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FRANCE FINANCIALS WEEKLY F/X COMMENT

Basking in the glory...

I think I'll frame last week's forecast and hang it in my office (as opposed to the loo).  It was all there; the Pru and AIA, unwinding the FX position to boost sterling; the weakness in the Eurozone economies; and a forecast of breaking through the magic 1.2000 barrier.  Here we are, a week later, at 1.2079 and maybe rising further.

Let's not count those chickens...

So Sterling is on the comeback trail, and our money worries will soon be over.  I'm afraid not.  This has very little to do with Sterling strength, and a lot to do with Euro weakness. The Euro, I'm afraid, in deep in the merde.  We know what that feels like, so best not to crow too loudly.

It is really difficult  to predict where rates will go, but I think the Euro weakness is already priced in to the rates, and the short term corporate demand for Sterling, mainly from the Pru,  is over. Three weeks ago the rate was in the €1.12's.  At some point the Eurozone crisis may well calm down, and if it does rates could easily fall again.

There is also another corporate issue on the horizon, BP.  They are a huge UK company and the oil spill problems will end up costing them billions of pounds which will need to be sold to pay bills in dollars, causing widespread weakness of Sterling against all currencies.

Where to now?

Of course Sterling may continue its recent comparative strength, but we are at the highest level against the Euro for many months (I know it seems like years).  There has to be a temptation to take this rate while we have it and sell our own Sterling for Euros.  I also know that my own basic forecast is that historically Sterling is undervalued at anywhere under 1.2500, but this resurgence is nothing to do with a structural recovery of the pound.  It is a structural rupture of the Euro.  

Some analysts are predicting €1.25 or even higher by the year end, but for the short term I think the pound will remain susceptible to periods of intense pressure, and I wouldn’t be surprised to see it fall back to 1.1500 or under.

Maybe not this week though.  I think we might have some more fun in store.  If we can get to 1.2200 on Monday, that could be a platform for 1.2300 to 1.2350 by the end of next week.

Fingers crossed, 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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