russia invading Ukraine would probably change all these calculations – but if you are looking for a catastrophic event to follow Covid then China invading Taiwan is top of the list!

Ignoring the political factors for the moment, a rate of $1.30 - $1.45 is the likely range for 2022.

Euro

As against the US, the dollar sterling fell 10% in March 2020 against the euro. Unlike the US dollar rate, the sterling stayed weak against the euro throughout 2020, ending the year at €1.10 against a Jan 20 rate of €1.17. Sterling improved to €1.15 in March 2021 and has stayed in a very narrow range ever since of €1.15 – €1.18.

The eurozone still has its fair share of challenges, both political and economic not least of which is further Covid restrictions for the unvaccinated during the winter. German exports are starting to look weak and as the mainstay of the euro German economic performance matters. The one thing Germany will not want in this scenario is a significantly stronger euro – so our guess is that sterling is more likely to strengthen against the euro than weaken in 2022. So a range of €1.15 - €1.25 is our best guess.

Chinese Yuan

Despite all the issues with Covid, material cost increases, and now power cuts over the last 21 months, the CNY has strengthened against the major currencies, particularly the US dollar. At the start of 2020, 1 US$ was worth 7.0 CNY, but it will now only buy 6.4 CNY. The US Govt will consider this 8.5% devaluation a good thing as it complains that the CNY is systematically undervalued, but US consumers will be less happy when this translates into double-digit inflation on this year’s Christmas gifts! It is a major reason why US inflation rates are likely to exceed those of other major economies in 2021/2022. It also means every product from China sold in US$ will be under severe price pressure.

Sterling started 2020 at around 9.1 CNY per £1 and apart from the March 2020 drop to 8.2 it has stayed in the range 8.6-9.0 CNY. It is currently at the bottom end of this range, which means sterling has fallen approx. 4% against CNY since Jan 2020. This is fuelling UK inflation but not to the same extent as in the USA.

Looking ahead China’s factories continue to suffer from power shortages which are expected to last all winter and will reduce economic output. It is difficult to predict how this will affect the CNY rate, whilst traditionally in difficult times China will allow its currency to fall in this circumstance it will not help as the factories cannot produce more anyway. The danger vis that in some sectors, buyers will move permanently to sourcing outside China.

The China/Taiwan issue was touched on earlier, but the potential for disruption, if this becomes likely, is off the scale. It is difficult to see how US and European companies could continue to buy vast quantities of goods from China if they took hostile action. And as the world’s biggest producer of semi-conductors Taiwan is of critical importance to many consumer goods sectors, and any disruption or loss of supply would have huge impacts throughout the developed world. All exchange rate bets would be off!