FX Weekly Comment

The week ended badly for the pound.  Having apparently stabilised in the mid 1.25's during the early part of the week, things fell apart a bit at the seams on Thursday and Friday, despite more bad news from the eurozone, so:

Pound looking good

Greece's future as part of the Euro is still very much up for grabs.  It is difficult to see how the vote on the 17th June will go.  To the 'not a chance, pal, were off' Syriza party or the right wing 'Ok, we give in, hit us again' right wing New Democracy party.  Either way, the Greeks are going to hurt.  I read an interesting view on this earlier this week in the FT:

Sir, Following the wealth of discussion and commentary generated by the ongoing Greek drama one could form the perception that Greeks got what they deserved for not paying their taxes.

It’s true that tax evasion is partly responsible for Greece’s current misfortunes, however it was in the country’s long-term interest given the circumstances: for the past 20 years, the Greek state has been mismanaged to a great extent, with inefficient processes and a lack of spending controls.

On top of that, the public sector has been further burdened by jobs created for the sole purpose of securing votes. In this environment of corrupt and unrestrained spending, public finances have been treated as a treasure to be looted rather than as an asset to be sustained. How do you stop this engine of wasteful spending if you’re not the one running it?

You stop funding it. Much like the shrewd investor who stops funding enterprises with bad prospects, Greeks stopped giving their money where it was not being put to good use. Their actions accelerated change: having run out of tax fuel and restricted by a fixed currency, the engine that is the Greek state is finally forced to optimise for efficiency.

So let’s not blame the Greeks for not paying their taxes; of all their financial decisions so far, this one has probably been the most sound.

Spain is looking to be submerging in more and more financial doodoo.  Bankia, the Spanish collective 'bad bank' set up to isolate all the bad bits of the Spanish banking sector, revised their 2011 figures from a €300m profit to a €2.98bn loss, and immediately followed that up with a request for a €19bn bail-out. Standard and Poor's, never ones to ignore a stable door just because the horse has bolted, immediately downgraded Bankia and four other Spanish lenders to junk status.

Not helping the situation is the margin that they are having to pay to renew their sovereign bonds.  This is now at a level of 6.5%, pretty near the 7% level deemed to be unsustainable. Greece, Portugal and the Rep. of Ireland were all at this level when they received international bail-outs, which is beginning to look more and more likely for Spain.  But of course that can't really happen, because Spain is just too big...

Pound hits the skids

So you'd think with all that going on in euroland, we'd have no problems maintaining 1.25 and beyond, but no, dark forces are apparently gathering.  The first boot to fly our way was aimed by Charlie Bean, another of Merv's merry men.  Mr Bean (stop smirking, this is serious) made it quite plain that more QE is very likely.  And we all know that a fair amount of sterling's strength has been based on the decreasing likelihood of the need for more QE.

The trailing boot was the result of the May PMI report, which showed that manufacturing performance in the United Kingdom contracted massively. April’s PMI was at 50.5, and projections were for a PMI of 49.7 in May. The true figure published at 45.9. Such a large and unexpected contraction had an immediate impact.  Companies are obviously cutting back on production and employment as new business declines due to rising uncertainty.   This is the second-steepest fall in the 20 year history of the index.  45.9 is the lowest PMI figure for over 3 years, and this has resulted in Sterling falling back to the high 1.23’s

So what now?

Big week for sterling next week.  We should find out whether or not QE is really back in.  If it is, sterling will be on the back foot.  How far back will depend on Greece and Spain.  I still have a hunch that we will go higher, but don't get greedy.  If you need Euros urgently, buy them now.

And on that note

This is the 130th, and last, weekly FX Comment blog.  As you may know, my 'real job' is looking after the financial arrangements of my Spectrum clients.  These are ever growing in number, and I need to make sure that I have enough time in the week to concentrate fully on their needs and requirements.  I will of course always have a great interest in how the pound fares against the Euro, and I may indeed feel moved to comment in future, but not on a regular basis.  I do hope you have enjoyed my weekly missives.

FX Wekly Comment

I'm tempted to say I've cracked this forecasting lark, but happily I've more sense than that.  Instead I'll savour the good times while they're here.  Last week I called for the pound to come again and consolidate above the 1.25 level.  A closing price this week of 1.2510 may not be completely convincing, but it's close enough for me.  Not that the pound had things all its own way, by any means, this week.

Recession confirmed - again

So the double dip really did happen after all.  Revised GDP data confirmed that the UK is officially in a double-dip recession with the latest figure showing a contraction of 0.3%. Retail sales figures were also much worse than expected revealing a 2.3% drop when only a -0.8% figure was expected.

Leading to more QE?

Christine Lagarde, head of the International Monetary Fund (IMF) stated that the UK needs to consider injecting more money into the economy and potentially cutting interest rates to stimulate growth.  Cutting interest rates from 0.5?  We'll be paying the banks to hold our money soon at that rate.  Thankfully however the minutes of the latest MPC meeting show that the vote was 8-1 against starting up the printing presses again just yet.  Not a very rosy picture though, all the same.

Noisy neighbour problems

With EU problems continuing apace, Merv and his mates are now making it quite clear that this will soon start to affect the UK. 50% of our exports go to the EU, so a strong pound is not helpful in Merv's eyes. Further EU problems will affect the UK economy, and will eventually increase the chances of more QE.  That would not be good for the pound.

And now the bad news, for the Euro that is

We've seen that sterling has its problems, but they pale into insignificance when you look at the eurozone mess.  And make no mistake, this is why the Euro will remain weak, and in my view sterling will make more ground:

Greece

Well it all comes down to Greece, doesn't it?  Many people are sympathetic, taking the view that Greek politicians over the years have created the mess that they are currently in. I tend to share that view.  Less sympathetically Christine Lagarde said on Friday , and I paraphrase 'Pull yourselves together and start paying your taxes'. 

France

As at the end of December 201, total French bank lending to Greece was €36 billion, higher than Germany's €10.5 billion, according to a Bank for International Settlements report.  "The banks are doing contingency planning concerning a Greek exit, but you can understand why they wouldn't say so publicly," a consultant to French banks said.  An investment banker who advises European banks said French lenders had all stepped up their contingency preparations for a Greek pull-out at regulators' request over the past two weeks.

