Oh dear, wrong again! Mugs game this forecasting lark. Sterling having flattered to deceive last week, I was duly deceived, and this week we got what I expected last week. Timing, that's what it's all about... his week I really do think that we will see very little from the currency markets. Yesterday (the 17th) was 'black Friday' in the City of London and big cities throughout the UK. Very little to do with the markets, but it was office party day, and a good number of market participants, in the UK at least, will now be more than a tad jaded in the final push to Christmas.
Look back and wonder..
Can you guess the range for sterling/euro in 2010? It is 1.09 to 1.24, so that leaves us just in the top half of the table at 1.1780 this week. That's quite a big range, and it's worth pointing out that if you needed to buy euros to pay for a €250,000 house this year, the swing between those two rates is over €30,000. Nice if you got it right...
The early rounds
As the year draws to a close I think it would be useful to try to work out the current state of play between the two currencies. Let's take sterling first. The dear old pound has taken a battering over the past three years, and at times it has looked as though the ref ought to step in and end the bout, but it's still there. It has paid heavily for its 'special relationship' with the US financial markets. Mortgage backed securities? No problem my septic friend. Who cares whether or not the borrower will be able to repay when interest rates go up? They're all mixed in with some good stuff, aren't they? Well yes they were , but not enough good stuff to soak up the mess, and the world's financial system was left staring down both barrels of a very sawn off shotgun.
Of course the euro was caught up in all this mess as well, but not to anywhere near the same extent. We all know what a pain it is to get a decent mortgage in France, and it's been like that for years. So many years in fact that if you told a French mortgage lender that you could get a loan of eight times joint salary in the UK, he would assume you were either joking or lying. This caution didn't do France, and the other eurozone countries, any harm at all when things started to get a little 'difficult'. Yes, the European banks lost a few billion here and there, certainly more than they could afford, but there were no Northern Rock or RBS debacles. So the early rounds post 2007 went to the euro, and sterling very nearly went down the pan.
A swing?
Having failed to put sterling on the canvas and out for the count, it is probably no surprise that things started to go wrong for the euro. The pre-fight pundits had always claimed that the euro had a weak chin. Having sixteen very different countries using the same currency and the same interest rate just isn't natural. Fine if they all became one country (Europa?), but that was never going to happen. Each of those countries has a different economic cycle, and governments need to tweak and trim their economic capabilities by moving interest rates up or down, or buying or selling their currency. So what happens when you can't do that anymore? You farm PIGS, that's what happens. Greece gleefully accepts billion upon billion of development aid, and it seeps down through fakelaki into all the wrong back pockets. Ireland suddenly realises that it has mortgage rates at 3%. Begorrah, I can buy a huge house very cheaply, if I can find a bank that will lend me the money. And so it goes, until one day the bills drop on the doorstep, and the PIGS can't pay.
Round 7
So here we are, the pretty girls dressed in skimpy santa outfits have left the ring and the bell has gone. The euro has staggered through the last two rounds, rocked by a desperate lunge by sterling which caught that dodgy chin. We now have two desperately tired contenders, and there are six rounds left. This could go either way
Sterling is still hurting from the financial crisis, and will need to conserve energy (and cash) to get through this match. The euro is also hurting badly. Apart from a bruised chin, it might have a couple of broken ribs.
If they both hang in there for the full 12 round, I think it will be a draw, and we will become used to exchange rates floating gently between 1.25 and 1.30. The biggest worry is that the euro might not make it, and be forced to throw in the towel. In that case sterling will be the winner, but at what cost?
Time for a Christmas break. Here's wishing anyone daft enough to read this stuff (and thank you) a marvelous Christmas and New Year, and I'll be back in 2011 to let you know how round 7 is going.
a bientot, Rob
Saturday, December 18, 2010
Saturday, December 11, 2010
Weekly F/X comment
Perhaps the less said about my forecast last week the better. 1.1675 doesn't look much like 1.1950 whichever way you look at it, so what did I get wrong? Euro weakness is the answer, and lots of it. Strife in the Euro camp. This week, Germany rejected a proposal from Luxembourg and Italy that a large chunk of euro zone sovereign debt finance should be replaced with collective Eurobonds, and the Luxembourg prime minister accused Ms. Merkel of being "un-European".
So what's wrong with good old-fashioned Eurobonds?
Germany has now rejected the idea twice. On Monday Germany's finance minister said it was unworkable on technical grounds, because the European treaties would not allow it. On Wednesday, Angela Merkel, the German chancellor, gave the real reason; that a collective Eurobond would provide the wrong incentives, allowing weak states to hide behind the strong. She believes that member states need the financial discipline of the bond markets and separate interest rates. Now to my mind that is indeed pretty un-European. I thought the idea was for a single pan-European interest rate? Apparently not if it means that Germany has to pay more than it needs to in the process.
