Interesting times indeed in all financial markets, including foreign exchange. It's not very often that I mention the USA in my weekly ramble around the pound/Euro rate, but I think they're worth a mention this week.
USA - showtime
Debt ceiling. To you and me, the amount of debt you have when you finally turn round and say 'No more'. In the case of the US it has a slightly different meaning, more like 'OK, how much more do we need?' That is until now, when a few quarrelsome senators have decided that a few thousand trillion dollars might just about be enough, much to the dismay of President Obama and everyone else who keeps the States running. If the debt ceiling isn't raised by Tuesday, The USA will start to default on its debts, as it won't be able to borrow any more money to pay creditors.
Should this worry us? YES! The USA is the largest economy in the world. They owe everybody money, including you, me Europe in general and the UK in particular. So now we have not only the Eurozone up rue Merde sans pagaie, we have the Septics in the same boat. We now have the possibility of not just European contagion, but also Global debt contagion. What fun!
One outcome of this is that market F/X speculators are looking round for a currency where there is some semblance if financial stability, and believe it or not, relatively speaking we fit the bill.
UK - same old story
The Pound hasn't had the best of weeks, and yet it has benefited from events abroad, both in Europe and the US. Both this week's CBI report and consumer confidence data were poor. The outlook for the UK economy is still uncertain as we struggle to overcome the drag of the austerity package during a weak recovery phase.
Eurozone - guilty as charged?
The Euro has suffered this week for various reasons. Worse than expected German unemployment, a drop in economic sentiment and weak appetite at an Italian government bond auction all contributed to the Euro's woes. Fear of contagion in the Eurozone has not gone away and uncertainty is likely to slow any major Euro advance against the pound over the next few weeks. The European Sovereign Debt crisis continues to hit the heasdlines. In the short term the ECB has enough reserves to maintain stability, but with combined soveriegn funding requirements of over €80Bn during the next three months, the feeling is that they might be running out of breathing space. I can only see the debt problem getting worse over the rest of the year. The jury is still out over Greece and the second bailout, and it could get interesting.
What now?
Call me an optimist if you lie, but I think that the Euro is in trouble, and this could be the start of something good for sterling. I, for one, hope so! 1,1500 or higher would be a good signal by next week.
Saturday, July 30, 2011
Saturday, July 23, 2011
F/X Weekly Comment
A pretty quiet week in the currency markets really, with little to get excited about. That is if you are deaf, blind, and can't smell rotten fish at ten paces. In fact it was pure theatre, a hairsbreadth away from being totally momentous. Sarkozy and Merkel walked to the edge of the abyss, looked down, and nearly wet themselves (OK, I apologise in advance for the poor taste there). Then they reached for the cheque book and hoped for salvation ( I nearly put 'prayed' there, but I'm probably in enough trouble already).
Greece
Greece is up to its keftedes in 'merde'. It has been for a long time. It should never have been allowed to join the Euro in the first place; indeed it never passed the tests for entry. It is no surprise that it is one of the first countries to go bust. It is totally unsuited to the handcuffs that a single currency brings to its economy. That is actually an economy that runs on 'brown envelopes'. Fakelaki is the Greek word for it, and it equates to corruption.
So, having gone bust, it receives a €79bn bailout, and with it comes stringent doses of financial medicine. Too much for the Greeks to stomach, they threaten to default on their debt, but their debt is Euro debt, and that doesn't go down well in Brussels. Cue bailout number 2, this time for another €109bn, giving them longer to repay, and at lower interest rates. Oh, by the way, we'll let Ireland and Portugal have these lower rates too, just to keep them quiet.
Greece
Greece has absolutely no chance of repaying this debt, yet the powers that be insist on continually papering over the cracks. And this week, yet again, the market bought it, and the Euro rallied at the sight of firm and concisive action from European leaders. Now I very rarely get particularly het up over financial matters, but I cannot grasp this logic, unless of course it is based entirely in self-preservation on the part of market participants (surely not?). If I were a modern George Soros, with a few billion to use speculating in the currency markets, I'd be after the Euro. I'd be so short of the Euro that you'd have to spell it with fewer letters. 'Going short' by the way refers to selling something you haven't actually got, in the anticipation that you will be able to buy it at a later date to fulfil your debt at much lower cost.
And more Greece
This second bailout, to my mind, constitutes default, and it will be interesting to see if the rating agencies agree with me next week. If they do, justice could yet be done, and sterling may even get to 1.20 plus, where it should in my view be today. More likely though, the agencies will follow the herd, and we'll soon be struggling to hold on to the 1.12 level. If they have the nerve to call it as it is, and the market realises that it could have a lame duck in its sights (like sterling in the ERM in 1992) we could really have some fun...
Greece
Greece is up to its keftedes in 'merde'. It has been for a long time. It should never have been allowed to join the Euro in the first place; indeed it never passed the tests for entry. It is no surprise that it is one of the first countries to go bust. It is totally unsuited to the handcuffs that a single currency brings to its economy. That is actually an economy that runs on 'brown envelopes'. Fakelaki is the Greek word for it, and it equates to corruption.