Spain

Spain's wealthiest autonomous region, Catalonia, needs financing help from the central government because it is running out of options for refinancing debt this year, according to Catalan President Artur Mas on Friday.
"We don't care how they do it, but we need to make payments at the end of the month. Your economy can't recover if you can't pay your bills," Mas told a group of reporters from foreign media.  A somewhat economically challenged standpoint in my view. 
The debt burden of Spain's 17 highly devolved regions, and rising bad loans at the country's banks, are the cause of investor concerns Spain will need an international bailout.  Catalonia, which represents one fifth of the Spanish economy, has more than 13 billion euros in debt to refinance this year, as well as its deficit.
On the banking front, Spain's fourth largest bank, Bankia (such imagination!), was invited this week to restate its 2011 balance sheet after it emerged that it needs a €15bn bailout from the state.  Not surprisingly, it's shares have been suspended.

What does all this mean?
Tin hat time is what it means.  Bye bye Greece, probably with effect from the 1st Jan 2013.  Euro weakness in spades.  1.30on the cards as a short to medium term target.

FX Weekly Comment

Champagne time at last.  There are good reasons why sterling has fallen back to 1.2430 today, but the undeniable fact is that during the week we finally broke through the 1.25 barrier, and at one point reached 1.2578.  I was sorely tempted to email one client who told me a few years ago that sterling would never again see the high side of 1.10, but I decided that she probably wouldn't appreciate it.

Please excuse me while I indulge myself by printing an extract from the very first FX Weekly comment article, back in September 2009 for the Guide2 Group:

'At present one pound equals 1.1468 Euros, or it did on Friday evening.  My personal view at present is that sterling is undervalued below 1.2500 Euros.  I also believe that when large movements take place in the markets they are usually overdone.  Sterling’s fall from 1.5200 to 1.0250 was an extreme example of this, a knee-jerk reaction to the sub-prime induced credit crunch.  I think there will be setbacks, but we will edge our way back to the mid 1.20’s by next spring.' 

OK, so what's a couple of years between friends?  Here's what happened this week.

Euro implosion - fuse lit?

Greece is once again the word.  There is no mechanism in place for any currency to leave the Euro.  Jacques Delors would turn in his grave at the mere thought of it.  Yet here we are, with the chances of Greece having to leave increasing day by day.  That is because there is currently no elected Greek government following the recent elections.  The Greek electorate cannot stand any more austerity.  To them, and I sympathise, the German led demands on their basic living standards are too extreme, and it comes as no surprise that they will not vote for any parties that support even more austerity measures.  None of the parties could even muster up a cobbled coalition to agree on a political course.  So, more elections in June, with the likelihood that an anti austerity movement will take power.  No more austerity; no more money.  There's the door.

When Greece goes, who will criticise the Spanish for looking on and taking a very dim view of their austerity programme?  If Spain goes, then Portugal, then Italy?  It will be a painful process for anyone leaving he Euro.  The old currency will be reinstated, and the markets will very quickly devalue that currency by a massive percentage.  It is however the only way forward.  A Greek economy with a devalued Drachma would soon find itself in a very competitive position with regards to the rest of Europe, and growth would then begin.  No one should doubt how painful the transition would be though, and some think that austerity might be the better option.

It's Merv time...

Merv and his mates are not happy bunnies when sterling strengthens against the Euro.  They would much rather see a weaker pound, for much the same reasons as a devalued Drachma would eventually help out Greece.  This week was all a bit too much for him, and by Thursday he couldn't take it anymore, and it was time to put the boot in.  Merv warned that any hopes the UK economy could avoid being affected were by the Euro mess were "wholly unrealistic".  He also slashed the UK growth forecast this year to 0.8% from 1.2%, saying the eurozone "storm" remains the main threat to UK recovery. The eurozone was "tearing itself apart" and the UK would not be "unscathed", said melancholy Merv.  He told a news conference that the eurozone posed the greatest threat to the UK recovery since Accrington Stanley last won the league (I added that bit, sorry), and there was a "risk of a storm heading our way from the continent"."We have been through a big global financial crisis, the biggest downturn in world output since the 1930s, the biggest banking crisis in this country's history, the biggest fiscal deficit in our peacetime history, and our biggest trading partner, the euro area, is tearing itself apart without any obvious solution.

You can see that he's a bit out of sorts about all of this, can't you?  After all that, just for good measure, he deliberately tried to put the wind up the markets by inferring that more QE was possible after all.

The result?

The pound withdrew to the low 1.24's.  Big deal.  The pound will come again. and I really do believe that we will consolidate above 1.25 during the next week or so.

FX Weekly Comment

So the champagne stays on ice, for now.  The pound very nearly reached my long awaited level of 1.25 when it touched 1.2492 at one stage on Thursday.  I'm getting a bit cocky now, and I think we might see the twin towers at 1.28.  That is 1.28 Euros to the pound and 1.28 dollars to the Euro.  There's a lot going on at the moment, and here is some of it:

 

Exit stage right

 

Hollande didn't win he presidential election, Sarko lost it.  Predictable really, for a leader who presided over the worst economic meltdown for decades.  A pity really; he was once seen as the French Thatcher, someone who would have the political strength to take on the unions.  Unfortunately he soon showed his true colours and his own interests outweighed the needs of France. 

The euro suffered heavy losses this week as fears surfaced that election results may have a marked effect on the makeup of the eurozone.  Fears that Greece could soon leave the euro and fears over the state of the Spanish economy gripped the market. The Greek elections raised doubts that the Greece would stay in the euro much longer as anti-austerity parties took over a great deal of power from the two main parties. To date, no coalition has been formed.  Another election in June is looking ever more likely which would mean that a coalition may be formed between parties who want to tear up the current austerity deal.  Italy also moved substantially to the left, potentially threatening their will to follow the austerity line.  With a series of countries rejecting austerity, why should counties such as Spain, Portugal and Ireland feel obliged to toe the line?  Watch out Euro.

