Well, 1.1500 or higher I called for last week, and as I write this late on Friday afternoon here we are at 1.1540. And what a week it's been. Worries about Eurozone debt were boosted by worries about the US debt mountain that I spoke of last week. Together they make a formidable problem, and the world's stock markets have taken this all to heart and gone on a slide.
PIIGS
It's looking more and more likely that there may be two 'I's in PIGS, with Italy coming under the spotlight this week. So much so that Mr Berlusconi had to stand up in parliament and make strong noises in its defence. That ,as we know, is enough to spook any market, and sure enough the Euro suffered as a result. Then European Commission President Jose Manuel Barroso joined in the fun by warning that the Eurozone's sovereign debt crisis was spreading, reinforcing fears that Italy and Spain might become embroiled in the problems. His comments spooked the markets even more, and both the stock markets and the Euro finished lower.
So far Ireland, Greece and Portugal have been bailed out, Greece twice. The European Commission is quite rightly worried that it will not be able to afford to do the same for Spain and Italy, the zone's third and fourth largest economies. The ECB has announced that it will offer a fresh tranche of loans to banks to counter continuing fears about the eurozone debt crisis. Jean-Claude Trichet stated that economic uncertainty was 'particularly high'. Quite an understatement really!
UK
Unusually, sterling declined the opportunity to shoot itself in the foot and help the Euro out of its problems. In fact we actually came out with some better than expected Services PMI data.
IS
Which of course stands for Italy and Spain, a subset of PIIGS. For a flavour of what might be to come, today's economic data from both counties is interesting. Italian GDP rose 0.3% between April and June, up on 0.1% growth in the first quarter, according to data supplied by the Italian National Statistics Institute. The Spanish central bank predicted GDP growth of 0.2% during the same period, after growth of 0.3% last quarter. The bank called for decisive action by Eurozone leaders, and also for domestic action to introduce structural reforms aimed at reducing the country's deficit. Weak economic growth lowers tax revenues and makes it harder for both countries to tackle their deficits. Neither country is looking as if it has the underlying strength to drag itself out of the debt mess, and if the ECB can't afford it....
What now?
At the risk of ruining a good run (OK, a one-week run), I can still see trouble for the Euro, and a move into the 1.1600's looks possible to me.
Friday, August 5, 2011
Saturday, July 30, 2011
F/X Weekly comment
Interesting times indeed in all financial markets, including foreign exchange. It's not very often that I mention the USA in my weekly ramble around the pound/Euro rate, but I think they're worth a mention this week.
USA - showtime
Debt ceiling. To you and me, the amount of debt you have when you finally turn round and say 'No more'. In the case of the US it has a slightly different meaning, more like 'OK, how much more do we need?' That is until now, when a few quarrelsome senators have decided that a few thousand trillion dollars might just about be enough, much to the dismay of President Obama and everyone else who keeps the States running. If the debt ceiling isn't raised by Tuesday, The USA will start to default on its debts, as it won't be able to borrow any more money to pay creditors.
Should this worry us? YES! The USA is the largest economy in the world. They owe everybody money, including you, me Europe in general and the UK in particular. So now we have not only the Eurozone up rue Merde sans pagaie, we have the Septics in the same boat. We now have the possibility of not just European contagion, but also Global debt contagion. What fun!
One outcome of this is that market F/X speculators are looking round for a currency where there is some semblance if financial stability, and believe it or not, relatively speaking we fit the bill.
UK - same old story
The Pound hasn't had the best of weeks, and yet it has benefited from events abroad, both in Europe and the US. Both this week's CBI report and consumer confidence data were poor. The outlook for the UK economy is still uncertain as we struggle to overcome the drag of the austerity package during a weak recovery phase.
Eurozone - guilty as charged?
The Euro has suffered this week for various reasons. Worse than expected German unemployment, a drop in economic sentiment and weak appetite at an Italian government bond auction all contributed to the Euro's woes. Fear of contagion in the Eurozone has not gone away and uncertainty is likely to slow any major Euro advance against the pound over the next few weeks. The European Sovereign Debt crisis continues to hit the heasdlines. In the short term the ECB has enough reserves to maintain stability, but with combined soveriegn funding requirements of over €80Bn during the next three months, the feeling is that they might be running out of breathing space. I can only see the debt problem getting worse over the rest of the year. The jury is still out over Greece and the second bailout, and it could get interesting.
What now?