So, having gone bust, it receives a €79bn bailout, and with it comes stringent doses of financial medicine. Too much for the Greeks to stomach, they threaten to default on their debt, but their debt is Euro debt, and that doesn't go down well in Brussels. Cue bailout number 2, this time for another €109bn, giving them longer to repay, and at lower interest rates. Oh, by the way, we'll let Ireland and Portugal have these lower rates too, just to keep them quiet.
Greece
Greece has absolutely no chance of repaying this debt, yet the powers that be insist on continually papering over the cracks. And this week, yet again, the market bought it, and the Euro rallied at the sight of firm and concisive action from European leaders. Now I very rarely get particularly het up over financial matters, but I cannot grasp this logic, unless of course it is based entirely in self-preservation on the part of market participants (surely not?). If I were a modern George Soros, with a few billion to use speculating in the currency markets, I'd be after the Euro. I'd be so short of the Euro that you'd have to spell it with fewer letters. 'Going short' by the way refers to selling something you haven't actually got, in the anticipation that you will be able to buy it at a later date to fulfil your debt at much lower cost.
And more Greece
This second bailout, to my mind, constitutes default, and it will be interesting to see if the rating agencies agree with me next week. If they do, justice could yet be done, and sterling may even get to 1.20 plus, where it should in my view be today. More likely though, the agencies will follow the herd, and we'll soon be struggling to hold on to the 1.12 level. If they have the nerve to call it as it is, and the market realises that it could have a lame duck in its sights (like sterling in the ERM in 1992) we could really have some fun...
Friday, July 15, 2011
F/X Weekly comment
I'm uneasy. The reason I'm uneasy is that I'm not used to getting things as right as I did last week. The pound finished the week at 1.1400, even higher than my anticipated rate of 1.1350, but who's going to worry about and extra 50 basis points? But will it last?
Stress tests
The results of those stress tests on 90 European banks were announced a few minutes ago, and the results seem to be quite interesting. The Euro has been under pressure all week in anticipation of these results, and the announcement came after close of business on Friday, presumably to avoid any great sell off. In the event it seems that only 8 banks have failed. So far they haven't been named, other than one minor regional German bank, Helaba, who fell out with the examiners. The act that only seven others failed could well be supportive for the Euro on Monday, assuming there are no big names on the list. There is however a school of thought that the tests were not hard enough (think GCSE V A-Level), and didn't for example take into account the possibility of a Greek default, which looks to be almost a certainty. This could lead to further trouble for the Euro in the coming weeks.
UK data
Sterling's bounce has not had much do with any improvement in the UK economic data. Most market forecasters had been calling for sterling to move lower as a result of all the poor data we have seen of late, but the Euro's debt issues have outweighed this for a change. Unemployment data during the week showed a sharp rise, adding to concerns that poor growth prospects may prompt more QE from the Bank of England. More concerns about high debt levels, the effect of harsh austerity measures and poor UK exports could keep sterling weak, particularly against currencies other than Euro. The risk then is that despite recent gains, many analysts are still saying sterling may struggle due to all the negative economic data we are seeing.
Which wins?
That, of course, is the crunch question, but I'm on a roll here. I got last week right by calling for a weak Euro, so I'm going to keep my chips on red and go for gold (such Ill-literacy). I think sterling will have done a great job if we manage to consolidate in the 1,14s, so fingers crossed!
Saturday, July 9, 2011
F/X Weekly comment
Don't you just love it when a plan comes together? All I apparently have to do is make a pessimistic forecast for sterling, and sure enough the green shoots of recovery might just have started to peep up through the dead grass. We finished the week at 1.1256, a whole lot higher than I expected, but welcome all the same. Apologies to anyone out there who profits from a weak pound (shame on you). It was a very interesting week in the F/X markets:
Interest rates
No prizes for correctly forecasting that UK rates would stay on hold and that the ECB would raise Euro rates by 0.25% to 1.5%, but the really important thing is what M. Trichet says afterwards. Unfortunately Merv doesn't say anything after his meeting, we have to wait 2 weeks for the minutes to be released. Very boring, very British.
Tricky Trichet though alluded to the fact that economic activity in the Eurozone seems to be slowing down. His words were backed-up by disappointing Italian Industrial Production numbers on Friday morning, along with German trade figures which showed that the Europe’s largest economy is becoming increasingly dependent on imports.
Although Merv doesn't comment on his meeting, he did announce that there would be no more money-printing (QE) at present. This also gave support to sterling. All 'fish to the grill' as I once heard a conference speaker say. To be fair, he was Italian, and I don't think he knew what grist was. .
Pigs
Portugal got the capital punishment this week, being downgraded a huge four notches by Moody's. The ECB promptly reacted by saying that they will continue to accept Portugal's bonds as collateral for loans, but then they don't have much choice, do they?
Stress
No, not the stress of having to write this stuff every weekend. Stress tests for banks. A bit like the end of term tests you used to have when education worked. There are results of stress tests for a large number of Eurozone banks due out next week, and they could make interesting reading. There is a rumour that the main five Italian banks have passed, but I think the National bank of Greece is looking a bit glum, and Irish eyes don't seem to be smiling.
