FRANCE FINANCIALS WEEKLY F/X COMMENT

Well, another good week for sterling.  I hope you don’t mind me pointing out that my forecast was for 1.1400 at the end of the week, and we finished at 1.1396.  Before I let that go to my head, I must admit that I never dreamt that sterling would actually get above 1.1500 during the week.  In the end, the rate of 1.1396 is a bit of a let-down.

In fact it wasn’t sterling strength that took us over 1.15, it was Euro weakness, with more worries about the Greek economy.  Only later in the week did worries about sterling resurface to take some of the gloss off the picture.  No change there then…

 WHY RATES CHANGE

The rate moves purely as a result of supply and demand.  If more people or businesses sell sterling than buy it, the rate will go down, and vice-versa.  Exchange rates are influenced by economic date that is published at regular intervals.  This helps establish the appetite for a currency.  If the data is good, or expected to be good, then the currency will generally strengthen.  If data is expected to be good, but turns out to be bad, then that can spell trouble for a currency.  

As expatriate buyers of Euros with our sterling, we are a tiny proportion of the international market.  So much so that I’m afraid we do not have any influence at all.  We are at the mercy of the markets.  All the usual disclaimers remain in place this week.  In other words, never rely on a forecast; they never convey guarantees of any sort.

THERE ARE SOME WAYS TO PROTECT AGAINST CURRENCY MOVEMENTS

I have been talking recently about Forward Exchange contracts. If you need to make regular payments in a different currency, or maybe you know that you have to make a large payment in a different currency at some time in the future, you should take a look at these deals.  These are contracts that you can enter into with a bank of foreign exchange company that allow you to lock-in the exchange rate that you will get over the next year or two years.  The rates are based on the current exchange rate, adjusted by a factor which represents the difference in the interest rates of the two currencies over the timeframe you are looking at.

The contracts come in two types, fixed and option.  The fixed contracts, fairly obviously, are set for one date in the future, when the exchange will take place.  The option version, not surprisingly, is more flexible.  If you know that you will have to pay out a sum of Euros in approximately six months time, you can take out on Option Forward that gives you a rate that you can use between two specified dates, say in this case between five and seven months from now.  You have to bear in mind though that you are now contracted to that rate, and you will get that rate whether the pound goes up or down.  You are protected against it going down, but you lose any gain you might have had if it goes up.

With sterling in its current parlous state, it would surely be wise to cover any commitments that you have.

AND NOW… THE FORECAST

My forecasts will reflect my personal views, and certainly not those of the Spectrum IFA Group.  My ongoing view is still that sterling is undervalued below 1.2500 Euros. 

I will be away with my colleagues at the Spectrum IFA group next weekend, so this forecast will cover the next two weeks, to Friday the 5th Feb, which is pushing my luck a bit, but I’m going with renewed sterling strength.  The pound has shown that it can live above 1.1500 again, so I’m going to go for a retest of this level over the next two weeks, with it hopefully ending up above that level.

A la prochaine,  Rob.

Rob Hesketh and France Financial

Rob moved to France in 2003 after working for 30 years in International Banking in the City of London and Brussels.  He joined the Spectrum IFA Group in 2005 and became registered and authorised by the French fiscal authorities in mid 2006.  He is now a partner in Spectrum and looks after client relationships in the South West of France.

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