Call me an optimist if you lie, but I think that the Euro is in trouble, and this could be the start of something good for sterling. I, for one, hope so! 1,1500 or higher would be a good signal by next week.
USA - showtime
Debt ceiling. To you and me, the amount of debt you have when you finally turn round and say 'No more'. In the case of the US it has a slightly different meaning, more like 'OK, how much more do we need?' That is until now, when a few quarrelsome senators have decided that a few thousand trillion dollars might just about be enough, much to the dismay of President Obama and everyone else who keeps the States running. If the debt ceiling isn't raised by Tuesday, The USA will start to default on its debts, as it won't be able to borrow any more money to pay creditors.
Should this worry us? YES! The USA is the largest economy in the world. They owe everybody money, including you, me Europe in general and the UK in particular. So now we have not only the Eurozone up rue Merde sans pagaie, we have the Septics in the same boat. We now have the possibility of not just European contagion, but also Global debt contagion. What fun!
One outcome of this is that market F/X speculators are looking round for a currency where there is some semblance if financial stability, and believe it or not, relatively speaking we fit the bill.
UK - same old story
The Pound hasn't had the best of weeks, and yet it has benefited from events abroad, both in Europe and the US. Both this week's CBI report and consumer confidence data were poor. The outlook for the UK economy is still uncertain as we struggle to overcome the drag of the austerity package during a weak recovery phase.
Eurozone - guilty as charged?
The Euro has suffered this week for various reasons. Worse than expected German unemployment, a drop in economic sentiment and weak appetite at an Italian government bond auction all contributed to the Euro's woes. Fear of contagion in the Eurozone has not gone away and uncertainty is likely to slow any major Euro advance against the pound over the next few weeks. The European Sovereign Debt crisis continues to hit the heasdlines. In the short term the ECB has enough reserves to maintain stability, but with combined soveriegn funding requirements of over €80Bn during the next three months, the feeling is that they might be running out of breathing space. I can only see the debt problem getting worse over the rest of the year. The jury is still out over Greece and the second bailout, and it could get interesting.
What now?
Call me an optimist if you lie, but I think that the Euro is in trouble, and this could be the start of something good for sterling. I, for one, hope so! 1,1500 or higher would be a good signal by next week.
Saturday, July 23, 2011
F/X Weekly Comment
A pretty quiet week in the currency markets really, with little to get excited about. That is if you are deaf, blind, and can't smell rotten fish at ten paces. In fact it was pure theatre, a hairsbreadth away from being totally momentous. Sarkozy and Merkel walked to the edge of the abyss, looked down, and nearly wet themselves (OK, I apologise in advance for the poor taste there). Then they reached for the cheque book and hoped for salvation ( I nearly put 'prayed' there, but I'm probably in enough trouble already).
Greece
Greece is up to its keftedes in 'merde'. It has been for a long time. It should never have been allowed to join the Euro in the first place; indeed it never passed the tests for entry. It is no surprise that it is one of the first countries to go bust. It is totally unsuited to the handcuffs that a single currency brings to its economy. That is actually an economy that runs on 'brown envelopes'. Fakelaki is the Greek word for it, and it equates to corruption.
So, having gone bust, it receives a €79bn bailout, and with it comes stringent doses of financial medicine. Too much for the Greeks to stomach, they threaten to default on their debt, but their debt is Euro debt, and that doesn't go down well in Brussels. Cue bailout number 2, this time for another €109bn, giving them longer to repay, and at lower interest rates. Oh, by the way, we'll let Ireland and Portugal have these lower rates too, just to keep them quiet.
Greece
Greece has absolutely no chance of repaying this debt, yet the powers that be insist on continually papering over the cracks. And this week, yet again, the market bought it, and the Euro rallied at the sight of firm and concisive action from European leaders. Now I very rarely get particularly het up over financial matters, but I cannot grasp this logic, unless of course it is based entirely in self-preservation on the part of market participants (surely not?). If I were a modern George Soros, with a few billion to use speculating in the currency markets, I'd be after the Euro. I'd be so short of the Euro that you'd have to spell it with fewer letters. 'Going short' by the way refers to selling something you haven't actually got, in the anticipation that you will be able to buy it at a later date to fulfil your debt at much lower cost.
And more Greece
This second bailout, to my mind, constitutes default, and it will be interesting to see if the rating agencies agree with me next week. If they do, justice could yet be done, and sterling may even get to 1.20 plus, where it should in my view be today. More likely though, the agencies will follow the herd, and we'll soon be struggling to hold on to the 1.12 level. If they have the nerve to call it as it is, and the market realises that it could have a lame duck in its sights (like sterling in the ERM in 1992) we could really have some fun...