UK economy
Not normally worth a mention, I know, but watch out. Last month's PPI input and output prices came in rather better than expected on Friday. Now you don't hear that very often, do you?
Where now?
It really pains me to say that I think we might have the start of something good for sterling here, because we all know that that would be the kiss of death to the pound. Actually though I am sensible enough to realise that nothing I either think, say or write will make the slightest bit of difference. 1.1350 next week please.
Interest rates
No prizes for correctly forecasting that UK rates would stay on hold and that the ECB would raise Euro rates by 0.25% to 1.5%, but the really important thing is what M. Trichet says afterwards. Unfortunately Merv doesn't say anything after his meeting, we have to wait 2 weeks for the minutes to be released. Very boring, very British.
Tricky Trichet though alluded to the fact that economic activity in the Eurozone seems to be slowing down. His words were backed-up by disappointing Italian Industrial Production numbers on Friday morning, along with German trade figures which showed that the Europe’s largest economy is becoming increasingly dependent on imports.
Although Merv doesn't comment on his meeting, he did announce that there would be no more money-printing (QE) at present. This also gave support to sterling. All 'fish to the grill' as I once heard a conference speaker say. To be fair, he was Italian, and I don't think he knew what grist was. .
Pigs
Portugal got the capital punishment this week, being downgraded a huge four notches by Moody's. The ECB promptly reacted by saying that they will continue to accept Portugal's bonds as collateral for loans, but then they don't have much choice, do they?
Stress
No, not the stress of having to write this stuff every weekend. Stress tests for banks. A bit like the end of term tests you used to have when education worked. There are results of stress tests for a large number of Eurozone banks due out next week, and they could make interesting reading. There is a rumour that the main five Italian banks have passed, but I think the National bank of Greece is looking a bit glum, and Irish eyes don't seem to be smiling.
UK economy
Not normally worth a mention, I know, but watch out. Last month's PPI input and output prices came in rather better than expected on Friday. Now you don't hear that very often, do you?
Where now?
It really pains me to say that I think we might have the start of something good for sterling here, because we all know that that would be the kiss of death to the pound. Actually though I am sensible enough to realise that nothing I either think, say or write will make the slightest bit of difference. 1.1350 next week please.
Friday, July 1, 2011
F/X Weekly Comment
Ah good, all is well with the world again, and normal service has been renewed. My forecast last week has proved to be just about as accurate as George Osborne's growth predictions. I think I can leave the headers in place from last week, but I'll have another go at the content:
Greek Debt (again)
The pound lurched lower against the Euro this week as the Greek austerity vote passed predictably through parliament. In the short term, at least, a Greece default is unlikely, and this is deemed to be positive for the Euro. Within a couple of weeks a second bailout package will be agreed, so there is scope for a further boost to the single currency. The plain fact is though that the Eurozone debt problems have in no way been resolved, only deferred, but any loss in Euro sentiment is being countered by the abject surrender of sterling and the bleak outlook of the U.K economy.
Pathetic Sterling
Harsh? Definitely not. Friday's PMI data showing that expansion in the UK’s manufacturing sector dropped to its lowest rate in 21 months in June brought the pound under further selling pressure on the day. Even the saving grace that Asian and Eurozone data releases were equally weak didn't manage to get sterling up above 1.1100. The pound has fallen 9.1 percent in the past 12 months, making it the second-worst performer among 10 developed-market currencies after the dollar. Worsening economic growth has prompted traders to reduce bets on higher rates, and investors are betting that 3M (Merv and his Merry Men) will start to raise borrowing costs next May. As recently as February, data was pointing to a rate increase in May of this year.
Where now?
I think for all our sakes that I need to drastically reduce any sense of optimism for sterling at present. We tested the 1.10 level this week, and unless something spectacular happens, we could see the pound break down through that level next week.
A bientot, Rob
Greek Debt (again)
The pound lurched lower against the Euro this week as the Greek austerity vote passed predictably through parliament. In the short term, at least, a Greece default is unlikely, and this is deemed to be positive for the Euro. Within a couple of weeks a second bailout package will be agreed, so there is scope for a further boost to the single currency. The plain fact is though that the Eurozone debt problems have in no way been resolved, only deferred, but any loss in Euro sentiment is being countered by the abject surrender of sterling and the bleak outlook of the U.K economy.
Pathetic Sterling
Harsh? Definitely not. Friday's PMI data showing that expansion in the UK’s manufacturing sector dropped to its lowest rate in 21 months in June brought the pound under further selling pressure on the day. Even the saving grace that Asian and Eurozone data releases were equally weak didn't manage to get sterling up above 1.1100. The pound has fallen 9.1 percent in the past 12 months, making it the second-worst performer among 10 developed-market currencies after the dollar. Worsening economic growth has prompted traders to reduce bets on higher rates, and investors are betting that 3M (Merv and his Merry Men) will start to raise borrowing costs next May. As recently as February, data was pointing to a rate increase in May of this year.
Where now?
I think for all our sakes that I need to drastically reduce any sense of optimism for sterling at present. We tested the 1.10 level this week, and unless something spectacular happens, we could see the pound break down through that level next week.
A bientot, Rob
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