F/X Weekly comment

Comparative boredom this week, but after all the fun and games recently the markets are probably due a rest. We end the week at 1.1680, a mere 10 points higher than last week's 1.1670. There was the promise of fireworks this week, but a series of damp squibs failed to ignite traders deal buttons.



Sterling

Merv was in his element this week with the QIR, the Quarterly Inflation Report, where he gets a chance to don his gloomy face and talk down sterling at every opportunity. In short, he described a deterioration in economic conditions since the last report and highlighted the Eurozone’s debt crisis as ‘the single biggest risk’ to the continuance of British economic expansion. Cheer up Merv, it can't be that bad, can it?

UK data this week indicated that the number of unemployed rose by 129,000 in the three months to the end of September, taking the UK jobless total to 2.62million. The figures also showed that over 1million 16 to 24 year olds are jobless; this is the first time since records began that youth unemployment in the UK has risen above the disturbing 1m level. Unemployed teenagers are a lot more of a problem than unemployed 50 year olds.

Oddly, UK retail sales in October rose by 0.6% instead of falling as expected with consumers facing cost pressures on all sides. It is possible that this is a result of pre Christmas price discounting in the shops, but that could make Januaries figures look sick if there is no money left in the purse for the sales.


Europe - Mario #1

Draghi, that is. He seems to be a decent 'no nonsense' type of character who gets stuck in when necessary. He made it quite plain this week that he is unhappy that the European leaders who agreed to boost the Euro bailout fund from €440bn to €1 trillion or so have so far failed to come up with any explanation of how they are going to achieve this juggling act. Probably not helped by an inscrutable Chinese gentleman telling them to sort their lives out before he puts his hand in his pocket.


Europe - Mario #2

Monti of course. The new Italian PM has now won confidence votes in both houses of parliament for his new government including bankers, CEOs and university professors. Good luck to him, I say. Perhaps he should hire Berlusconi as a distraction.


Europe - Spain


What they need is a Mario. Mario Draghi did get involved this week, with intervention by the ECB to buy Italian and Spanish government bonds on Friday helped keep bond yields from rising too far. By early afternoon Spanish 10-year bonds were yielding 6.35% while Italian 10-year bond yields were at 6.67%. On Thursday, Spain's borrowing cost at an auction of 10-year bonds was almost 7%, which is a level seen as unsustainable.
Spain is currently preparing for a general election on Sunday. Any prices on the ruling Socialist party still being in office next week?

What next?


I'm still bullish for sterling. I think that the Euro has more pain to endure yet, even if it doesn't prove fatal. I'll leave the next bit in from last week:

I certainly don't think it will be all one way traffic, but the milestone of 1.20 isn't all that far away, and my holy grail of 1.25 doesn't seem all that far behind it. Not next week though. I think we have to accept quite a few reversals along the way. I think we may dip below 1.1600 during the week, and then start to build from there.