Weekly F/X comment

Hello and Happy New Year to all.
I had intended to start this year's missives last weekend, but to tell you the truth it was so boring I didn't bother, and as I don't get paid for doing it anyway, I decided to let my New Year hangover rule my agenda for the weekend. Indeed sterling was suffering a fair hangover of its own, languishing around the 1.15 to 1.16 level, mainly due to a complete lack of interest. I think there might be a deeper meaning there, but I won't follow it up. This week however, it's all change, and while all the old protagonists are still on stage, there seems to be a new energy in the market.
Woe betides the euro
It has been a rough start to 2011 for the euro and things don't look like getting much better next week, with a great juicy chunk of PIG bond sales on the way for the markets to devour. The euro fell over 4% against sterling this week, its worst weekly loss since mid-August. Notice I say that the euro fell against sterling, not sterling rose against the euro. Theoretically the same thing, I know, but I like to deal in subtleties.
Borrowing costs for Portugal surged this week as it prepares to sell 20 billion euros in bonds. Spain and Italy need to raise a combined total of 317 billion Euros to manage their imminent debt maturities. This should really focus the market's mind on how it will digest peripheral (a polite word for PIG) government bonds issues in 2011. Higher funding costs should put added pressure on their already weak economies and heighten concerns about their ability to repay debt. Portugal will dip their toes in the water on Wednesday, and Spain and Italy will dive in on Thursday. If you're wondering when Italy became part of this mess, they have indeed been given joint 'I' status with Ireland.
Talk of euro woes just wouldn't be right without mentioning Ireland, and the euro wasn't helped by rumours the Swiss National Bank has stopped accepting Irish government bonds as collateral in its money market operations. This only serves to reinforce the view that the EU's struggle with rising debt and borrowing costs will continue in 2011.
Herr today, gone tomorrow?
From a political standpoint, the euro’s strength into Christmas week was not unexpected. Politicians and their banker pals will do anything they can to avoid a crisis during Christmas. This does make sense, as so many of the general public are on holiday at the time, and free to focus on the issues (never a good thing for politicians).
Now that the holiday season is over, and the European crisis spreading through the PIGs, the question is how much more will Germany put up with? The big guns have already been deployed, with hundreds of billions of the euro bailout funds already spent. The issue now is whether Germany will be willing to supply more ammunition, or might it give up on the Eurozone and choose to end the bailouts? France wants Germany to join its plan to make the EU council a kind of economic government that would oversee all future bailout efforts. Germany, in contrast, doesn’t want to create any new organisations and wants to promote the existing European Financial Stability Facility into a permanent feature that would oversee the ongoing crisis, removing the ECB from the front line and demanding stricter cost-cutting measures from future recipients of bailouts.
Angela Merkel’s CDU party faces seven state elections in 2011. Losing these could mean no additional term for her in 2013, so she needs to be careful not to further irritate and already outraged German population. 51% of Germans are unhappy with the euro while 77% say joining the EU has brought them no benefit. All eyes are therefore on the German political arena for clues as to what’s coming for the euro. If Germany doesn’t back the euro fully as a currency now, things will get very interesting indeed.
I used to be a fully paid up member of the 'euro is too big to fail' brigade. I'm not going to renew my subscriptions this year.

This week?
The euro is on the slide. I bought some on Thursday at 1.18 and I'm regretting it already. As Kevin Keegan might have once said ''I'd love it we got to 1.25, I'd really love it.' I don't think we'll get all the way there this week, but 1.23 would be nice, wouldn't it?


a bientot, Rob