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....