End game?
It strikes me the eurozone's politicians will have to face the hard question next year of whether to help states such as Ireland engineer a managed default and exit from the euro or make concerted efforts to bring the eurozone into a tighter political and fiscal union and thereby facilitate economic transfers from strong states to the weak. The practical prospect of this happening seems somewhat remote, but without it we could now be looking at the start of the end game for the euro.
A chartist's view
One of my promises when I started writing these articles was that I would avoid technical mumbo-jumbo and chart-speak, so I will choose my words carefully here. Below we have a chart which shows the turbulent history of sterling against the euro over the past 5 years, or to be more precise the past 3 1/2 years. As you can see all was well in the world until half way through 2007, then we lost nearly 10% in the second half of that year. In 2008 the merde really hit the ventilateur, and we lost another 22%. Since then however we have seen a recovery of sorts in both 2009 and 2010. Here comes the technical bit.
Take a look at this link: http://markets.investorschronicle.co.uk/companies/summary.asp?YYY2070_05il4cW/O8fDu6TjdxyEB1/lYp2aAGZomAsCpdYn/Rg=
Look at the four troughs (lowest points) from December 2008 through to now, and mentally (or actually if you like) draw a line linking them all and carrying on into the future, that line will be going 'uphill'. Real chartists out there will be choking on their coffee at this point, but I'm not talking to them. This is called a trendline, and if the chart does indeed carry on in this way sterling will be back above 1.3000 sometime in 2012.
Now I know for a fact that Barclays have lots of chartists, and the bank seems to be listening to them. The bank`s long-term forecast is for sterling to reach €1.28 by this time next year. Barclays view is that “The Coalition is enacting deep structural reform in order to take a lump out of the deficit, which is a risk…It could ultimately be good for the structural growth story in the UK.” Yes, well, maybe and maybe not. I have my own view on the Osborne austerity package, but that's for another day.
A note of caution regarding charts and chartists. What do you think the chartist view was in September 2008, just before sterling fell over the cliff?
So what now?
I have been forced to re-think my entire view of sterling's likely performance pre-Christmas. Somewhat reluctantly I think we may now indeed see an assault on the 1.200 level, so let's go for 1.2025 by the end of next week.
a bientot, Rob
www.France-Financial.com
www.Spectrum-IFA.com
Phone 0468 247758 or 0631 787647
Please note that all these comments are my personal view and do not represent any firm advice by either France Financial or the Spectrum IFA Group.
The Spectrum IFA Group - TSG Insurance Services S.A.R.L. Siège Social: 34 Bd des Italiens, 75009
« Société de Courtage d'assurances » R.C.S. Paris B 447 609 108 (2003B04384)
Numéro d'immatriculation 07 025 332 - www.orias.fr« Conseiller en investissements financiers, référencé sous le numéro F000184 par CIF-CGPC, association agréée par l’Autorité des Marchés Financiers »
So what's wrong with good old-fashioned Eurobonds?
Germany has now rejected the idea twice. On Monday Germany's finance minister said it was unworkable on technical grounds, because the European treaties would not allow it. On Wednesday, Angela Merkel, the German chancellor, gave the real reason; that a collective Eurobond would provide the wrong incentives, allowing weak states to hide behind the strong. She believes that member states need the financial discipline of the bond markets and separate interest rates. Now to my mind that is indeed pretty un-European. I thought the idea was for a single pan-European interest rate? Apparently not if it means that Germany has to pay more than it needs to in the process.
End game?
It strikes me the eurozone's politicians will have to face the hard question next year of whether to help states such as Ireland engineer a managed default and exit from the euro or make concerted efforts to bring the eurozone into a tighter political and fiscal union and thereby facilitate economic transfers from strong states to the weak. The practical prospect of this happening seems somewhat remote, but without it we could now be looking at the start of the end game for the euro.
A chartist's view
One of my promises when I started writing these articles was that I would avoid technical mumbo-jumbo and chart-speak, so I will choose my words carefully here. Below we have a chart which shows the turbulent history of sterling against the euro over the past 5 years, or to be more precise the past 3 1/2 years. As you can see all was well in the world until half way through 2007, then we lost nearly 10% in the second half of that year. In 2008 the merde really hit the ventilateur, and we lost another 22%. Since then however we have seen a recovery of sorts in both 2009 and 2010. Here comes the technical bit.