 

Back on the farm

Merv and the team decided to keep the printing presses in mothballs this week, and also to leave the base rate unchanged.   A few pundits had believed that they would announce more QE.  Merv decided against any statement, which some view as controversial with the economy contracting and the MPC not coming up with any alternative therapy,  especially when fiscal tightening is being used at the same time.  With unemployment on the rise and private spending still at depressed levels, the BoE might be criticised for not doing enough to revive the economy.  Inflation is the coloured gentleman in the woodpile here, with fears that persistent inflation will lift wage  expectations,  hurting UK competitiveness. Inflation in March rose to 3.5% and price growth has not come down as rapidly as expected.  Household real disposable income shrank for the third year running, and without a substantial improvement here the recovery will be sluggish at best.   The pound likes this lack of QE though, and here we are at the highest level since the end of 2008. 

Other UK figures were a bit confusing.  UK industrial production fell by 0.3% from February to March, more than the market expected.   Manufacturing output however grew by 0.9%, well ahead of the 0.4% gain foreseen by analysts.  So much for statistics. 

F/X Weekly Comment

So far, so good.  Sterling seems to be establishing a base at these levels, ending the week up 70 points at 1.2330.  Not all the news was good for sterling, but as I've said a couple of times recently, the pound seems to be able to shrug off the bad news and thrive on the good. Long may that continue...

Dodgy stats for the pound

Weak UK house price figures from the latest Halifax survey barely affected the pound today. House prices apparently fell by 2.4% last month, as opposed to a rise of 2.2% the month before.  The market chose instead to focus on figures showing that sales of new cars in the UK showed an annualised increase of 3.3% last month, provided a chink of hope for sustained recovery.  The latest PMI survey from the service sector continues to show expansion at 53.3 although this was under the expected 54.4 level.

Even dodgier stats for Europe

The release of the Europe-wide Composite PMI survey set alarm sirens wailing for the future prospects for the Euro. The data revealed that the eurozone’s private sector is contracting even  faster  than had previously been thought. This took the rate to 1.2328 by the middle part of today’s trading session, and the single currency isn't expected to bounce back in the near future.  There is clear  evidence now that the eurozone’s sovereign debt problems are starting to hurt the continental European economy. A whole raft of disappointing European data releases this week reinforced this sentiment, as firstly German unemployment figures and then the PMI survey came out significantly worse than had been expected.   The worst was yet to come, however, with the release of March’s eurozone unemployment figures. These showed that unemployment in the region had rocketed to 10.9%, its highest level since records began. It appears that widespread government spending cuts and tax hikes in an attempt to balance the finances of debt-ridden eurozone states are causing European consumers to stop spending, hitting Europe’s economy hard.

Sarko Sortie

I expect that by the time you read this our charming diminutive president may now be free to 'pursue other interests'.  I do hope so anyway.  What will be interesting will be how M. Hollande manages to merge his socialist beliefs with capitalist reality.  This could be interesting, and another ace up sterling's sleeve.

What now?

Same as last week.  Still onwards and upwards for me.  1.25 here we come.  The trick here will be to work out when to press the 'buy' button, and avoid being too greedy. 

Another good week for the ten bob note.  Sterling seems on the face of it to be cruising at the moment, ending the week at a comfortable 1.2260, but under the surface things are a little more frantic...



Double Dip Recession


We've been hearing about this for months, and here we are.  It's finally arrived.  GDP figures this week show a 0.2% shrinkage in the first three months of 2012.  The economy shrank by 0.3% in the fourth quarter of 2011, and the technical definition of a recession is defined as two consecutive quarters of contraction.  So there we are, the dreaded Double-Dip.  Well, maybe, and maybe not.  This week’s GDP figure is only an early estimate, and is subject to at least two further revisions in the coming months.  I think that there is enough evidence from other data to suspect that the DD might not actually have happened at all.

This didn't however stop Martin Weale beating a drum again for more QE.  If you remember, he and Adam Posen were the two of Merv's crew calling for the printing presses to be cranked up.  Then last month Posen decided enough was enough.  Weale obviously hasn't given up yet though.


Hollande and France

This could get a little confusing.  The Dutch government collapsed this week, unable to reach agreement on an austerity package.  At the same time Francois Hollande beat Sarko in the first round of the Presidential election.  This does not mean that the French president is going to be Dutch, but it does mean that the mighty Euro is having to brush off some fairly considerable blows, and is showing signs of stress.  M. Hollande, after all, is no great fan of austerity packages and tax hikes.  Think of it another way.  The names Hollande and Merkel don't merge together in any way as well as Merkozy does.



S&P Again

This time downgrading Spain’s credit rating by two levels, to BBB+ with a negative outlook, increasing worries that the inherent debt crisis engulfing much of Europe is spreading at a faster rate. The Euro drifted weaker through Thursday, as reports from  Italy showed a bigger decline in business confidence, which sank to the lowest level in over two years. Business confidence in the Euro-zone as a whole also fell sharply in April.


What now?

Still onwards and upwards for me.  1.25 here we come.  The trick here will be to work out when to press the 'buy' button, and avoid being too greedy.

F/X Weekly Comment

It's so much more fun being wrong on the way up than on the way down. Last week I hoped for continued consolidation at the 1.21 level, and lo and behold the pound surges through 1.22 to finish the week at 1.2230. And a very interesting week it was.

S&P reaffirm UK AAA rating
Let's get the boring bit out of the way. Who cares what credit rating agencies think anyway?

A poser from Posen
Adam Posen is of course one of Merv's current clutch of merry men. For many months now he has been on record calling for more action from the money printing dep't of the BoE (QE). Suddenly this week that has changed, and with the minutes of the last meeting released this week, he has dropped this call. The minutes indicate that the UK’s current high inflation may now be at greater risk of lasting into the medium term. This decreases the chance of further QE, and if confirmed helps remove a drag on sterling. Since the release Posen has said that in his view the economy is likely to be in a better position than data trends suggest. Markets will watch next week's Q1 GDP data to see if he is right.

UK employment
UK unemployment has registered its first fall since last spring, according to figures released the Office of National Statistics on Thursday. It fell by 35,000 to 2.65 million over the 3 months since December, a much better figure than the markets had forecast. Sterling reacted very strongly to this, and within a very short period of time the BoE minutes were released, giving another boost.

