F/X Weekly Comment

Call me alarmist if you like, but I have a sneaking suspicion that in years to come dinner party conversation in financial circles might go along the lines of 'Do you remember the week it all started to fall apart for the Euro? You know, the week when Greece defaulted and the fuse was lit under Italy? Where were you that week?'

Sterling

Forget about sterling. It wasn't in the game this week. It's all about:


Debt; Default; Doubt.

More a case of where to start really. I was very surprised to see M Sarkozy at Carcassonne airport on Tuesday. I am quite certain that he had more pressing things to attend to, and indeed he did turn up in Brussels on Wednesday for a prolonged chat with his Fellow European leaders, or at least Angela Merkel. I understand this chat did last through til breakfast, but am assured that no impropriety was involved, and their main subjects of concern were their Greek and Italian cousins.

As we all know, the Greek cousin lives in a state of constant excess, and is proving to be an embarrassment to the Euro establishment. It might not come as a surprise to you that the answer to this problem is to pay off half of his gambling and drinking tabs, which adds up to approximately €150bn, and then lend him another €100bn to tide him over. Problem solved, for today.

The Italian cousin is a different matter altogether. A bit of a cad (apparently), his boyish charm has led him to enjoy a charmed life, protected when necessary by law changes and widespread fiscal degeneration, to the extent that nobody twigged until recently that he makes the Greek cousin look like a pillar of financial rectitude.

Let's pop back to the real world for a minute. Greece is defaulting. dress it up however you like, but it cannot and will not repay its debts. And it still needs to borrow more. Italy is fooling the markets no longer. It is no surprise to me that on a day when the markets breathed a sigh of relief that at least a dose of realism has been adopted regarding Greece, Italy paid 6.06% on its 10 year debt refinancing, and didn't manage to borrow all that it needed. That is the highest interest rate since the Euro was created. Levels anywhere higher than this are generally rated as unsustainable.

EFSF
Don't worry about the letters. It's not Euro Folly Shall Fail. It's the Euro bailout fund. A huge pot of money to rescue recalcitrant Euro cousins. Merkozy have decided (rightly) that €410bn isn't going to be enough, and that something in excess of €1trillion sounds more like it. How are they going to get from A to B? Two possibilities, firstly get other people to chip in, such as the cash rich Chinese, or leverage. That is using the original pot to borrow more. If that sound a bit like what got us all into this mess in the first place to you... join the club.


What next?


And so we finished the week at 1.1400. Scant change for all the excitement really. I get the impression that the foreign exchange and money markets are beginning to tire of the Euro Circus and the hype that goes with it. If they start to refocus on fundamentals, as they should, we should see calmer markets. Sterling won't benefit much though until Osborne and King get their act in gear and bring in measures designed to bring the UK back into growth - and those measures will have to be shown to be working.

That won't happen by next week, that's for sure. Sterling to remain under 1.1450 for me.

F/X weekly comment

It's been an interesting week, in a dull sort of way. My gloomy scenario for sterling hasn't materialised, but that doesn't mean that we're out of the mire, by any means. What has actually happened is a 'Time Out' , and we will wait with baited breath to see what will happen about Greece and the overall Euro debt scenario.

Big weekend

This was always going to be a big weekend, and it won't disappoint. It will be a very important for the future of the Eurozone, and without any doubt sterling's value against the Euro will continue to be dictated by the outcome of this weekend's discussions between EU leaders to sort out the future of Greece and the other threatened peripheral economies.

As I write this, the news that they do not expect to come up with any significant declaration over the weekend and have postponed any major statement until Wednesday has done nothing to calm anyone's nerves, and may serve to weaken the Euro. .

Sterling?

Not a lot happened really. What announcements there were virtually cancelled themselves out. There was a good news story in that the UK Public Sector Net Borrowing figure for September came in at a lower than anticipated level, but to offset this the Nationwide Consumer Confidence survey showed that British consumer confidence contracted for the fourth month in succession.



What next?


Probably a lot more to talk about next week. We are at 1.1480 now, and we could easily be at either 1.1700 or 1.1200 by this time next week. To be honest, I suspect somewhere towards the lower range, but as ever I'd be happy to be prove wrong.

F/X weekly comment

Normal service is resumed this week, with my forecast of 1.1700 a good 300 points adrift of the actual result. To be fair though, it is probably a fair reflection of the news and statistic that have emerged since last weekend. My sentiment is changed, to the extent that bought some Euros this week at 1.1350. Here's why I did that:


UK Stats

As you may guess, nothing to look at with any enthusiasm. Unemployment is now at its highest level since 1996. An 8.1% rise in one month. 2.57m Britons now are out of work. The labour market figures also showed that UK youth unemployment has reached a record level, with 991,000 British 16-24 year olds currently without work. This represents the coal-face of the austerity measures, and can only increase pressure on Osborn and Cameron to ease their foot off the pedal. If they do that, the markets will perceive it as a sign of weakness, and sterling will be under even more pressure.