Greece
Greece is up to its keftedes in 'merde'. It has been for a long time. It should never have been allowed to join the Euro in the first place; indeed it never passed the tests for entry. It is no surprise that it is one of the first countries to go bust. It is totally unsuited to the handcuffs that a single currency brings to its economy. That is actually an economy that runs on 'brown envelopes'. Fakelaki is the Greek word for it, and it equates to corruption.
So, having gone bust, it receives a €79bn bailout, and with it comes stringent doses of financial medicine. Too much for the Greeks to stomach, they threaten to default on their debt, but their debt is Euro debt, and that doesn't go down well in Brussels. Cue bailout number 2, this time for another €109bn, giving them longer to repay, and at lower interest rates. Oh, by the way, we'll let Ireland and Portugal have these lower rates too, just to keep them quiet.
Greece
Greece has absolutely no chance of repaying this debt, yet the powers that be insist on continually papering over the cracks. And this week, yet again, the market bought it, and the Euro rallied at the sight of firm and concisive action from European leaders. Now I very rarely get particularly het up over financial matters, but I cannot grasp this logic, unless of course it is based entirely in self-preservation on the part of market participants (surely not?). If I were a modern George Soros, with a few billion to use speculating in the currency markets, I'd be after the Euro. I'd be so short of the Euro that you'd have to spell it with fewer letters. 'Going short' by the way refers to selling something you haven't actually got, in the anticipation that you will be able to buy it at a later date to fulfil your debt at much lower cost.
And more Greece
This second bailout, to my mind, constitutes default, and it will be interesting to see if the rating agencies agree with me next week. If they do, justice could yet be done, and sterling may even get to 1.20 plus, where it should in my view be today. More likely though, the agencies will follow the herd, and we'll soon be struggling to hold on to the 1.12 level. If they have the nerve to call it as it is, and the market realises that it could have a lame duck in its sights (like sterling in the ERM in 1992) we could really have some fun...
Friday, July 15, 2011
F/X Weekly comment
I'm uneasy. The reason I'm uneasy is that I'm not used to getting things as right as I did last week. The pound finished the week at 1.1400, even higher than my anticipated rate of 1.1350, but who's going to worry about and extra 50 basis points? But will it last?
Stress tests
The results of those stress tests on 90 European banks were announced a few minutes ago, and the results seem to be quite interesting. The Euro has been under pressure all week in anticipation of these results, and the announcement came after close of business on Friday, presumably to avoid any great sell off. In the event it seems that only 8 banks have failed. So far they haven't been named, other than one minor regional German bank, Helaba, who fell out with the examiners. The act that only seven others failed could well be supportive for the Euro on Monday, assuming there are no big names on the list. There is however a school of thought that the tests were not hard enough (think GCSE V A-Level), and didn't for example take into account the possibility of a Greek default, which looks to be almost a certainty. This could lead to further trouble for the Euro in the coming weeks.
UK data
Sterling's bounce has not had much do with any improvement in the UK economic data. Most market forecasters had been calling for sterling to move lower as a result of all the poor data we have seen of late, but the Euro's debt issues have outweighed this for a change. Unemployment data during the week showed a sharp rise, adding to concerns that poor growth prospects may prompt more QE from the Bank of England. More concerns about high debt levels, the effect of harsh austerity measures and poor UK exports could keep sterling weak, particularly against currencies other than Euro. The risk then is that despite recent gains, many analysts are still saying sterling may struggle due to all the negative economic data we are seeing.
Which wins?
That, of course, is the crunch question, but I'm on a roll here. I got last week right by calling for a weak Euro, so I'm going to keep my chips on red and go for gold (such Ill-literacy). I think sterling will have done a great job if we manage to consolidate in the 1,14s, so fingers crossed!
Saturday, July 9, 2011
F/X Weekly comment
Don't you just love it when a plan comes together? All I apparently have to do is make a pessimistic forecast for sterling, and sure enough the green shoots of recovery might just have started to peep up through the dead grass. We finished the week at 1.1256, a whole lot higher than I expected, but welcome all the same. Apologies to anyone out there who profits from a weak pound (shame on you). It was a very interesting week in the F/X markets:
Interest rates
No prizes for correctly forecasting that UK rates would stay on hold and that the ECB would raise Euro rates by 0.25% to 1.5%, but the really important thing is what M. Trichet says afterwards. Unfortunately Merv doesn't say anything after his meeting, we have to wait 2 weeks for the minutes to be released. Very boring, very British.