Sinking PIIGs
While sterling is still riding the crest of its wave, those irritating Euro peripheral debt problems just won't go away. Spain, Portugal and Italy are jostling for position at the front of the queue at the moment. Christine Lagarde's comment that Spain is not in need of the bailout fund's support is being taken with a very large pinch of salt. It undoubtedly remains vulnerable to the debt situation however, and markets will be watching for any developments at this weekend’s IMF/World Bank/ G20 meetings.

Mysteriously Thursday's Spanish debt auction saw a strong uptake for government bonds. The Spanish treasury was looking to raise €2.5bn of its gilts, but managed to sell some €2.54bn worth of debt at significantly reduced yields. The rate of interest paid by Spain on its benchmark 10-year bonds dropped markedly from 5.743% to 5.403%, suggesting on the face of it that panic levels regarding the country’s debt situation are receding. There is however a strong suspicion that this has been engineered by Brussels, with non PIIG buying of the bonds in an attempt to ease the pressure.

Italy joined in the fun and released worrying 2012 growth forecast figures which predicted that domestic economic activity is set to shrink by 1.2% this year. Previous estimates were for fall to -0.4% this year, so the announcement took the market by surprise. Mario Monti also revealed that as a consequence of slower growth, Italy won't be able to balance its budget next year, as previously promised. This suggests that the Italian economy is struggling to cope with the austerity measures have been intrduced since Silvio Berlusconi was shown the door. Back to the IMF, and there are signs that Christine Lagarde is having real problems raising more cash for the bailout fund. With all that is in the pipeline, this is no time to be running out of money.

What now?
Onwards and upwards. 1.25 here we come. Not quite sure when though....

F/X weekly comment

Last week my modest hope was that sterling would be able to consolidate in the 1.21 range, and lo and behold, here we are a week later at 1.2120. Not only did we manage to stay in range on the week, we also managed to reach an 18 month high 1.2160 on Wednesday. The only tarnish was that we also sat 1.2080 during the week, but then it's not a perfect world, is it? Newsworthy this week:


Crest of a wave

With hopefully more, bigger waves to follow. I think sentiment has changed. I mentioned recently that whatever bad news comes through for sterling at the moment, the market seems to cock a deaf ear and ignore it. This week it was some pretty awful UK trade deficit figures for in February; £8.8bn instead of the predicted £7.7bn. The pound went up on the news! Eurozone industrial production did better than expected in February, rising by 0.5%, but the market bought sterling again. How refreshing.

Talking of bigger waves, we are now within approximately 250 points of the highest sterling/Euro level for nearly four years. Heady stuff indeed. The problem here is that as rates get higher, private individuals, companies and speculators all tend to start buying the Euro. fair enough, I know, but think what's on the other half of that trade They are selling sterling. A 'bought' currency gets stronger, a 'sold' currency gets weaker. Not exactly what we're looking for.

Another concern that I have is that Merv and the boys are firmly of the opinion that a weak pound will help the UK in the long run by making exports more affordable overseas. They are quite capable of spiking sterling's guns when we least expect it.


Remember George Soros?

He has a bit of history in foreign exchange markets, to say the least. He's never gone away since his heydays in the 80s and 90s, and every now and then he speaks out and markets listen. He talked about a corporate reluctance to leave their funds in euro-denominated assets, then went on to say that Germany is attempting to impose a near-impossible task on the Eurozone in enforcing unworkable austerity measures on the region’s peripheral states. He then waded in with an assertion that the single currency, in its current state, is ‘broken’ and needs to be mended. Well I think we all knew that already. The problem is that instead of strong medicine or surgery, sticking plasters seem to be the chosen tool.



Onwards and upwards?

I'd like to think so, but I'm a bit wary . If sentiment remains intact and bad UK figures continue to be ignored, then yes. If the figures are good, yes. But there are two ways to view a consolidation in the 1.21s. It could be a new 'base camp' from which to climb further, or it could be a plateau, where the ascent could run out of steam.

We need to remember that the UK is exposed to the EU debt crisis, partly because we need them as customers, and partly due to the fact our banks are up to their necks in that same debt. This scenario will keep the Euro weak, but it may also start to weigh heavily on the pound

I'm going to keep my optimistic hat on this week, but for me that means further consolidation of the 1.21 level. let's get used to being here for a while.

F/X weekly comment

Now this is more like it! I must confess to feeling a little bit pleased with myself when the pound finally went through the forecast 1.2125 on Thursday and at one point traded at 1.2140. After all, it doesn't happen that often, does it? Friday of course was a bit of a non-event, as the UK was on holiday, but most of the rest of the financial world traded on and the Euro could have moved sharply in our absence, but it didn't. We ended the week at 1.2120, close enough to last week's target to keep me happy. Here's how the week panned out.


UK on the up

The Halifax House price index rose 2.2% in March, following the drop by 0.4% in February. The Services PMI rose to 55.3 in March compared to 53.8 in February. A decrease to 53.5 was widely expected in the market. Other reports earlier this week were also positive, giving hope that Merv and his crew will keep their powder dry on more QE in May. These figures were indeed very welcome, and they also highlighted a contrast with a struggling euro zone economy.


Euro downer

The release of more disappointing economic data from Germany, this time in the form of February’s Industrial Production figures, contributed to a rocky week for the Euro. This combined with persistent fears about the spiralling yields on several eurozone states’ bonds. There was no change to EU interest rates in this week's ECB meeting. This was expected, but what wasn't were the comments by the ECB president Mario Draghi. He said the euro zone economic outlook is subject to downside risks relating to the debt crisis and commodity prices. Whilst this may seem obvious, the fact that a person in his position says it speaks far greater volumes.

A disappointing auction of Spanish government bonds also weighed on the Euro, as worries grew about Spain's high debt levels and weak economy. Europe's economic prospects look very poor indeed, and debt problems in Spain, Portugal and Italy mean that the ECB will have to dig even deeper to support banks and its weaker economies. Greece almost pales into insignificance.


A new dawn, or did someone turn a light on by mistake?

I'm going to keep my optimistic hat on this week. As I said last week, things are starting to feel different. It's a bit like watching the Baggies 2-0 up with ten minutes to go, and cruising. Very comfortable, very unusual, and you know anything can happen! I'd really like to see a consolidation in the 1.21 range next week. Not too much to ask for, is it?

