Guide to MidiPyrenees currency update in association with France Financial

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FRANCE FINANCIALS WEEKLY F/X COMMENT

Last week I forecast a bumpy ride for sterling, ending up in the upper 1.1200 range.  The real result was even bumpier than I expected, and sterling finished the week at 1.1060 after a buffeting after Bank of England Governor Mervyn King said a UK economic recovery would take a long time and that he was considering cutting the rate paid on reserves which UK banks park at the central bank. This caught the market by surprise, sellers of sterling came out to play.  Later in the week the Daily Telegraph reported that Lloyds Banking Group Plc had been forced to abandon a move to withdraw from the U.K. government's asset protection plan, sending the message that they thought the bank was not strong enough.  Daily Telegraph said Lloyds Banking Group Plc had been forced to abandon a move to withdraw from the U.K. government's asset protection plan.

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 spoke last week 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.

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. 

This week is very difficult to call.  The big day for sterling will be Wednesday, which sees the release of the minutes of the last Bank of England policy meeting.  Last week's comments from Mervyn King before a Treasury Select Committee weighed heavily on the UK currency, so markets will be very interested in the tone of the discussions at this month's meeting. A number of MPC members are also scheduled to speak over the course of the week. In data terms it is a quiet week for the UK, with just the Rightmove house price index for September out on Monday.

All this could go either way for sterling, so I'm going to opt for a better time this week.  It could do with some good news, so I'm looking for 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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