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.