Feature: Weekly currency update from France Financial - 19 October

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FRANCE FINANCIALS WEEKLY F/X COMMENT

Last week I forecast a slightly better week for sterling.  I make no apologies for being a bit pleased with myself as we finished the week at 1.0982, and my forecast was for a top of 1.1000.  I must confess though that I went through a very dodgy few days with the pound down in the 1.06s.

Sterling racked up its biggest 1 day gain against a basket of currencies including the Euro in nearly a year on Thursday, after a UK policymaker's comments prompted speculation the Bank of England may not extend quantitative easing.

Monetary Policy Committee member Paul Fisher yesterday told the Financial Times the BoE's interest rate cuts and injection of money into the economy via asset purchases were working, and it's this positive view that caused the rally.  The market is eagerly awaiting the November MPC meeting to see if the BoE extend quantitative easing. If they do not then we are likely to see a rally in sterling.

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'm bullish for sterling this week.  Sorry if that sounds like jargon, it means I think sterling will go up.  I'm looking for 1.1200 or better by this time 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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