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FRANCE FINANCIALS WEEKLY F/X COMMENT

Last week I was again hoping that sterling would start to make some headway against the euro.  All was going swimmingly until Thursday, when data showing that the UK’s public finances deteriorated at a much faster pace than expected in October, taking public borrowing to its highest on record. There was a rise in Retail Sales figures, but this was swamped by the bad news, and sterling fell off its perch and ended the week at 1.1101

Just to add to the fun, ratings agencies have said that the UK may face a cut in its debt rating if things get worse. This would ruin the appeal of UK government debt and probably prompt investors to pull funds out of the country into other currencies seen as a safer bet.

The minutes of the latest bank of England meeting were also released this week, and they did little to change the view UK interest rates will stay low for some time yet, which is seen as negative for sterling as other countries rates will rise.

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. 

We may have to wait a little longer for this scenario to come to fruition I’m afraid, but I see a limited downside for sterling.  This will leave us rangebound for now, bouncing between  1.1000 and 1.1200

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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