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!.