FX Weekly Comment

Champagne time at last.  There are good reasons why sterling has fallen back to 1.2430 today, but the undeniable fact is that during the week we finally broke through the 1.25 barrier, and at one point reached 1.2578.  I was sorely tempted to email one client who told me a few years ago that sterling would never again see the high side of 1.10, but I decided that she probably wouldn't appreciate it.

Please excuse me while I indulge myself by printing an extract from the very first FX Weekly comment article, back in September 2009 for the Guide2 Group:

'At present one pound equals 1.1468 Euros, or it did on Friday evening.  My personal view at present is that sterling is undervalued below 1.2500 Euros.  I also believe that when large movements take place in the markets they are usually overdone.  Sterling’s fall from 1.5200 to 1.0250 was an extreme example of this, a knee-jerk reaction to the sub-prime induced credit crunch.  I think there will be setbacks, but we will edge our way back to the mid 1.20’s by next spring.' 

OK, so what's a couple of years between friends?  Here's what happened this week.

Euro implosion - fuse lit?

Greece is once again the word.  There is no mechanism in place for any currency to leave the Euro.  Jacques Delors would turn in his grave at the mere thought of it.  Yet here we are, with the chances of Greece having to leave increasing day by day.  That is because there is currently no elected Greek government following the recent elections.  The Greek electorate cannot stand any more austerity.  To them, and I sympathise, the German led demands on their basic living standards are too extreme, and it comes as no surprise that they will not vote for any parties that support even more austerity measures.  None of the parties could even muster up a cobbled coalition to agree on a political course.  So, more elections in June, with the likelihood that an anti austerity movement will take power.  No more austerity; no more money.  There's the door.

When Greece goes, who will criticise the Spanish for looking on and taking a very dim view of their austerity programme?  If Spain goes, then Portugal, then Italy?  It will be a painful process for anyone leaving he Euro.  The old currency will be reinstated, and the markets will very quickly devalue that currency by a massive percentage.  It is however the only way forward.  A Greek economy with a devalued Drachma would soon find itself in a very competitive position with regards to the rest of Europe, and growth would then begin.  No one should doubt how painful the transition would be though, and some think that austerity might be the better option.

It's Merv time...

Merv and his mates are not happy bunnies when sterling strengthens against the Euro.  They would much rather see a weaker pound, for much the same reasons as a devalued Drachma would eventually help out Greece.  This week was all a bit too much for him, and by Thursday he couldn't take it anymore, and it was time to put the boot in.  Merv warned that any hopes the UK economy could avoid being affected were by the Euro mess were "wholly unrealistic".  He also slashed the UK growth forecast this year to 0.8% from 1.2%, saying the eurozone "storm" remains the main threat to UK recovery. The eurozone was "tearing itself apart" and the UK would not be "unscathed", said melancholy Merv.  He told a news conference that the eurozone posed the greatest threat to the UK recovery since Accrington Stanley last won the league (I added that bit, sorry), and there was a "risk of a storm heading our way from the continent"."We have been through a big global financial crisis, the biggest downturn in world output since the 1930s, the biggest banking crisis in this country's history, the biggest fiscal deficit in our peacetime history, and our biggest trading partner, the euro area, is tearing itself apart without any obvious solution.

You can see that he's a bit out of sorts about all of this, can't you?  After all that, just for good measure, he deliberately tried to put the wind up the markets by inferring that more QE was possible after all.

The result?

The pound withdrew to the low 1.24's.  Big deal.  The pound will come again. and I really do believe that we will consolidate above 1.25 during the next week or so.