Weekly currency forecast from France financial - 16 November 09

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FRANCE FINANCIALS WEEKLY F/X COMMENT

Last week I was hoping that sterling would start to make some headway against the euro.  A week later we are precisely where we started, at 1.1190.  After a good start to the week, which saw sterling reach a 3 month high against the euro, it fell back sharply in midweek, scuppered by two major events.  Firstly the S&P ratings agency said Britain, due to its huge levels of government debt which we've talked about here before, was the major economy most at risk of losing its triple-A rating.  This hurt the pound, as investors and speculative traders often sell Sterling on any suggestion Britain may lose its top-notch rating. The second culprit was our friend Mervyn King, who said the Bank of England was open-minded about pumping more money into the economy and highlighted the benefits of a weak pound.

So, despite good recovery for the pound over the last 4 weeks, this week shows that Sterling is still very fragile and any negative news can quickly affect exchange rates. As unemployment is up, and the governor of the BoE warning that the government have no plan at all to repay the huge levels of government debt, the outlook is still poor. Couple this with the fact that interest rates are likely to remain low for some time, we are unlikely to see any significant recovery for the pound in a hurry.  That said, I still feel that the overall trend is up.  We'll just need to overcome a few hurdles on the way.

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 ended the week all square, I am hopeful that sterling can resume its upward track against the Euro.   There are important announcements due this week, which could well affect sterling.  The minutes of the November MPC meeting feature in the UK and should provide further background in terms of the central bank's decision to extend its QE activities. On the data front, it  is also a pretty key week with consumer prices, retail sales, public sector borrowing, Rightmove house prices and the CBI's latest industrial trends survey all due for release.

If all goes well, and let's face it, that is unlikely, 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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