Guide to Midi-Pyrenees currency update from France Financial - 27 Sept 09

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FRANCE FINANCIALS WEEKLY F/X COMMENT

Last week I forecast a better week for sterling, ending up in the upper 1.1250 to 1.1300 range.  It didn't happen.  No good news arrived, and to make matters worse our own Mervyn King, Governor of the Bank of England no less, decided to put the boot in by saying that a fall in the exchange rate would help to balance the UK economy by giving exports a lift.  That may well be, but it's a bit like saying rampant depreciation is a good thing because it will make your new car cheaper to insure.

Still, nought out of ten for my predictive skills last week.

 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. 

The latest bout of pound weakness began on Monday, when traders seized upon an article in the BoE Quarterly Bulletin that said sterling's long-run sustainable exchange rate may have fallen due to an increased focus on Britain's economic imbalances. Thanks again Merv.  It does make it all the more likely that in the short term sterling will take another look at parity with the euro.  In other words, it's going down.  Brace yourselves for 1.0600 by 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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