Tricky Trichet though alluded to the fact that economic activity in the Eurozone seems to be slowing down. His words were backed-up by disappointing Italian Industrial Production numbers on Friday morning, along with German trade figures which showed that the Europe’s largest economy is becoming increasingly dependent on imports.
Although Merv doesn't comment on his meeting, he did announce that there would be no more money-printing (QE) at present. This also gave support to sterling. All 'fish to the grill' as I once heard a conference speaker say. To be fair, he was Italian, and I don't think he knew what grist was. .
Pigs
Portugal got the capital punishment this week, being downgraded a huge four notches by Moody's. The ECB promptly reacted by saying that they will continue to accept Portugal's bonds as collateral for loans, but then they don't have much choice, do they?
Stress
No, not the stress of having to write this stuff every weekend. Stress tests for banks. A bit like the end of term tests you used to have when education worked. There are results of stress tests for a large number of Eurozone banks due out next week, and they could make interesting reading. There is a rumour that the main five Italian banks have passed, but I think the National bank of Greece is looking a bit glum, and Irish eyes don't seem to be smiling.
UK economy
Not normally worth a mention, I know, but watch out. Last month's PPI input and output prices came in rather better than expected on Friday. Now you don't hear that very often, do you?
Where now?
It really pains me to say that I think we might have the start of something good for sterling here, because we all know that that would be the kiss of death to the pound. Actually though I am sensible enough to realise that nothing I either think, say or write will make the slightest bit of difference. 1.1350 next week please.
Interest rates
No prizes for correctly forecasting that UK rates would stay on hold and that the ECB would raise Euro rates by 0.25% to 1.5%, but the really important thing is what M. Trichet says afterwards. Unfortunately Merv doesn't say anything after his meeting, we have to wait 2 weeks for the minutes to be released. Very boring, very British.
Tricky Trichet though alluded to the fact that economic activity in the Eurozone seems to be slowing down. His words were backed-up by disappointing Italian Industrial Production numbers on Friday morning, along with German trade figures which showed that the Europe’s largest economy is becoming increasingly dependent on imports.
Although Merv doesn't comment on his meeting, he did announce that there would be no more money-printing (QE) at present. This also gave support to sterling. All 'fish to the grill' as I once heard a conference speaker say. To be fair, he was Italian, and I don't think he knew what grist was. .
Pigs
Portugal got the capital punishment this week, being downgraded a huge four notches by Moody's. The ECB promptly reacted by saying that they will continue to accept Portugal's bonds as collateral for loans, but then they don't have much choice, do they?
Stress
No, not the stress of having to write this stuff every weekend. Stress tests for banks. A bit like the end of term tests you used to have when education worked. There are results of stress tests for a large number of Eurozone banks due out next week, and they could make interesting reading. There is a rumour that the main five Italian banks have passed, but I think the National bank of Greece is looking a bit glum, and Irish eyes don't seem to be smiling.
UK economy
Not normally worth a mention, I know, but watch out. Last month's PPI input and output prices came in rather better than expected on Friday. Now you don't hear that very often, do you?
Where now?
It really pains me to say that I think we might have the start of something good for sterling here, because we all know that that would be the kiss of death to the pound. Actually though I am sensible enough to realise that nothing I either think, say or write will make the slightest bit of difference. 1.1350 next week please.
Friday, July 1, 2011
F/X Weekly Comment
Ah good, all is well with the world again, and normal service has been renewed. My forecast last week has proved to be just about as accurate as George Osborne's growth predictions. I think I can leave the headers in place from last week, but I'll have another go at the content:
Greek Debt (again)
The pound lurched lower against the Euro this week as the Greek austerity vote passed predictably through parliament. In the short term, at least, a Greece default is unlikely, and this is deemed to be positive for the Euro. Within a couple of weeks a second bailout package will be agreed, so there is scope for a further boost to the single currency. The plain fact is though that the Eurozone debt problems have in no way been resolved, only deferred, but any loss in Euro sentiment is being countered by the abject surrender of sterling and the bleak outlook of the U.K economy.
