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!