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.