Take a look at this link: http://markets.investorschronicle.co.uk/companies/summary.asp?YYY2070_05il4cW/O8fDu6TjdxyEB1/lYp2aAGZomAsCpdYn/Rg=
Look at the four troughs (lowest points) from December 2008 through to now, and mentally (or actually if you like) draw a line linking them all and carrying on into the future, that line will be going 'uphill'. Real chartists out there will be choking on their coffee at this point, but I'm not talking to them. This is called a trendline, and if the chart does indeed carry on in this way sterling will be back above 1.3000 sometime in 2012.
Now I know for a fact that Barclays have lots of chartists, and the bank seems to be listening to them. The bank`s long-term forecast is for sterling to reach €1.28 by this time next year. Barclays view is that “The Coalition is enacting deep structural reform in order to take a lump out of the deficit, which is a risk…It could ultimately be good for the structural growth story in the UK.” Yes, well, maybe and maybe not. I have my own view on the Osborne austerity package, but that's for another day.
A note of caution regarding charts and chartists. What do you think the chartist view was in September 2008, just before sterling fell over the cliff?
So what now?
I have been forced to re-think my entire view of sterling's likely performance pre-Christmas. Somewhat reluctantly I think we may now indeed see an assault on the 1.200 level, so let's go for 1.2025 by the end of next week.
a bientot, Rob
www.France-Financial.com
www.Spectrum-IFA.com
Phone 0468 247758 or 0631 787647
Please note that all these comments are my personal view and do not represent any firm advice by either France Financial or the Spectrum IFA Group.
The Spectrum IFA Group - TSG Insurance Services S.A.R.L. Siège Social: 34 Bd des Italiens, 75009
« Société de Courtage d'assurances » R.C.S. Paris B 447 609 108 (2003B04384)
Numéro d'immatriculation 07 025 332 - www.orias.fr« Conseiller en investissements financiers, référencé sous le numéro F000184 par CIF-CGPC, association agréée par l’Autorité des Marchés Financiers »
Saturday, December 4, 2010
Weekly F/X Comment
Now that's more like it. I think I'll give myself 8 out of 10 for last week's predictions, which was that sterling would end up at between 1.1750 and 1.1800 and the actual result is... 1.1750! If you think I'm being a bit mean on that score, I ought to point out that a heck of a lot went on during the week that I hadn't anticipated, and at one point we were over 1.1900 and looking strong. I do however feel particularly pleased that I managed to push through a large customer investment deal at over 1.1800 on Wednesday. Shame I didn't do some for myself.
A big week for England
England? Surely I mean Great Britain, or the UK? No, I mean England, and the scandalous vote for the World Cup venues in 2018 and 2022, with the decisions going to Russia and Qatar. I can only assume that there is an air-conditioning contractor somewhere who is very pleased with his FIFA order of multiple giant reversible Clim domes to supply warm air in 2018 and cool air in 2022. I put this vote well up there as a principal reason for sterling's reversal late this week.
Well actually I don't, but I just wanted to have a moan anyway.
Back to the PIGS
No silly porcine frivolity this week, but there is no escaping the fact that sterling/euro movement is still being driven by fear (or the lack of it) of contagion amongst the peripheral eurozone countries. The euro survived a tough week, and came out fighting. At one point fears that Ireland's problems would engulf Portugal and Spain looked as if they would push the euro into a downward spiral. The ECB held interest rates at 1% as expected, but the markets had been looking to governor Trichet to announce strong measures to calm market nerves, but he didn't, and that was when we saw rates over 1.1900 briefly.
Eventually however, the ECB swung into action. A threatened market rout forced the central bank into a new wave of bond purchases. As a direct result the extra yield that investors demand to hold Portuguese 10 year bonds over German bunds fell below 300 basis points (that's 3%) for the first time since August. Ireland’s 10 year yield plunged 30 basis points to 8.2 percent yesterday and the Spanish yield, which hit 5.67 percent on Nov. 30, closed at 5.1 percent. Lots of figures there but I think you can see that the effect was to take pressure off the debt covering charges suffered by the peripheral countries.
The latest round of the crisis is forcing leaders once more to assert their support for the euro. Angela Merkel, the European Paymaster-General, said: “The German government stands behind the euro “It is fighting for a stable euro and will do everything within its power” to push other EU countries toward embracing a “culture of stability” in their public finances.
Options that the EU leaders may consider if the crisis were to worsen include boosting their 750 billion euro temporary rescue fund or turning it into an asset-buying program; cutting the interest rate charged on bailout loans such as the Irish package, or issuing joint bonds for the all the euro nations. Against this potential onslaught, sterling has continued weak domestic statistics and a VAT rise to hit demand from January onwards. Not much in the way of ammunition really.
So what now?
