For a while after World War II nobody needed to worry about currency fluctuations because currencies were tied to the US dollar under the Bretton Woods system. Exchange controls were in place and some older readers may remember being restricted to taking no more than £50 out of the UK.
But on 15 August 1971 President Nixon announced that the US was ending the convertibility of the US dollar to gold and this led to the end of the Bretton Woods system and fixed-rate currencies – such as sterling – became free-floating.
The following chart shows the fluctuations of GBPUSD since it became free-floating in 1971.
As can be seen, in the decade following 1971 sterling fell against the dollar (almost reaching parity in February 1985); but since then has been broadly trading in the range 1.4-2.0.
The following charts show the monthly changes in GBPUSD for the last 20 years.
The chart below shows the average monthly returns for GBPUSD. For example, on average the rate has fallen 0.39% in January.
The chart below shows the proportion of monthly returns that were positive. For example, GBPUSD has risen in January in 46% of years since 1993.
Weak months for GBPUSD have been: February, May, August and November
Strong months for GBPUSD have been: April, September and October
These observations would seem to have some persistency as they are valid for other periods analysed: 1971-2014 and 2000-2014.
The United Kingdom Budget Day used to be in April, after the start of the fiscal year, but these days it is in March, before the end of the fiscal year. The Chancellor of the Exchequer will give his Budget to Parliament this Wednesday, 19 March 2014.
The following charts show the daily returns since 2000 for three asset classes for the three days around Budget Day:
B(-1): the day before the Budget
B(0): Budget Day
B(+1): the day after the Budget
For example, in year 2000 the Budget was on 21 March, the day before the Budget the FTSE 100 rose 1.04%, on Budget Day the index fell 0.13%, and on the day after the index fell 0.12%.
The following two charts give a summary for the three asset classes.
On average since 2000 the equity market has seen mildly positive daily returns on the day before the Budget and on Budget Day itself. But the most significant observation is that equities have been weak on the day after the budget – since 2000 the market has only risen on three days after the Budget.
Sterling seems to like the Budget, on average GBPUSD has risen for all three days.
Gilts have been weak for all three days, with the weakest day being the day after the Budget.
Do changes in the exchange rate affect UK equities?
The following chart plots the monthly returns of the sterling/US dollar (GBPUSD) exchange rate against the FTSE 100 Index for the period 1971-2012.
As can be seen there is very little correlation. Changes in GBPUSD have no consistent influence on the FTSE 100 Index on a monthly basis.This is not period-dependent, a chart for the more recent period 2000-2012 is little different.
The following chart is similar, except instead of the FTSE 100 it plots the FTSE 250 Index against GBPUSD (this time for the period 1985-2012).
Again, as with the FTSE 100 Index, there is negligible correlation.
The following chart shows the returns on a range of international stock markets and commodities in 2012.
The German market was the strongest (+29.1%), followed by the Asian markets of India, Japan, and Hong Kong.
The FTSE 100 was ranked 22 out of the 25 markets appearing here.
Over half the markets increased by more than 10% in 2012.
The following chart shows a sample of currency moves against the British pound in the year. For example, the British pound increased 16.5% against the Japanese Yen, and fell in value 6.7% against the Polish Zloty.
Equity and commodity markets (sterling)
The following chart shows the returns on the same range of markets shown above, but this time in sterling terms (i.e. showing the returns for a UK investor).
The German market remains the strongest for 2012, with its returns reduced from 29.1% to 26.4% due to the slight appreciation of GBP against EUR over the year.
A big difference is the return for the Nikkei Index in sterling terms – falling from 22.9% to 5.5%.
In sterling terms the FTSE 100 climbs from 22nd position to 15th.
And in sterling terms the FTSE 250 Index climbs to 2nd position.