F/X Weekly Comment

For the second week in a row sterling has ended almost completely unchanged against the Euro at 1.1670. This could be the calm before the storm, and there certainly were some squalls during the week:



Sterling

Activity on the sterling front was dominated by what has been happening in the Eurozone again this week, but there were a couple of noteworthy events. The pound was hampered by the release of the minutes of the last BoE meeting which showed a 9-0 vote to leave interest rates on hold in the UK, and there is a feeling amongst commentators that a couple of committee members are looking for the possibility of more QE in the not too far distant future. This is generally seen as a negative on the country’s currency. There is large expectation across the board for economic conditions to worsen in the UK as consumers continue to be squeezed by rising prices and higher costs whilst trouble in the Euro zone is likely to weaken export demand next year.

Another of Merv's henchmen, MPC member Martin Weale warned in a speech this week that the UK’s economic recovery would take as long as 5 years, adding to the pressure on sterling. Investors were also completely confused by the UK government’s plans to ease youth unemployment, at the same time avoiding any explanation of where the funding will come from.


Fun and Games in Euroland

The dear old Euro had a torrid time during the week. An unexpected source of more pressure for single currency came in the form of a huge shock in the German Bond auction and weaker than expected Eurozone industrial orders. The German government was unable to sell about 35% of the €6bn 10 year bonds it offered to the market, managing to sell just €3.9bn of debt. It could of course have offered more return to in investors, but chose not to. This provided the clearest sign yet that even the strongest Eurozone country is at growing risk of crisis contagion. Italy didn't do any better at their bond auction, having no choice but to pay the 6.5% demanded by investors, and Portugal's rating was downgraded to 'junk'. These setbacks came as Fitch Ratings issued a warnings that France’s AAA credit rating would be at risk if things don't start to improve soon.

The Eurozone industrial production numbers came in much worse than expected, down a massive 6.4% against expectations of down 2.4%. The euro fell against the dollar, and also gave away earlier gains against the pound to end up in exactly the same position as last week.



What next?


Well next week we have the long awaited autumn statement from George Osborne. Anyone of sane mind will have very low expectations that this will provide any boost for sterling, but I'm willing to stand up and be that lunatic. I once worked for a tyrant of a manager in foreign exchange, who never tired of expounding his theory of contrarianism. 'You'll never make any money betting the same way as everybody else' he used to say. To be fair, he seemed to have the knack of knowing when to do nothing and when to back his own words with great success. I'm not sure I have the same knack, but let's go for it. I'm still bullish for sterling, and I think the market might just find that the message G.O. delivers next week is not quite as bad as expected.

We'll see.... I think we may dip below 1.1600 during the week, and then start to build from there.