The UK trade deficit actually narrowed to £1.9bn this week, a better figure than expected, but it didn't help at all. That in itself is another bad sign. When no-one buys your currency when good news comes out, it could be time to batten down the hatches.

Last week's decision to print another £75bn of readies also started to drag on the pound, despite being relatively well received last week.


Euro politics

European politicians were having a busy time this week, mostly at sterling's expense. Slovakia grabbed its 15 minutes of fame by rejecting ratification of the expansion of the European Financial Stability Facility, or trough as I prefer to think of it. Nobody really took them seriously though, and sure enough a day or so later another vote saw the measure passed. Isn't politics wonderful? Such flexibility of mind, and maybe wallet.

EC President Jose Manuel Barroso waded in with a speech outlining the roadmap to lead the Eurozone out of the debt problems it is currently treading water in. Barroso outlined five wide-ranging policies, including closer political unity, increased pressure on retail banks to support troubled states and the bolstering of the aforementioned EFSF. He then stretched the imagination a little too far when he declared that 'any decision to use its capacity more efficiently through leveraging will not have an effect on its triple-A rating'. Yeah, right.

Meanwhile, there was also good news for the Eurozone’s real economy, with the release of August’s whole-of-Eurozone Industrial Production figure, which showed that industrial output had unexpectedly expanded by 1.2% since July’s figure. Analysts had anticipated that the figure would show a monthly contraction of 0.8%.




What next?


As you may have gathered, I'm getting an unhappy feeling for the pound at the moment. The signs are looking a little ominous. There is a huge meeting due at the end of the month, with Sarkozy and Merkel due to reveal their plans to save the Euro, and probably the world with it. If the markets swallow it, the pound will struggle while it continues to produce poor economic data. I don't think too much will happen in the next week, but I might buy some more Euros. 1.13ish for me by next weekend

F/X weekly comment

Please forgive me for basking in the glory of a correct forecast, but it doesn't happen often. I signed off last week with 'What happens next is anybody's guess, but mine is that Greece will stay in the news, and we may see the pound hang on above 1.1550 by next Friday, when I will (hopefully) report on a full week of shenanigans'. Well, here we are in the high 1.15s, and it certainly has been a week to remember...

QE2

No, not the boat, the (money) printer. £75bn of it, taking the total extra cash launched into the UK economy to £275bn so far. Where has it gone? Search me, well don't bother actually, because I haven't seen any of it. To be fair, it's not paper money, good old £20 notes. No, it's bond purchases, injecting money into the balance sheets of sick banks. More on them later.

Strange in a way, as up to the last MPC meeting there was only one member, Adam Posen, calling for more QE. Suddenly he has at least four other believers, and the button gets pressed. Now call me cynical if you wish, but could this possibly have any connection wiht the fact that sterling crept over 1.1700 to the Euro earlier this week, as Greece did indeed stay in the news, and for all the same recent reasons? Bust, Broke, Bankrupt. Now when a country or an economic zone is in trouble, one way to crawl out of it is to weaken your currency, and we have seen Merv and the boys follow this line religiously. Yet here was the Euro managing to out-weaken us. What can we do to stop the flow? What about another dose of QE? The markets hate it and they will sell sterling. And they did, but mostly against the dollar. We did fall into the 1.14s for a while, but the plain fact is that the Euro is having a difficult time of it at present, so we soon saw sterling edging back over 1.1500. I did read one commentators page which tried to push the line that the market was impressed by the MPC talking decisive action to kickstart the UK economy. Balderdash.


Sick Banks

As a measure of how stressed the Euro is, not even the downgrading of twelve UK financial institutions, including RBS, Lloyds,and the Co-op, managed to pull sterling back into the doldrums. Fascinating stuff. There's no doubt that the UK economy is deep in the mire, and sterling should be heading south at a rate of knots. With the likes of Greece and the other PIGS in such a parlous state however, we have taken on the rosy glow of a safe-haven currency. How long for I wonder?


What next?

I spent a good part of this week attending presentations by analysts and fund managers, and of course economic woes were high on the list of topics for discussion. I had to smile though when one fund manager made a valiant case for there being no default by Greece on its debt. this was in complete contradiction of the previous speaker, who said it was a' given'. I like a good contrarian view.

For that very reason I'm going for a good week for sterling this week. Let's have another go at the 1.17's. That might be because I was away and didn't get the chance to buy some Euros up there though...