Pathetic Sterling
Harsh? Definitely not. Friday's PMI data showing that expansion in the UK’s manufacturing sector dropped to its lowest rate in 21 months in June brought the pound under further selling pressure on the day. Even the saving grace that Asian and Eurozone data releases were equally weak didn't manage to get sterling up above 1.1100. The pound has fallen 9.1 percent in the past 12 months, making it the second-worst performer among 10 developed-market currencies after the dollar. Worsening economic growth has prompted traders to reduce bets on higher rates, and investors are betting that 3M (Merv and his Merry Men) will start to raise borrowing costs next May. As recently as February, data was pointing to a rate increase in May of this year.
Where now?
I think for all our sakes that I need to drastically reduce any sense of optimism for sterling at present. We tested the 1.10 level this week, and unless something spectacular happens, we could see the pound break down through that level next week.
A bientot, Rob
Greek Debt (again)
The pound lurched lower against the Euro this week as the Greek austerity vote passed predictably through parliament. In the short term, at least, a Greece default is unlikely, and this is deemed to be positive for the Euro. Within a couple of weeks a second bailout package will be agreed, so there is scope for a further boost to the single currency. The plain fact is though that the Eurozone debt problems have in no way been resolved, only deferred, but any loss in Euro sentiment is being countered by the abject surrender of sterling and the bleak outlook of the U.K economy.
Pathetic Sterling
Harsh? Definitely not. Friday's PMI data showing that expansion in the UK’s manufacturing sector dropped to its lowest rate in 21 months in June brought the pound under further selling pressure on the day. Even the saving grace that Asian and Eurozone data releases were equally weak didn't manage to get sterling up above 1.1100. The pound has fallen 9.1 percent in the past 12 months, making it the second-worst performer among 10 developed-market currencies after the dollar. Worsening economic growth has prompted traders to reduce bets on higher rates, and investors are betting that 3M (Merv and his Merry Men) will start to raise borrowing costs next May. As recently as February, data was pointing to a rate increase in May of this year.
Where now?
I think for all our sakes that I need to drastically reduce any sense of optimism for sterling at present. We tested the 1.10 level this week, and unless something spectacular happens, we could see the pound break down through that level next week.
A bientot, Rob
Friday, June 24, 2011
F/X Weekly Comment
Somehow it doesn't feel right not having to apologise for another wildly inaccurate forecast from the previous week. Maybe it's because I'm scared of missing the glory of (occasionally) getting it right. It might even have happened last week, as we have ended up virtually unchanged at just below the 1.1300 level. The equivalent of a 0-0 scoreline then, but there was plenty of action this week.
Greek Debt (again)
You might be forgiven for assuming that having in your midst a country where economic calamity has reduced its citizens to rioting in the streets against austerity measures might rock the boat somewhat in your desire for a stable joint currency. But no, the good ship Euro sails blithely on into the teeth of the approaching storm, and nothing is apparently happening to divert it. After a while, one begins to doubt whether the storm is actually there. What if all those dark clouds actually deliver is a few showers? I remain firmly in the tornado camp.
Pathetic Sterling
Harsh? No, I don't think so. The Euro really ought to be in deep trouble at the moment. If those Greek rioters get their way, it still might be, but what are Merv and his merry band of men doing? Sitting around discussing another dose of home grown inflation in the form of more QE, that's what. QE is a bit like giving a fat man the key to a chocolate factory and suggesting that it might make him a bit more likely to diet later.
More storms
The more of the current mess I see, the more I am becoming convinced that the Euro will not be around in its current form in 5 years time. Greece, Spain, Portugal and Ireland, maybe even Italy, are simply not in the same league as their more northern neighbours. I see a great need for a first and second division Euro, with the weaker members free to weaken their currencies and have some control over interest rates. If they the succeeded in pulling their economies round, they could be promoted back into the top tier.
Perhaps not the ideal subject for a weekly column, but I think I might revert back to the theme occasionally.
Where now?
This is where I see the sense in not making predictions, but here goes... I think Greece is still up there as a potential flashpoint for the next few weeks. They may have been voted a second bailout package, but the first have to accept the austerity measure, and somehow I don't think Stavros is all that keen. 1.14 and above for me by next week.
Greek Debt (again)
You might be forgiven for assuming that having in your midst a country where economic calamity has reduced its citizens to rioting in the streets against austerity measures might rock the boat somewhat in your desire for a stable joint currency. But no, the good ship Euro sails blithely on into the teeth of the approaching storm, and nothing is apparently happening to divert it. After a while, one begins to doubt whether the storm is actually there. What if all those dark clouds actually deliver is a few showers? I remain firmly in the tornado camp.
