FX Weekly Comment

The week ended badly for the pound.  Having apparently stabilised in the mid 1.25's during the early part of the week, things fell apart a bit at the seams on Thursday and Friday, despite more bad news from the eurozone, so:

Pound looking good

Greece's future as part of the Euro is still very much up for grabs.  It is difficult to see how the vote on the 17th June will go.  To the 'not a chance, pal, were off' Syriza party or the right wing 'Ok, we give in, hit us again' right wing New Democracy party.  Either way, the Greeks are going to hurt.  I read an interesting view on this earlier this week in the FT:

Sir, Following the wealth of discussion and commentary generated by the ongoing Greek drama one could form the perception that Greeks got what they deserved for not paying their taxes.

It’s true that tax evasion is partly responsible for Greece’s current misfortunes, however it was in the country’s long-term interest given the circumstances: for the past 20 years, the Greek state has been mismanaged to a great extent, with inefficient processes and a lack of spending controls.

On top of that, the public sector has been further burdened by jobs created for the sole purpose of securing votes. In this environment of corrupt and unrestrained spending, public finances have been treated as a treasure to be looted rather than as an asset to be sustained. How do you stop this engine of wasteful spending if you’re not the one running it?

You stop funding it. Much like the shrewd investor who stops funding enterprises with bad prospects, Greeks stopped giving their money where it was not being put to good use. Their actions accelerated change: having run out of tax fuel and restricted by a fixed currency, the engine that is the Greek state is finally forced to optimise for efficiency.

So let’s not blame the Greeks for not paying their taxes; of all their financial decisions so far, this one has probably been the most sound.

Spain is looking to be submerging in more and more financial doodoo.  Bankia, the Spanish collective 'bad bank' set up to isolate all the bad bits of the Spanish banking sector, revised their 2011 figures from a €300m profit to a €2.98bn loss, and immediately followed that up with a request for a €19bn bail-out. Standard and Poor's, never ones to ignore a stable door just because the horse has bolted, immediately downgraded Bankia and four other Spanish lenders to junk status.

Not helping the situation is the margin that they are having to pay to renew their sovereign bonds.  This is now at a level of 6.5%, pretty near the 7% level deemed to be unsustainable. Greece, Portugal and the Rep. of Ireland were all at this level when they received international bail-outs, which is beginning to look more and more likely for Spain.  But of course that can't really happen, because Spain is just too big...

Pound hits the skids

So you'd think with all that going on in euroland, we'd have no problems maintaining 1.25 and beyond, but no, dark forces are apparently gathering.  The first boot to fly our way was aimed by Charlie Bean, another of Merv's merry men.  Mr Bean (stop smirking, this is serious) made it quite plain that more QE is very likely.  And we all know that a fair amount of sterling's strength has been based on the decreasing likelihood of the need for more QE.

The trailing boot was the result of the May PMI report, which showed that manufacturing performance in the United Kingdom contracted massively. April’s PMI was at 50.5, and projections were for a PMI of 49.7 in May. The true figure published at 45.9. Such a large and unexpected contraction had an immediate impact.  Companies are obviously cutting back on production and employment as new business declines due to rising uncertainty.   This is the second-steepest fall in the 20 year history of the index.  45.9 is the lowest PMI figure for over 3 years, and this has resulted in Sterling falling back to the high 1.23’s

So what now?

Big week for sterling next week.  We should find out whether or not QE is really back in.  If it is, sterling will be on the back foot.  How far back will depend on Greece and Spain.  I still have a hunch that we will go higher, but don't get greedy.  If you need Euros urgently, buy them now.

And on that note

This is the 130th, and last, weekly FX Comment blog.  As you may know, my 'real job' is looking after the financial arrangements of my Spectrum clients.  These are ever growing in number, and I need to make sure that I have enough time in the week to concentrate fully on their needs and requirements.  I will of course always have a great interest in how the pound fares against the Euro, and I may indeed feel moved to comment in future, but not on a regular basis.  I do hope you have enjoyed my weekly missives.