F/X weekly comment

Well this is about as exciting as watching paint dry. Here we are at the end of this week at 1.2000, a mere 40 points away from where we finished last week, and the week before, and exactly the same as the week before that. I looked at one website today that was clearly trying to drum up some interest for its foreign exchange business by showing a choppy chart for sterling Euro over the week. It was only by looking at the axes that you could see that the high was 1.2008 and the low 1.1975. When I were but a lad you'd expect to see that sort of movement while you had a cup of coffee and your first fag of the day. Remember smoking in offices? You had to join in or it would make you feel ill. Not that we had Euros in those days though. Real currencies for me, deutschmarks and francs; lire and pesetas; escudos and drachma.

There was however quite a bit of action in the background this week, even if it didn't filter through into market movement:


Poor UK data

No, surely not? Aren't we supposed to be bursting out of recession into the blossoming spring of recovery? Not according to GfK NOP (whoever they may be), who announced that we consumers suffered a lapse in confidence in March as we became more worried about the financial outlook and the economy in general. The index decreased two points to -31 from -29 in February, according to the survey. It is the lowest since reading since December (not exactly a long timescale there) and contradicted expectations of a small improvement. On a longer timescale, it is three points lower than a year ago, which may well help to wipe any smug grins off faces at the BoE.
We also heard that mortgage approvals fell during the month, and money supply for February registered its biggest monthly fall ever (impressive huh?). This was followed by poor figures in the services sector and to round it all off UK house prices had their sharpest drop in over 2 years.
Well not exactly rounding it all off, because the OECD then stuck the boot in when they calculated that the UK economy shrank in the first three months of the year, which means, dear friends, that we are back into a recession. Let's hope they're wrong on that one.
So how the hell did sterling shrug all this off and end the week 30 points higher than last week? Surely we should be hanging on to our parachutes for dear life as we plummet down towards parity?

Greece is the word

Standard & Poors commented that Stavros and friends may need yet further fiscal re-structuring in order to eventually get itself out of the mire. The Greek Tragedy has dropped out of the headlines over the past couple of weeks, thanks to the confirmation that it would be receiving the €130bn second bail-out. Strange that it should take so long for anyone to draw this obvious conclusion, but who am I to comment?

But...

Could it have been the Greek appetizer for a Spanish main course? Spain is in deep trouble. There are 5.4 million unemployed people in Spain, 23.3% of the workforce. Youth unemployment is at almost 50%. The new government forecasts another 600,000 unemployed Spaniards by the end of 2012. 430,000 Spanish families are to be evicted from their homes by 2016 if Spanish banks and courts keep up the current rate of mortgage foreclosures. The latest austerity budget is cutting nearly €30bn rom public spending this year alone. The general strike on Thursday is not going to create more jobs for the millions of unemployed Spaniards who are deeply despondent about the inability of modern Spain’s economic and political system to offer them and their children a proper future.



What now?


For now I'll stick again to last week's forecast of 1.2125. I'm beginning to get a sense that the balance is swinging against the Euro. It used to be that whatever was good in the UK couldn't manage to boost the pound. Now it seems that continuing bad news seems unable to damage it. Blind faith it might be, but it's worth a go!.

F/X weekly comment

Still waiting for that move through to 1.2125. The budget came and went this week and George Osborne emerged unscathed, if accused of being a grannie-mugger. We've ended up, or rather down, at 1.1960, which is a bit disappointing really. And it could all have been so different:


The best laid plans

Negative numbers were the order of the week, with a very weak set of German PMI figures, which suggested that the eurozone’s leading economy is beginning to struggle in response to pan European debt worries. Problems for the Euro were reinforced by Irish growth figures which showed that the Republic’s economy had contracted by 0.2% in the three months to the end of December 2011. That set the scene for a fun Friday. If the Italian Retails Sales numbers showed that the country’s self-imposed austerity measures are beginning to weigh down the country’s economy, then a weaker the Euro would be the result, sending the pound back toward its 18-month high of 1.2168.


Go astray

So it came as no surprise to me when Italian retail sales rose in January contrary to market expectations, and despite a struggling economy and increasingly tight fiscal policy. Retail sales rose 0.7% from December in seasonally-adjusted terms, led by a 1.2% monthly jump in food purchases.

Economists had expected Italian retail sales to be flat in January after falling in November and December. The jump in January's retail sales was the strongest in at least two years and may signal pent-up demand, especially as the shops offered steep post-Christmas discounts this year. If I had been a jobbing F/X trader looking to boost my weekly P&L on the back of this scenario, I'd have been having a quiet weep by now.

Just to rub salt into the wound, French business confidence in manufacturing also rose in March. The index increased to 96 in March from 93 in February, as the outlook of business leaders improved. A figure of 93 had been expected. An overall sentiment reading, including construction, retail, services, and wholesale, also rose in March to 95 from 91 in February, just to put the boot in.

Nearer to home

The underlying reason for the fall back into the 1.19's was our old friend Merv and his MPC cronies. The latest policy minutes showed that committee members Posen and Miles pushed for more QE to help stimulate the economy. Most sane observers in the market had expected a unanimous vote for asset purchases to be left on hold following the February decision to increase the scheme by 50 billion pounds to 325 billion. This of course put sterling under pressure.

On the same day The Office for Budget Responsibility's forecasts for growth and borrowing detailed by Osborne were marginally more optimistic than the previous estimates, but the earlier release of much higher-than-expected public sector borrowing for February pulled the pound down. Any future deterioration in the borrowing figures may well mean that ratings agencies Fitch and Moody's will downgrade the UK's AAA sovereign debt status, another potential source of weakness for pound. Ho hum....




What now?


I'll stick again to last week's forecast of 1.2125. Not that I have any real idea where we're going to be next week. Call it blind faith.

