Weekly currency forecast from France Financial - 8 Nov 09

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FRANCE FINANCIALS WEEKLY F/X COMMENT

Last week I predicted that sterling would weaken, and while it did have its dodgy moments during the week, it ended up virtually exactly where it started, at 1.1189.  We have speculation about the Bank of England's actions to thank for this.  Foreign exchange markets are very fickle, and very often balance expectation against fear.

The bank left rates on hold, but increased the QE programme by £25bn. A poll had shown that two thirds of analysts had predicted the BoE would expand its asset-buying scheme, with the consensus being an increase of 25 billion pounds. Some in the market however had forecast a 50 billion pound increase.

Analysts said the pound rallied as market participants were relieved the BoE did not take more drastic action on quantitative easing, and on the view that it may hold off from implementing aggressive stimulus through the end of the year.  So, as the move was widely predicted, and only £25bn was pumped in rather than £50b, this caused strength for the pound across the board. Some analysts said Thursday's top-up may be the last.  With the BoE meeting over, analysts said the market's next focus was on the bank's quarterly inflation report next week, which they said would shed more light on the medium-term outlook for inflation, the key driver of the BoE's monetary policy.

The European Central Bank (ECB) kept interest rates on hold at a record low of 1% for the sixth month in a row. They began cutting rates in October 2008, taking them from 4.25% to their current record low in May.  After the rates announcement was made the president of the European Central Bank, Jean-Claude Trichet, predicted the eurozone economy would recover gradually in 2010.

Next week, the release of third quarter eurozone economic growth figures are expected to show the bloc exited recession, growing by around 0.5% from the second quarter.  This view that the EU will recover much faster than the UK economy helped trim any gains against the Euro.

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. 

Having survived a potentially difficult week, I am hopeful that sterling can resume its upward track against the Euro.   With the BoE meeting over, the market's next focus is on the bank's quarterly inflation report next week, which should shed more light on the medium-term outlook for inflation, the key driver of the BoE's monetary policy.

Barring any unforeseen problems, and let's face it, most problems are unforeseen, I hope to see sterling in the 1.1300s 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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