Weekly F/X comment

Oh dear, wrong again! Mugs game this forecasting lark. Sterling having flattered to deceive last week, I was duly deceived, and this week we got what I expected last week. Timing, that's what it's all about... his week I really do think that we will see very little from the currency markets. Yesterday (the 17th) was 'black Friday' in the City of London and big cities throughout the UK. Very little to do with the markets, but it was office party day, and a good number of market participants, in the UK at least, will now be more than a tad jaded in the final push to Christmas.

Look back and wonder..
Can you guess the range for sterling/euro in 2010? It is 1.09 to 1.24, so that leaves us just in the top half of the table at 1.1780 this week. That's quite a big range, and it's worth pointing out that if you needed to buy euros to pay for a €250,000 house this year, the swing between those two rates is over €30,000. Nice if you got it right...

The early rounds
As the year draws to a close I think it would be useful to try to work out the current state of play between the two currencies. Let's take sterling first. The dear old pound has taken a battering over the past three years, and at times it has looked as though the ref ought to step in and end the bout, but it's still there. It has paid heavily for its 'special relationship' with the US financial markets. Mortgage backed securities? No problem my septic friend. Who cares whether or not the borrower will be able to repay when interest rates go up? They're all mixed in with some good stuff, aren't they? Well yes they were , but not enough good stuff to soak up the mess, and the world's financial system was left staring down both barrels of a very sawn off shotgun.
Of course the euro was caught up in all this mess as well, but not to anywhere near the same extent. We all know what a pain it is to get a decent mortgage in France, and it's been like that for years. So many years in fact that if you told a French mortgage lender that you could get a loan of eight times joint salary in the UK, he would assume you were either joking or lying. This caution didn't do France, and the other eurozone countries, any harm at all when things started to get a little 'difficult'. Yes, the European banks lost a few billion here and there, certainly more than they could afford, but there were no Northern Rock or RBS debacles. So the early rounds post 2007 went to the euro, and sterling very nearly went down the pan.

A swing?
Having failed to put sterling on the canvas and out for the count, it is probably no surprise that things started to go wrong for the euro. The pre-fight pundits had always claimed that the euro had a weak chin. Having sixteen very different countries using the same currency and the same interest rate just isn't natural. Fine if they all became one country (Europa?), but that was never going to happen. Each of those countries has a different economic cycle, and governments need to tweak and trim their economic capabilities by moving interest rates up or down, or buying or selling their currency. So what happens when you can't do that anymore? You farm PIGS, that's what happens. Greece gleefully accepts billion upon billion of development aid, and it seeps down through fakelaki into all the wrong back pockets. Ireland suddenly realises that it has mortgage rates at 3%. Begorrah, I can buy a huge house very cheaply, if I can find a bank that will lend me the money. And so it goes, until one day the bills drop on the doorstep, and the PIGS can't pay.

Round 7
So here we are, the pretty girls dressed in skimpy santa outfits have left the ring and the bell has gone. The euro has staggered through the last two rounds, rocked by a desperate lunge by sterling which caught that dodgy chin. We now have two desperately tired contenders, and there are six rounds left. This could go either way
Sterling is still hurting from the financial crisis, and will need to conserve energy (and cash) to get through this match. The euro is also hurting badly. Apart from a bruised chin, it might have a couple of broken ribs.
If they both hang in there for the full 12 round, I think it will be a draw, and we will become used to exchange rates floating gently between 1.25 and 1.30. The biggest worry is that the euro might not make it, and be forced to throw in the towel. In that case sterling will be the winner, but at what cost?

Time for a Christmas break. Here's wishing anyone daft enough to read this stuff (and thank you) a marvelous Christmas and New Year, and I'll be back in 2011 to let you know how round 7 is going.

a bientot, Rob