As we approach Christmas interest in the FX markets will wane. After all, there are an awful lot of Christmas parties to fit into the month, and also it is bonus negotiation time, so no-one wants to lose any money. I think sterling's push for 1.200 has fizzled out for this year. If you really need to buy euros, I'd do it sooner rather than later. But remember, it's just my guess! 1.1675 for me next week.
a bientot, Rob
A big week for England
England? Surely I mean Great Britain, or the UK? No, I mean England, and the scandalous vote for the World Cup venues in 2018 and 2022, with the decisions going to Russia and Qatar. I can only assume that there is an air-conditioning contractor somewhere who is very pleased with his FIFA order of multiple giant reversible Clim domes to supply warm air in 2018 and cool air in 2022. I put this vote well up there as a principal reason for sterling's reversal late this week.
Well actually I don't, but I just wanted to have a moan anyway.
Back to the PIGS
No silly porcine frivolity this week, but there is no escaping the fact that sterling/euro movement is still being driven by fear (or the lack of it) of contagion amongst the peripheral eurozone countries. The euro survived a tough week, and came out fighting. At one point fears that Ireland's problems would engulf Portugal and Spain looked as if they would push the euro into a downward spiral. The ECB held interest rates at 1% as expected, but the markets had been looking to governor Trichet to announce strong measures to calm market nerves, but he didn't, and that was when we saw rates over 1.1900 briefly.
Eventually however, the ECB swung into action. A threatened market rout forced the central bank into a new wave of bond purchases. As a direct result the extra yield that investors demand to hold Portuguese 10 year bonds over German bunds fell below 300 basis points (that's 3%) for the first time since August. Ireland’s 10 year yield plunged 30 basis points to 8.2 percent yesterday and the Spanish yield, which hit 5.67 percent on Nov. 30, closed at 5.1 percent. Lots of figures there but I think you can see that the effect was to take pressure off the debt covering charges suffered by the peripheral countries.
The latest round of the crisis is forcing leaders once more to assert their support for the euro. Angela Merkel, the European Paymaster-General, said: “The German government stands behind the euro “It is fighting for a stable euro and will do everything within its power” to push other EU countries toward embracing a “culture of stability” in their public finances.
Options that the EU leaders may consider if the crisis were to worsen include boosting their 750 billion euro temporary rescue fund or turning it into an asset-buying program; cutting the interest rate charged on bailout loans such as the Irish package, or issuing joint bonds for the all the euro nations. Against this potential onslaught, sterling has continued weak domestic statistics and a VAT rise to hit demand from January onwards. Not much in the way of ammunition really.
So what now?
As we approach Christmas interest in the FX markets will wane. After all, there are an awful lot of Christmas parties to fit into the month, and also it is bonus negotiation time, so no-one wants to lose any money. I think sterling's push for 1.200 has fizzled out for this year. If you really need to buy euros, I'd do it sooner rather than later. But remember, it's just my guess! 1.1675 for me next week.
a bientot, Rob
Saturday, January 2, 2010
Where now for Sterling?
Happy New Year! Let’s hope for fewer financial hangovers this year. I left you in early December with my view that Sterling would fluctuate between 1.10 and 1.13 for the rest of the year, and that’s exactly what it did, ending up at 1.1291. That means that I was correct for all of December. Long may that continue, but somehow I doubt it.
Believe it or not, Sterling is now over 6% higher against the Euro than it was a year ago. Hard to believe, isn’t it? A year ago of course Sterling was at its all time low. It did improve to 1.20 during the year, but then came QE and that all changed.
So where to now? Sterling is still hampered by severe doubts over the economy and rising public debt. And yet there was enough interest in Sterling towards the end of December to help forge a solid recovery against the Euro.
I feel that we will need to wait until the election to get any true feeling for where Sterling is going next. Until then we will continue to bounce around in a broad range of 1.08 to 1.13. As we are at the top of that range now, I forecast that Sterling will struggle when markets open this week, and we will see a fall to around 1.1050 by next weekend.
Believe it or not, Sterling is now over 6% higher against the Euro than it was a year ago. Hard to believe, isn’t it? A year ago of course Sterling was at its all time low. It did improve to 1.20 during the year, but then came QE and that all changed.
So where to now? Sterling is still hampered by severe doubts over the economy and rising public debt. And yet there was enough interest in Sterling towards the end of December to help forge a solid recovery against the Euro.
I feel that we will need to wait until the election to get any true feeling for where Sterling is going next. Until then we will continue to bounce around in a broad range of 1.08 to 1.13. As we are at the top of that range now, I forecast that Sterling will struggle when markets open this week, and we will see a fall to around 1.1050 by next weekend.
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