Currency update from Guide2 Midi-Pyrenees and France Financial - 8 Feb 2010

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FRANCE FINANCIALS WEEKLY F/X COMMENT

Back after a break supping vintage Port in Oporto last weekend, and quite frankly rushed off my feet after the last article that I submitted recently on a financial spring-clean.  If you haven't read it yet, please do, it seems to have struck a chord with many.  As for sterling, it has been distinctly out of tune this week.  Despite the best efforts of the Euro to throw itself over the cliff edge, sterling has taken on a case of the jitters and has not been able to capitalise on the problems with Greece which seem to be spreading to Spain and Portugal.  There is real danger for the Euro here.

 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 sense that there is still potential for sterling to go up in the next week, but fears about QE and a hung parliament are holding it back.  The base does seem to be around 1.1400 though.  I'm still going for a test of 1.1500 this week.

A la prochaine,  Rob.