Weekly F/X Comment

Now that's more like it. I think I'll give myself 8 out of 10 for last week's predictions, which was that sterling would end up at between 1.1750 and 1.1800 and the actual result is... 1.1750! If you think I'm being a bit mean on that score, I ought to point out that a heck of a lot went on during the week that I hadn't anticipated, and at one point we were over 1.1900 and looking strong. I do however feel particularly pleased that I managed to push through a large customer investment deal at over 1.1800 on Wednesday. Shame I didn't do some for myself.

A big week for England
England? Surely I mean Great Britain, or the UK? No, I mean England, and the scandalous vote for the World Cup venues in 2018 and 2022, with the decisions going to Russia and Qatar. I can only assume that there is an air-conditioning contractor somewhere who is very pleased with his FIFA order of multiple giant reversible Clim domes to supply warm air in 2018 and cool air in 2022. I put this vote well up there as a principal reason for sterling's reversal late this week.
Well actually I don't, but I just wanted to have a moan anyway.

Back to the PIGS
No silly porcine frivolity this week, but there is no escaping the fact that sterling/euro movement is still being driven by fear (or the lack of it) of contagion amongst the peripheral eurozone countries. The euro survived a tough week, and came out fighting. At one point fears that Ireland's problems would engulf Portugal and Spain looked as if they would push the euro into a downward spiral. The ECB held interest rates at 1% as expected, but the markets had been looking to governor Trichet to announce strong measures to calm market nerves, but he didn't, and that was when we saw rates over 1.1900 briefly.
Eventually however, the ECB swung into action. A threatened market rout forced the central bank into a new wave of bond purchases. As a direct result the extra yield that investors demand to hold Portuguese 10 year bonds over German bunds fell below 300 basis points (that's 3%) for the first time since August. Ireland’s 10 year yield plunged 30 basis points to 8.2 percent yesterday and the Spanish yield, which hit 5.67 percent on Nov. 30, closed at 5.1 percent. Lots of figures there but I think you can see that the effect was to take pressure off the debt covering charges suffered by the peripheral countries.
The latest round of the crisis is forcing leaders once more to assert their support for the euro. Angela Merkel, the European Paymaster-General, said: “The German government stands behind the euro “It is fighting for a stable euro and will do everything within its power” to push other EU countries toward embracing a “culture of stability” in their public finances.
Options that the EU leaders may consider if the crisis were to worsen include boosting their 750 billion euro temporary rescue fund or turning it into an asset-buying program; cutting the interest rate charged on bailout loans such as the Irish package, or issuing joint bonds for the all the euro nations. Against this potential onslaught, sterling has continued weak domestic statistics and a VAT rise to hit demand from January onwards. Not much in the way of ammunition really.

So what now?
As we approach Christmas interest in the FX markets will wane. After all, there are an awful lot of Christmas parties to fit into the month, and also it is bonus negotiation time, so no-one wants to lose any money. I think sterling's push for 1.200 has fizzled out for this year. If you really need to buy euros, I'd do it sooner rather than later. But remember, it's just my guess! 1.1675 for me next week.

a bientot, Rob