Pathetic Sterling
Harsh? No, I don't think so. The Euro really ought to be in deep trouble at the moment. If those Greek rioters get their way, it still might be, but what are Merv and his merry band of men doing? Sitting around discussing another dose of home grown inflation in the form of more QE, that's what. QE is a bit like giving a fat man the key to a chocolate factory and suggesting that it might make him a bit more likely to diet later.
More storms
The more of the current mess I see, the more I am becoming convinced that the Euro will not be around in its current form in 5 years time. Greece, Spain, Portugal and Ireland, maybe even Italy, are simply not in the same league as their more northern neighbours. I see a great need for a first and second division Euro, with the weaker members free to weaken their currencies and have some control over interest rates. If they the succeeded in pulling their economies round, they could be promoted back into the top tier.
Perhaps not the ideal subject for a weekly column, but I think I might revert back to the theme occasionally.
Where now?
This is where I see the sense in not making predictions, but here goes... I think Greece is still up there as a potential flashpoint for the next few weeks. They may have been voted a second bailout package, but the first have to accept the austerity measure, and somehow I don't think Stavros is all that keen. 1.14 and above for me by next week.
Friday, June 17, 2011
F/X Weekly Comment
Ah well, wrong again, but we're getting used to that, aren't we? Actually I wasn't too far away. As per Les Dawson, all the right notes were there, but not necessarily in the right order. Sterling pushed higher this week, nudging 1.1400, despite a rather nasty surprise earlier in the week. It then fell at the final fence and ended at 1.1300. Here's how it went.
UK Retail Sales
Down 1.6% in May. That's at least twice as bad as anyone expected. As a result, rather unsurprisingly, hopes of UK interest rate rises this year are disappearing down the tubes, whereas the Euro rate will apparently rise regardless of its other problems. Higher interest rates equals better return on deposits, so more people buy the currency. The more people buy something, the more expensive it gets, that's the law of supply and demand. If it's the Euro the currency markets are buying, not sterling, the Euro gets stronger and the pound weaker. You guessed it, the rate goes down. So why has it gone up?....
Greek Debt
To the rescue. Greece’s parliament must pass stringent spending cuts and undertake a widespread privatisation programme in order to receive its next tranche of bail-out funds from the IMF. and analysts feel that there is a higher chance of this happening if Greece has a clear leader in place. Rioters took to the streets in Athens on Thursday to protest against the proposed cuts and the yield on two year Greek bonds rose to an astronomical 28.6%. The Greek situation remains tense, to say the least. This is the king of the PIGS. Having been baled out once, they are still shipping water.
The Euro fell to its lowest since 2009 against a basket of currencies after support declined for the Greek Prime Minister. There were further divisions in the ECB and German official’s camps over the involvement of the private sector in resolving the crisis. The ECB and France want to avoid a declaration of default, while Germany wants private-sector involvement as the cost of continually asking their taxpayers to bail out Europe’s basket cases is causing political fallout.
The lack of a deal pushed bond yields of Greece to 17.9%, their highest level since the introduction of the euro in 1999, and Moody's placed France's top three banks on review for a possible downgrade, citing the banks' exposure to Greek debt.
Storm Clouds Gathering
It goes without saying that political developments from Greece will be the main driver of things this weekend. There are reports that the Finance Minister Papaconstantinou has been replaced but at present that is unconfirmed. There are also meetings between Angela Merkel and Nicolas Sarkozy in Berlin and of EU finance ministers on Sunday and Monday; there is a lot of risk out there and I don't think speculators will want to be holding euros at the moment.
Short term respite for sterling is possible then, but in the medium term I see more problems for sterling. These economic data indicators are not getting any better, and if the euro does shrug off Greece and start to raise rates aggressively, we could be in trouble.
I'm going to start keeping clear of weekly forecasts. I've said many times that it's a mugs game, and if you play that game for too long you start to look like one!
UK Retail Sales
Down 1.6% in May. That's at least twice as bad as anyone expected. As a result, rather unsurprisingly, hopes of UK interest rate rises this year are disappearing down the tubes, whereas the Euro rate will apparently rise regardless of its other problems. Higher interest rates equals better return on deposits, so more people buy the currency. The more people buy something, the more expensive it gets, that's the law of supply and demand. If it's the Euro the currency markets are buying, not sterling, the Euro gets stronger and the pound weaker. You guessed it, the rate goes down. So why has it gone up?....
