Made in Britain Increases as Europe No. 4 With Nissan-Tata: Cars
Comment of the Day

January 25 2012

Commentary by Eoin Treacy

Made in Britain Increases as Europe No. 4 With Nissan-Tata: Cars

This article by Steve Rothwell for Bloomberg may be of interest to subscribers. Here is a section:
The biggest threat to the U.K. production levels may be from fluctuations in the value of the euro versus the pound, said Peter Schmidt, managing director of Warwick, England-based Automotive Industry Data.

Sterling fell 38 percent against the euro between 2000 and 2010, making British products less expensive for Europeans, just as the proportion of U.K.-built cars that went for export rose from 65 percent to 76 percent, according to SMMT figures.

Toyota is effectively hedged because it buys parts from U.K. suppliers in euros, according to Walker. Graham Hoare, executive director of powertrain engineering at Ford, which last year built 1.7 million engines in Dagenham, London, and Bridgend, Wales, said that the opposite applies, with many components sourced from continental Europe, so that a weaker pound creates “headwinds” and makes it tougher to remain competitive.

“If the euro were to founder it could lead to the closure of one U.K. plant after another,” said Schmidt. “Manufacturers cannot afford to make cars at a loss. Nobody can.”

Eoin Treacy's view The UK's dependence on the financial sector and credit fuelled growth left it more exposed than most to the financial crisis. The most immediate casualty was the Pound. It crashed lower against a host of currencies, allowing the UK to “get its devaluation in first”. This proved an advantage and allowed British manufacturing to become considerably more competitive.

The Pound tested parity against the Euro in early 2009 but has been ranging with an upward bias since. The Euro deteriorated sharply from mid 2011 as its debt crisis took centre stage and the UK embarked on a program to narrow its deficits. No country, and particularly those with weak growth, wants a strong currency. In this regard, the UK and Eurozone are in competitive.

With weak growth and the threat of recession, the potential for another round of quantitative easing from the Bank of England is a realistic possibility. The ECB is also making a vast amount of liquidity available. Interest rate differentials are not wide enough to matter to most investors and there is the possibility they will narrow further.

The Pound was somewhat overbought when it encountered resistance in the region of €1.22 three weeks ago. The consolidation so far has been quite orderly and a sustained move below €1.16 would be required to question medium-term scope for continued higher to lateral ranging.

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