F/X weekly comment

I'm going to upset the applecart well and truly this week, and return to a 'bullish' stance on sterling. For the happily uninitiated, this means I think the pound is going to go up. The bad news is that this probably means it will go down, but it just seems to me that most of the merde flying around in the currency markets at the moment seems to be sticking to the Euro.

Sweet 16

For a few hours on Thursday we actually saw sterling trading in the 1.16's for the first time since the 14th March. There is a lot of Far-East interest in buying the Euro when it's cheap at the moment, and that had the effect of bringing the rate down again into the mid 1.15's, but sterling still feels buoyant, and it wouldn't surprise me at all if the financial press over the weekend were to be anti-Euro.

Some sterling news

First quarter UK GDP was confirmed at up 0.5%, which was important, as any lower revision would have been very bad news indeed. As it was, it kept sterling firm, and even allowed it to ride the potential storm of the threat of downgrading for a host of UK banks and building societies. I tend to think of this as rating agencies trying to flex their muscles, when in fact they have already proved that they are a very weak link in the financial chain.

Euro news

Nearly all of it bad. Epitomised by one Mr Juncker. Jean-Claude Juncker is the head of the Eurogroup, a clutch of EU finance ministers. Known to some as 'Mr Euro' or perhaps 'Herr Euro', he put the skids under his pet project by stating that the IMF may be unwilling to pay the next tranche of the bailout package to Greece. Who knows, maybe paying the bailout money for DSK has drained the coffers? That sent sterling crashing through the 1.16 level, as mentioned earlier. Not because sterling was particularly strong of course, but because the Euro was weakened.

Isn't that old news though? Maybe, but the fact is that the bad news is starting to stack up for the Euro. Look at this list:

 Italy put on downgrade watch by S&P (more muscle flexing by wimps, but still bad news.
 Anti government protests over unemployment and economy in Spain.
 Belgium has had no government for nearly a year, and may split.
 Angela Merkel’s Christian Democrats lose control of Baden-Wurttemburg for the first time since 1953.
 IMF to move away from European control after DSK caught with his trousers down?
 Portugal could be heading down Belgian lines as political crisis grows.


Makes the UK political and economic scene look positively benign, doesn't it? It may take a few weeks, but we might even start to edge up towards 1.20 again.

Now there's there kiss of death for you...

Weekly F/X Comment

Sterling and the Euro slugged it out all week, and sterling survived to end the week marginally higher than close of business last Friday at 1.1461, which of course confounded my theory that we would end up looking at the 1.12 level again for the time being. My main concern last week was the quarterly inflation report to be issued on Wednesday, but in fact this provided a boost for sterling:

Inflation fears rise in UK


Sterling was boosted on Wednesday as the B of E Inflation Report showed more worries than expected on the horizon on the inflation front. This resurrected ideas of an early interest rate hike, and sterling surged ahead against the Euro. The common currency soon fought back however, with more news on the Greek front.

Greece angst

The Euro lost ground to nearly every trading counterparty early in the week with more doubts surfacing over Portugal, and especially Greece. The banking systems are the main worry, with fears that the perhaps unknown depth of the Greek problem could throw the whole Euro banking system into turmoil. Sterling of course benefitted from this, especially with the boost of the inflation report to help it.

Another rabbit

One exasperating thing about the Euro is its ability to ‘pull rabbits out of the hat’ when up against the proverbial wall. There are so many things to take into consideration when you have a multitude of countries sharing the same currency. It is easy to focus on a problem in one area, without necessarily appreciating the necessary sense of scale required to take on beard news from other areas. Just when the doubters are focussing on Greece, the ECB will pull out a great set of growth figures for France and Germany. Add to that some decent figures for corporate growth in th Eurozone as a whole, and throw in the odd comment about future Euro rate rises, and all of a sudden the Euro looks far less of a basket case than it did ten minutes earlier.

Manipulation?

Far be it from me to suggest any great plot at work here. I’m not suggesting anything of the kind. What I am saying is that there are times when currency flows will be guided not by facts, but by structured presentation of those facts. What gets said and when is critical to currency movement in the short term. Over a longer period of time fundamental issues take control, but in the short term forecasting remains, as I am a prime example, a mugs game.

I don’t think sterling has much scope for growth in the current circumstances, so I’m sticking with my return to the 1,12s for now. I’m just not sure how quickly it will happen.

F/X weekly comment

Normal service is resumed this week, with my forecast of sterling down in the 1.12s meeting up with the reality of the pound ending the week at 1.1430! A nice way to be wrong though, unless you are heading back to the UK, but I think the majority, me included, like to see as high a rate as possible. Not only was I wrong in where we ended up, but the pound actually plumbed some severe depths during the week, hitting 1.1045 at one point. Then we had a 3.5% swing between Wednesday afternoon and Friday evening.

A game of two halves - Monday to Wednesday

Same old story for the pound. Data released on Tuesday showed that the UK's manufacturing sector grew at its weakest pace for seven months in April. This data reduced even more the likelihood of an interest rate rise later in the week. Coupled with the likelihood of a series of Euro rate hikes this summer, it is not exactly surprising that the pound headed south at a fair lick, and at one point looked like it might collapse below the 1.10 level.

Second half fightback - Wednesday to Friday

I don't think anyone saw this coming. Certainly not me anyway.
On Thursday both the BoE (Merve and his mates) and the ECB left interest rates on hold as expected. What rocked the boat was the comments from the ECB president, Jean Claude Trichet. He adopted a much softer stance on the central bank's rate outlook than markets had been expecting after April's hike, prompting traders to take profits on the Euro's gains versus sterling earlier in the week. That started the ball rolling.
On Friday morning the markets were eagerly awaiting the UK PPI (Producer Price Index) data, looking for a poor figure to send the pound back down to levels seen earlier in the week. In the event, the PPI figures were much better than expected. Still down, but down by nowhere near as much as the market had anticipated. Thus the expected move down soon turned into a further surge for the pound.
In addition to all of this, there was an important piece of corporate news going on in the background. Glencore, a huge multinational commodities company, was to launch shares on the UK stock market. If you want those shares, you need to have sterling. What happens if sterling is in demand? The rate goes up.


All good fun, but where do we go from here? Being a naturally cautious person, I'm inclined to think that this is unlikely to be the start of the great sterling revival, but I would love to be proved wrong. I back sterling's ability to shoot itself in the foot at any opportunity, and there is every opportunity next week, the Merve's quarterly inflation report.

I hate to say it, but I think the markets will sell sterling, and we could be down towards 1.12 levels again soon.