Greek Debt
To the rescue. Greece’s parliament must pass stringent spending cuts and undertake a widespread privatisation programme in order to receive its next tranche of bail-out funds from the IMF. and analysts feel that there is a higher chance of this happening if Greece has a clear leader in place. Rioters took to the streets in Athens on Thursday to protest against the proposed cuts and the yield on two year Greek bonds rose to an astronomical 28.6%. The Greek situation remains tense, to say the least. This is the king of the PIGS. Having been baled out once, they are still shipping water.
The Euro fell to its lowest since 2009 against a basket of currencies after support declined for the Greek Prime Minister. There were further divisions in the ECB and German official’s camps over the involvement of the private sector in resolving the crisis. The ECB and France want to avoid a declaration of default, while Germany wants private-sector involvement as the cost of continually asking their taxpayers to bail out Europe’s basket cases is causing political fallout.
The lack of a deal pushed bond yields of Greece to 17.9%, their highest level since the introduction of the euro in 1999, and Moody's placed France's top three banks on review for a possible downgrade, citing the banks' exposure to Greek debt.
Storm Clouds Gathering
It goes without saying that political developments from Greece will be the main driver of things this weekend. There are reports that the Finance Minister Papaconstantinou has been replaced but at present that is unconfirmed. There are also meetings between Angela Merkel and Nicolas Sarkozy in Berlin and of EU finance ministers on Sunday and Monday; there is a lot of risk out there and I don't think speculators will want to be holding euros at the moment.
Short term respite for sterling is possible then, but in the medium term I see more problems for sterling. These economic data indicators are not getting any better, and if the euro does shrug off Greece and start to raise rates aggressively, we could be in trouble.
I'm going to start keeping clear of weekly forecasts. I've said many times that it's a mugs game, and if you play that game for too long you start to look like one!
Friday, June 10, 2011
F/X weekly comment
I've just noticed that I managed to get through all of my article last week without once mentioning the £/€ rate. This is obviously the way forward, for me anyway! I did in fact get the direction right this week, stabbing a guess at a rise from last week's levels, which were in fact in the low 1.12s. This afternoon (Friday the 10th) we have actually crept over 1.1300. Not a huge improvement, but every bit helps. How did we make this welcome step?
PPI
Last week we talked about PMI, this week we have PPI, which is the Producer Price Index, which measures inflation of input and output pricing. Following yesterday's rate decision (no change, in case you hadn't heard) , the UK released new inflation data which showed a decline to ease inflationary pressure concerns, yet inflation rates are expected to remain high for a while.
Today's data showed that UK annual PPI output for May reached 5.3%, the fastest since 2008, from the revised 5.5% and PPI input for the year ending May retreated to 15.7% from the revised 17.9%. Merv in his last open letter to George Osborne revealed that inflation will probably move between 4% and 5% over the coming few months to remain above target in 2011 before it comes back in 2012, clarifying that the rise in energy prices and the VAT along with the sterling's previous depreciation were the main reasons behind the rapid price acceleration.
Whilst none of this is particularly good, it wasn't as bad as many onlookers had feared, and we had a case of bad news bringing respite for the pound.
Interest Rates
Euro this time. As with sterling, the ECB kept euro rates on hold, but did indicate that they will probably rise in July. This was also expected, and as investors booked profits on the Euro (by selling their positions) it caused the £/€ rate to rise slightly.
Claude Trichet also signalled that further rate rises would come in the EU, but perhaps not as fast as some analysts were expecting. This reduction in future rate hike expectations also helped slightly to push the pound higher.
Where now?
Without something big to push the markets either way, sterling will continue to bounce around at these levels. There does seem to be something brewing about a second Greek bailout, but I don't expect anything for a few weeks yet. 1.1250 for me next week.
PPI
Last week we talked about PMI, this week we have PPI, which is the Producer Price Index, which measures inflation of input and output pricing. Following yesterday's rate decision (no change, in case you hadn't heard) , the UK released new inflation data which showed a decline to ease inflationary pressure concerns, yet inflation rates are expected to remain high for a while.
Today's data showed that UK annual PPI output for May reached 5.3%, the fastest since 2008, from the revised 5.5% and PPI input for the year ending May retreated to 15.7% from the revised 17.9%. Merv in his last open letter to George Osborne revealed that inflation will probably move between 4% and 5% over the coming few months to remain above target in 2011 before it comes back in 2012, clarifying that the rise in energy prices and the VAT along with the sterling's previous depreciation were the main reasons behind the rapid price acceleration.