F/X weekly comment

Still waiting for the move through to 1.2125, and with the budget this week it could be a case of sh*t or bust. Can Osborne navigate axing the 50% tax rate and still keep his austerity flag flying? We ended the week at 1.2030, which is quite reassuring in view of the almost relentless tendency to crash off the 1.20 level whenever we get a look at it. No earth-shattering news this week, but there were a few items of note:


Potential downgrade

Our good friends the rating agencies were at it again, trying to justify their existence. This time it was Fitch , deciding to lower the UK’s long-term outlook to negative from stable, while confirming our AAA rating for the time being. I sometimes wonder who takes any notice of these self-serving leeches.

Real data

The pound has been aided this week by a recent improvement in UK economic data including retail sales and a narrowing of the trade gap reducing the chance of a second recession and further QE by Merv and his gang. Sterling has also been supported against the Euro by a recent widening in the difference between short-term UK and German bond yields, creating an appetite for sterling in long term f/x dealing.

Unemployment

UK unemployment rose by 28,000 to 2.67 million during the three months to January, putting the unemployment rate at 8.4%, according to figures from the Office for National Statistics. Despite these high figures, the rise was the lowest in almost a year. They were actually lower than forecast, and the slowing rise is good news for the pound, which gained following the release.

A quick word about Greece

I know I said I was getting bored with talking about Greece, but an article I read today has pulled me up short. Austerity measures are one thing, and Greeks may have been living in a fiscal cloud cuckoo land for centuries, but they didn't create this mess, Europe did. Greece could have carried on quite happily in its own romantic dream if it hadn't been seduced into the euro under false pretences. Now it faces a 40% reduction in the healthcare budget this year alone, on top of tax hikes and wage cuts. New cases of all kinds of horrible diseases of all kinds are escalating at a truly alarming rate. Greece cannot take this. It is teetering on the verge of collapse and social disintegration. Greece will not be alone in this suffering.


What now?


I'll stick again to last week's forecast of 1.2125. Not that I have any faith in George Osborne, but I do have faith in sterling.

F/X weekly comment

Wrong again, but hey, get used to it. I have. My forecast last week of 1.2125 now looks a tad optimistic, as we are finishing the week at 1.1970, just 30 points shy of last week's close. It was quite an interesting week though, albeit driven once again by vultures circling high above the Parthenon.

Greek debt - cheap or expensive?

Both actually. Cheap if you're looking to buy it (are you mad?) or very expensive if you already own it. Central to this week's activity has been the attitude of the owners of Greek government bonds. These are promises made by the Greek government to repay debt at set rates at a set time; promises now rather difficult to keep, as the Greek government has run out of money. In order to stand any chance of being able to repay the second bailout, and in fact to sand any chance of being paid the second bailout, they had to persuade the bondholders to 'write off' over half of the money, and accept replacement bonds to repaid further in the future at lower rates. Why would anyone in their right mind vote to accept that deal? Because if they didn't, Greece would collapse into disorderly default on the bonds. In other words, settle for 25% of what you are owed or run a very large risk of getting nothing at all.

And I quote:

Nicolas Sarkozy, renowned sage and Euro leading light (snigger): 'I would like to say how happy I am that a solution to the Greek crisis, which has weighed on the economic and financial situation in Europe and the world for months, has been found.'

Greek Finance Minister Evangelos Venizelos: 'I believe everyone will soon realise that this is the only way to keep the country on its feet and give it a second historic chance that it needs'

Jacob Kirkegaardof the Peterson Institute for International Economics: 'More to protect Europe from Greece than for Greece itself'


Sarkozy is clearly otherwise engaged in planning his retirement from politics. Venizelos is clearly a dedicated optimist. Kirkegaardof lives in the real world. Europe is merely buying time with this charade. The time will be used by European governments and banks to strengthen their financial defences, leaving them less vulnerable when the Greek day of reckoning eventually arrives.


What now?

Greece will go away for now, until the wallpaper starts to show the cracks again. That will leave the field clear for a week or so to let economic data rule the roost for a change. That's as long as Spain or Portugal don't rise to the top of the agenda just yet. UK figures are looking promising. Some of the 'green shoots of recovery' are starting to appear, while in Europe things are still looking messy. Sterling interest rates will stay the same, but the Euro may have to bring rates down, as they started to rise much too early.

All of this is positive for sterling, so as long as Merv doesn't put the boot in, we should be able to have another good run at the 1.20's.

I'll stick to last week's forecast of 1.2125. Let's face it, if I keep that going long enough, it must be right one week, mustn't it?

F/X weekly comment

It's been a low-key week on the F/X markets, and yet sterling has managed to creep up on the blind side and has yet again inched past the 1.20 level. That makes my forecast for last week plainly wrong, so what happened to make the pound exceed my expectations?


To print or not to print, that is the question

To which no-one really seems yet to have an answer. In essence, Merv back-tracked on the subject. He said on Wednesday the BOE will be guided by upcoming data when deciding whether to issue more QE. It had been widely anticipated that another £25bn would need to be printed in the next few months, but it appears that the latest data has cast doubt on these expectations.

On the other side of the Channel, Europe doesn't do QE, or at least says it doesn't. What it does do however is make vast sums of cheap money available to the banking system from time to time, as it did this week. Now you or I would be hard pressed to spot the difference between this and QE, but the markets know a ringer when they see one, and this week's actions have weakened the Euro just as much as they have strengthened sterling.


Back to basics - data, data and more data

Some decent UK figures and some dodgy Euro ones didn't do us any harm at all during the week. Thursday's manufacturing data edged down slightly to 51.2 from 51.8 but held above the key 50 level that divides expansion from contraction. Friday's construction index was very pleasing, coming in at 54.3 against forecasts of 51.3 thus showing expansion in an important area of UK economic activity. A view is starting to emerge that the economy is recovering (say it in hushed tones) and if this is the case it will of course help sterling rally.

German retail sales figures out on Friday showed an unexpected drop as price rises start to hit the consumer. A better figure had been expected s a result of a lowering of tension surrounding the Euro zone debt crisis. Thursdays manufacturing PMI from Germany stayed in positive territory, but wasn't anything to shout about. The Euro has certainly not shaken off doubts as to the peripheral economies, indeed fears for the Greek bailout are bubbling under the surface again.


Gissa job

Eurozone employment data showed that unemployment in the region rose to its highest level in the Euro's history in January, to touch a scary 10.7%. It is beginning to look as though pan European austerity measures are bringing an unwelcome side effect on growth and jobs across the whole economic area.


