Guide to Midi-Pyrenees exchange rate update from France Financial

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FRANCE FINANCIALS WEEKLY F/X COMMENT

Last week I forecast that we would end this week with sterling at roughly the same rate against the Euro, at just over 1.1500.  In fact it ended up just less than 1.1450, which in the world of foreign exchange forecasting is pretty close!

All the usual disclaimers apply this week as they will every week.  In other words, never rely on a forecast:

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.

THERE ARE SOME WAYS TO PROTECT AGAINST CURRENCY MOVEMENTS

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 Forward Exchange contracts.  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.

As a simple illustration, if you receive your UK pension in sterling, and want to avoid the possibility that the amount of euros you get each month could fall over the next year, you can take out a forward contract.  Interest rates in the cash markets are very similar for euro and sterling at present, so there would be very little in the way of a forward adjustment.  That would mean that you could lock in the current rate for you pension conversion for the next year.

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.

AND NOW... THE FORECAST

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

This week to me has a slightly negative look for sterling.  The Bank of England held its benchmark lending rate at a record low of 0.5 percent on Thursday for the sixth month running and said it would keep its 175 billion pound Quantitative Easing programme (printing money to you and me) in place, with no further money to be created for this month. Most observers had expected rates to be kept on hold, but some had seen an outside chance it would increase the amount of assets it has been buying with the 'new' money in an attempt to boost the economy.  Mervyn King is before Parliament on Tuesday to provide testimony on the central bank's latest Quarterly Inflation Report. His remarks on the outlook for the economy and monetary policy will be closely scrutinised amid speculation that the MPC (Monetary Policy Committee) could increase the quantitative easing activity even further later in the year.

Figures released this week include the August CPI (Consumer Price Index), which is expected to show inflation resuming its downward trajectory after last month's disappointing result. Meanwhile, the latest unemployment report should further confirm that the rate of deterioration in labour market conditions is easing but that the unemployment rate continues to rise nonetheless. Retail sales for August also feature during the week alongside house price reports and the CBI's industrial trends survey.

All this could provide a bumpy ride for sterling, so I'm going to opt for a rate of between 1.1250 and 1.1300 by the end of next week.

A la semaine 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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