Whilst none of this is particularly good, it wasn't as bad as many onlookers had feared, and we had a case of bad news bringing respite for the pound.
Interest Rates
Euro this time. As with sterling, the ECB kept euro rates on hold, but did indicate that they will probably rise in July. This was also expected, and as investors booked profits on the Euro (by selling their positions) it caused the £/€ rate to rise slightly.
Claude Trichet also signalled that further rate rises would come in the EU, but perhaps not as fast as some analysts were expecting. This reduction in future rate hike expectations also helped slightly to push the pound higher.
Where now?
Without something big to push the markets either way, sterling will continue to bounce around at these levels. There does seem to be something brewing about a second Greek bailout, but I don't expect anything for a few weeks yet. 1.1250 for me next week.
Friday, June 3, 2011
F/X weekly comment
As predicted last week, sterling went down. Yes, I know I said I thought sterling should go up, but I definitely said this means it will probably go down, and down it went. Not down the plughole yet, but definitely swirling in that direction. 400 points in a single week is a very poor performance indeed. So how did it happen?
UK PMI
2 doses of very nasty medicine. PMI stands for Purchasing Managers Index, and we have them for different sectors of the economy. This week we had figures for manufacturing and for services sectors. Purchasing managers are tasked with gauging future demand, and adjusting orders for materials accordingly. The PMI summarizes the opinions of these executives to give a picture of the future of the sector. A higher PMI indicates that materials purchases are increasing and that the economic outlook is positive. Alternately, a lower PMI means orders for materials are down and the future outlook is less favourable. By nature, the figure is very sensitive to the business cycle and tends to match growth or decline in the economy as a whole.
The services sector PMI fell to 53.8 in May, down from 54.3 in April. The service sector is by far the biggest economic sector in the UK and the fall was blamed partly on the overlap of bank holidays and partly because of subdued consumer demand.
Earlier in the week the PMI index for the manufacturing sector fell to its lowest level for 20 months. Separate data released by the Office for National Statistics (ONS) showed that construction orders fell by 23 per cent from the previous quarter and down by 18 per cent compared with the same period the previous year.
Euro
Despite all the factors listed in last week's article, and especially as eurozone debt concerns continue, the ECB’s willingness to raise interest rates is seen as positive for further increases, with the region’s largest economy Germany backing the resolution of the debt crisis and many investors taking that as a cue to support the single currency further. Eurozone inflation continues to rise, an indication to many that the Euro may benefit from further rate increases as opposed to the flat sentiment over rates coming from the Merv and his merry men.
So where from here? I have no shame at all in suggesting that you may as well toss a coin this week. I for one do not have a clue where it's going to end up this time next week. If I had to make a guess, it would be slightly higher than here, just on the yoyo effect of the markets.
UK PMI
2 doses of very nasty medicine. PMI stands for Purchasing Managers Index, and we have them for different sectors of the economy. This week we had figures for manufacturing and for services sectors. Purchasing managers are tasked with gauging future demand, and adjusting orders for materials accordingly. The PMI summarizes the opinions of these executives to give a picture of the future of the sector. A higher PMI indicates that materials purchases are increasing and that the economic outlook is positive. Alternately, a lower PMI means orders for materials are down and the future outlook is less favourable. By nature, the figure is very sensitive to the business cycle and tends to match growth or decline in the economy as a whole.
The services sector PMI fell to 53.8 in May, down from 54.3 in April. The service sector is by far the biggest economic sector in the UK and the fall was blamed partly on the overlap of bank holidays and partly because of subdued consumer demand.
Earlier in the week the PMI index for the manufacturing sector fell to its lowest level for 20 months. Separate data released by the Office for National Statistics (ONS) showed that construction orders fell by 23 per cent from the previous quarter and down by 18 per cent compared with the same period the previous year.
Euro
Despite all the factors listed in last week's article, and especially as eurozone debt concerns continue, the ECB’s willingness to raise interest rates is seen as positive for further increases, with the region’s largest economy Germany backing the resolution of the debt crisis and many investors taking that as a cue to support the single currency further. Eurozone inflation continues to rise, an indication to many that the Euro may benefit from further rate increases as opposed to the flat sentiment over rates coming from the Merv and his merry men.
So where from here? I have no shame at all in suggesting that you may as well toss a coin this week. I for one do not have a clue where it's going to end up this time next week. If I had to make a guess, it would be slightly higher than here, just on the yoyo effect of the markets.
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