What now?

Can this be seventh time lucky? Can Greece stay out of the headlines for two weeks running? Will Merv be able to resist pulling the plug on sterling yet again? Maybe, just maybe, I'm going for 1.2125 next week. Fingers crossed!

F/X weekly comment

So I get to pay out on the evens bet last week. Shame, but no real surprise. Nice to be right two weeks running though. There were some familiar factors involved:


Sixth time unlucky

Last week I pointed out that this was the sixth time that Sterling has poked its head up above the 1.20 level in the past three years, and of course on each of the previous five occasions it fell back, sometimes sharply. And here we are again, back at 1.1800.


Greece to the rescue

An unlikely headline, at best, but that in effect is what happened for the Euro last week. The Greek government took it upon themselves to sign away even more of the ordinary Greek-in-the-street's ability to cope on a day to day basis. To be fair, the alternative is even less attractive in substance, even though it might be difficult to persuade the public of that fact. To rub salt in the wound, the EU, IMF and ECB also demanded, and got, a monitoring post in Athens so that they can keep an eye on things. Well I for one hope that the building they choose isn't too flammable, and I wouldn't be too happy if I were a German accountant given the Athens posting. ECB president Mario Draghi chipped in, saying that 'backtracking on fiscal targets would elicit an immediate reaction by the market'. Go Mario.


Under Sentance of Debt

Actually I can spell, usually. This is Andrew Sentance, who until last year was one of Merv's Merry Men. His gloomy forecast this week was that the UK will continue to struggle with poor growth and sporadic phases of recovery until at least 2016. He anticipates annual growth of 1% or less per year until then.


MMM

Talking of Merv and his crew, they also managed to contribute to sterling's relapse this week, with the release of the last Bank of England minutes to the decision two weeks ago to keep interest rates on hold. During that meeting the decision was taken to issue another £50bn of QE, and that was taken favourably by the market at the time. In the minutes it was revealed that two members of the committee wanted even more money pumped into the economy than the £50bn. The two voted for a £75bn slab of QE, but the other seven went for £50bn. The reason this has caused a problem for sterling is that the market had assumed that the decision would have been unanimous, and that recent good economic data would mean that we could put the printer away now. It now appears however that the door is still open for even more QE in the future, and this has helped weaken sterling as increasing the amount of currency in the system must inevitably devalue it.


So what now?

Doldrums time again for a while I'm afraid, until we either get more clear signals on the UK economy, or Greece kicks off again, as it surely will. I firmly believe that we will see 1.200 again soon, and sometime soon we're going to breach that level and stay there, but not just yet. Mid 1.1800's for me this week.

F/X Weekly Comment

Whew! Got one right last week. I was beginning to forget what that felt like, but here we are, as predicted, back in the 1.20s, in fact at 1.2050 at close of play on Friday. Greece was again a factor, but to be honest I'm getting a bit bored of the attention being heaped on by far the smallest of the PIIG economies. Press and pundits seem less bored though, and determined to keep it in the news, so:


More Greek Woes

The euro was again under the cosh this week as the market concentrated on the news regarding the second Greek bailout. Deadlines came and went throughout the week, and a meeting scheduled for European finance chiefs on Wednesday, during which the deal was to have been finalised, was postponed until Monday due to German (and others) concerns that the Greek’s proposed austerity package didn't come with the required guarantee that the measures would actually be pushed through. A case of 'talk is expensive'. Ominously for Greece, a statement was also issued saying that 'further considerations are necessary'.


Moody Blues for Europe

No, not another comeback tour, but another ratings agency 'strutting its stuff'. This week Moody’s cut the debt ratings of six European countries including Italy, Spain and Portugal whilst placing France, Austria and ,oh yes, the UK on a negative outlook. They did however leave the European Financial Stability Facility’s AAA rating alone. (Why?)


Meanwhile Back 'Home'

The market had the unusual task of assimilating some good news for Sterling. The CBI came out with a bullish statement forecasting that the UK will avoid a double dip recession and that the recovery will gain momentum during the year. This was presumably based partly on the release of better than anticipated UK Retail Sales data for January. The annualised figure was posted at +2.0% versus expectations of a growth in shop sales of only 0.6%, raising investor’s expectations that the Bank of England will have to raise British interest rates sooner rather than later. Strange really, as only on Tuesday the headlines were that the sterling base rate would remain unchanged for at least two more years! The pound was also benefitting from the fact that only £50bn (only?) was issued last week instead of £75bn.


What now?

Well, this is now the sixth time that Sterling has poked its head up above the 1.20 level in the past three years, and of course on each of the previous five occasions it fell back, sometimes sharply. Last time though it only fell back into the 1.18's, and then only for a short time. Can this be sixth time lucky?

Bored of new from Greece I might be, but it will be Greek news that dictates which way Sterling goes from here. If a deal is reached on Monday, and Greece's gonads are wrung even tighter, the chances are that the Euro will strengthen and the rate will fall back again. If however, and this is possible, the Greek politicians decide that if they give any more ground it will be their gonads on the line, not the public's, we could have a very messy week indeed.

On balance, I think a deal will be struck. As the Dutch PM said this week 'It's cheaper to bail Greece out than to let it default'. I can see what he means, but Greece will default, by any reasonable description, whatever happens. The choice is between orderly default, with debtors agreeing to write off debt, and disorderly default, where the Greeks just decide they can't repay.

So I'll give you two prices this week, with betting odds:

1.2450 by next Friday 8/1
1.1825 by next Friday Evens

You can tell I've been to Monaco, can't you?

F/X weekly comment

Not a vast amount to report this week in terms of currency movement. We've ended up a centime down on the week at 1.1950. To me this feels a bit like a lull before a big storm. Interest rates in both the UK and Euroland were kept on hold again, but the BoE came in with a new slug of QE, more on that below. The big story though, not for the first time this year:

Greece is still the word...

Caught between a rock and a hard place, it's difficult not to feel some degree of sympathy for the Greeks this week. No? OK, it is difficult. They desperately need more EU money, but first they've got to prove that they will make at least some attempt to pay (a bit) of it back, and they're struggling. They thought they'd come up with a decent new austerity package this week, but those stern nasty Germans weren't impressed, and they were sent packing to drum up some more riot-fodder. As I write this, on Friday evening (10th Feb), a headline has just burst onto my computer screen:

Marilisa Xenogiannakopoulou

I wouldn't bother even trying to annunciate it, and no it's not the Greek version of countdown, it is in fact the name of the fourth Greek government minister to resign today in protest over the debt negotiations. Yes, today. Giving a flavour of current sentiment, George Karatzaferis, a coalition party leader said, "Greece must not and cannot be outside the EU. But it can do without the German boot." Unfortunately the German boot is in fairly close proximity to the German hand that is shelling out most of the money.


Back in Blighty...

Some decent figures out this week, and an expected old friend reared his head in the form of another tranche of QE (Money printing to you and me). Now the theory goes that QE doesn't mean higher inflation, but personally I'll take more convincing than I've seen so far. Another £50bn chucked into the system this week would have hurt sterling even more, but the market was quite relieved that it wasn't the £75 bn that they'd been expecting.


More on Greece...

Update Sunday pm. The austerity cuts include under discussion now include:
• Another 15,000 public-sector job cuts
• liberalisation of labour laws (hire and fire)
• lowering the minimum wage by 20% from 751 euros a month to 600 euros
These were presented to a eurozone ministers in Brussels, but were rejected unless a further €325m in savings for this year are promised, and the Greek leaders give "strong political assurances" on the implementation of all of the packages. Unions are holding a 48-hour strike, and thousands of protesters are rallied in central Athens against the measures. Riot police are on standby. Watch this space.


What now?


Back to guesswork in the short term, so back into the 1.200s next week for me...

F/X weekly comment

Two weeks on from my last blog on the single currency duel with sterling. Two weeks on, and precious little has changed, in fact the rate has moved by just 10 centimes, ending this week at 1.2050. A bit like my two weeks really, here I am in exactly the same place, but in the intervening period I found myself mixing with it the high-rollers in Monte Carlo. I didn't make my fortune though, and like sterling I'm back down at square one, if you can call it that (what would you call 1.05 then?). So what will change things from here?

The continuing story of Greece....

More like a soap really. How long can this drag on for? We were promised that a full resolution to the Greek debt problem would be in place by, let me see, which date shall we choose? Anyway, the latest promise is Monday. Dream on. Apparently there will be announcements on three issues. Firstly, the size of the haircut that private investors must take on their holdings (in addition to what hit the ECB will take). Secondly, the size of yet another bailout (MK111), which is going to have to be somewhere in the region of €130bn, and lastly another tranche of austerity measures announced by the Greek government for the Greek public to welcome with open arms.

A sideshow from Portugal...

Another fairly dismal round of bond refinancing during the week reminded the markets that Greece isn't where all the action is. In fact there is fun to be had wherever you look in southern Europe, if you like that sort of thing.

Can the UK and sterling capitalise on all of this?

Do bears defecate in Milton Keynes? Is the pope a Mormon? No, of course not. The latest apology for sterling is of course that we need the EU debt problem resolved quickly and positively in order to reassure the markets that the UK economy will not suffer. Lord preserve us from procrastinating apologists disguised as economists. Are we to believe that sterling is now inextricably tied in to a range between 1.0500 and 1.2050 against the lumbering school bully that is the Euro?

What now?

Maybe I should go and lie down for a while. Maybe then I'll wake up and the world will have come to its senses. Newt Gingrich will be US President, Greece will be the only currency left in the Euro, and there will be DM4 to the pound (and FF13). Gazole will be 20 cents a litre, but no-one will use it as cars run on air..

And why is this room all padded?

Still 1.200s next week folks.

F/X weekly comment

Another year, another pound, and maybe even a few more centimes thrown in for good measure. What a way to start 2012, basking in the relative wealth of 1.2130 and looking forward to even better things to come. Can it be true?

Not so fast...

I hate to be a killjoy about this, but I think we have to keep a grasp on reality here. The pound isn't worth 1.2130 Euros because it represents a vibrant economy bursting with growth potential, low debt and healthy surpluses. Far from it; the pound is at this level because the Eurozone economies are in an even worse shape than ours, and that's saying something. Takes the gloss off a bit, doesn't it?

But on the other hand...

A pound will still be a pound when we get to the end of 2012; a Euro may not be quite the full shilling when we get to that stage. I've listened to lots of pontificating over the last few weeks from political commentators, economists, traders and the like, and it strikes me that I've never heard so many people (not all though), who are convinced that the Euro cannot survive in its present form. Personally, I have no doubt that the Euro will exist in a year's time, but I do think things will have changed. I can't for the life of me see how Greece can possibly continue as a Euro country. I think that even after two bailouts (should that be bailsout?) it will still struggle to avoid default, maybe as early as Aril this year. Lending billions to an ailing economy is brave indeed, expecting to get your money back is downright foolish.

One out...

Not all out maybe, but I have a few candidates. Here is my list of cast iron favourites to still be members of the Euro club at the end of the year: Germany, France, Belgium, Luxembourg, Holland, Austria, Finland and Monaco. That, I agree, leaves quite a few casualties, but I don't expect the rest to be cast to the wolves. As I see it the Eurozone needs a relegation and promotion system. A premier league and first division if you like, with maybe a Doc Martins southern league tagged on for good measure.

I think there is a strong case for arguing that the Euro will reach breaking point this year, and something will have to be done. Anyone remember the ERM? And the Snake? Any country in such a mechanism isn't completely tied to one exchange rate, it has a leeway in which the rate can move. Such flexibility is currently craved by many of the peripheral countries. This would be Division 1. When any of the countries in this division manages to get its finances in order, it can be promoted back to the Premier division, the Full Monti (sorry, Euro).

The Southern league's founder member will of course be Greece, possibly to be joined by the likes of Cyprus and Malta, and any of the PIGS that flounder in Div 1. They, I'm afraid, are the basket cases, consigned to near economic collapse and forced to queue up in the Brussels soup kitchens for handouts. Just like bailouts, but you don't have to pay them back.

Short term?

Make hay while the sun shines. I'm converting at least half of my meagre sterling pittance into Euros. We might see 1.2200 this week.