GBP/Euro Market Update (Feb 09)
Feb 5th 2009, 9:37 am
#1
BE Enthusiast
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Joined: Dec 2004
Posts: 524
GBP/Euro Market Update (Feb 09)
Hi All,
As requested by a number of BE regulars here's a brief update on what's happening in the currency markets and for anyone in the UK enjoy the snow!
High & Low of the Month:
High: 1.1309 (on the 09/01/09)
Low: 1.0285 (on the 01/01/09)
Difference of cost on £200k:
High: 226,180 euros
Low: 205,700 euros
It seems a long time ago since the Northern Rock collapse and nationalisation welcomed the UK to America’s sub-prime lending problem back in September 2007. This sparked the first substantial decline in Sterling, leading to a significant break lower at Christmas 2007, through the base of what had been a cosy range of 1.38 – 1.53 for over 4 years, from 2003 to 2007.
• The consolidation around 1.25 between April and November 2008 offered hope that Sterling had taken its hit early in the credit crunch and would continue to fare relatively well against the Euro. However, the escalation of the global economic crisis and the unprecedented UK interest rate cuts again focussed attention upon the relative strength of the UK economy with foreign exchange traders, at least, concluding that our heavy reliance upon the financial services and housing sectors and relatively high levels of personal and Government indebtedness, would mean a deeper and longer recession in the UK.
Once this sentiment against Sterling switched the press bandwagon quickly highlighted the proximity of the 1:1 parity level with tourist rates below this level offering great sound-bites in the lead up to Christmas. Whilst there is no doubt that the UK economic deterioration is gathering speed, we note that:
a)Sterling is traditionally the market punch bag due to its relative lack of liquidity and ironically, its familiarity to the dominant London market traders, and
b) There is a strong argument to suggest Sterling is now becoming chronically under-valued on any purchasing parity measurement.
However, history shows us that this does not mean that markets will automatically buy or sell a currency swiftly back towards this equilibrium measure.
• In the short-term we therefore resort to respecting the underlying trend, meaning Sterling could easily continue to fall against the Euro, with parity an obvious target and 0.95 likely to be a step too far. But the current levels of volatility, in every asset class, suggest a recovery towards 1.15/1.20 would:
a)not be unexpected, and
b)not break the underlying trend.
• As with every currency hedging strategy at the moment, little and often and lots of caution is required. Sterling staged a remarkable recovery in the first full week of trading in 2009 rising 9 cents in a week to 1.13 and almost 11% since the 1.02 low on New Year’s Eve. Monday’s the 5th of January, trading had seen the largest daily percentage rise in 9 years and this momentum was maintained when the first of the big retailers, Next and Debenhams, announced results that qualified as ‘not as bad as feared’. Subsequently, Marks & Spencer’s worst trading results for a decade and UK manufacturing slumping by 7.4% over the year were shrugged off by the sprightly Pound.
• GBP/EUR was also aided by events across the English Channel where the Germans finally faced up to the economic realities confronting them. Having been vociferous critics of the UK and US’s plans to borrow and spend their way out of recession, Germany announced a fresh EUR 50 billion fiscal stimulus plan. No doubt the advanced warning of a string of dire economic releases helping to remove the rose tint from their spectacles and galvanising them into action.
• Firstly, German unemployment rose for the first time since 2006, adding to the EU numbers that have swollen to 7.8% of the workforce. But perhaps the most influential was the slump in German exports by a massive 10.6% in November. With their economy underpinned by a huge successful export sector, it is no wonder that this figure prompted the Germans to act. Sterling’s mild recovery against the Euro was partially reversed at the end of the month as the UK Government grappled with round 2 of the banking crisis. Barclays share price collapse had encouraged a swift announcement of the enlarged and revamped bank bailout package which, by popular demand was to include a loan guarantee element designed to kick start domestic lending. However, just as the announcement was being made, prior to London market opening, RBS revealed a UK record corporate loss of £28 billion, completely overshadowing the Government’s initiative and triggering a 67% decline in their share price. As other UK bank shares tumbled, Gordon Brown was left to rant at RBS’s irresponsible risk taking in losing £8 billion in complex derivatives and £20 billion taking over Dutch bank ABN-Amro.
• The impact on Sterling against the Euro was limited at this point, a slide to 1.10, with the recent downgrading of some of the Club-Med countries with the EU and the nationalisation of Anglo-Irish Bank providing some counter-balance to the UK banking situation and the rumour that the UK would suffer the same fate as Portugal, Spain and Greece. However, when the investment guru Jim Rogers warned investors to get out of Sterling, the impact on GBP/EUR in the thinner Far East markets was immediate, sending it lower to 1.07. As UK banking shares continued to fall, subsequent UK data heaped pressure on Sterling. than expected.
Central bank rates:
UK : (MPC) : 1.50%
US (FED): 0.00 – 0.25
EU (ECB): 2.00%
Going forward most industry analysts expect continued volatility. No surprises there!
Whilst FX isn't the most thrilling of subjects, the sooner you begin to think about your money transfers, the more likely are to make your money go as far as you do.
Best Regards
Mark Bodega
Director - HiFX
As requested by a number of BE regulars here's a brief update on what's happening in the currency markets and for anyone in the UK enjoy the snow!
High & Low of the Month:
High: 1.1309 (on the 09/01/09)
Low: 1.0285 (on the 01/01/09)
Difference of cost on £200k:
High: 226,180 euros
Low: 205,700 euros
It seems a long time ago since the Northern Rock collapse and nationalisation welcomed the UK to America’s sub-prime lending problem back in September 2007. This sparked the first substantial decline in Sterling, leading to a significant break lower at Christmas 2007, through the base of what had been a cosy range of 1.38 – 1.53 for over 4 years, from 2003 to 2007.
• The consolidation around 1.25 between April and November 2008 offered hope that Sterling had taken its hit early in the credit crunch and would continue to fare relatively well against the Euro. However, the escalation of the global economic crisis and the unprecedented UK interest rate cuts again focussed attention upon the relative strength of the UK economy with foreign exchange traders, at least, concluding that our heavy reliance upon the financial services and housing sectors and relatively high levels of personal and Government indebtedness, would mean a deeper and longer recession in the UK.
Once this sentiment against Sterling switched the press bandwagon quickly highlighted the proximity of the 1:1 parity level with tourist rates below this level offering great sound-bites in the lead up to Christmas. Whilst there is no doubt that the UK economic deterioration is gathering speed, we note that:
a)Sterling is traditionally the market punch bag due to its relative lack of liquidity and ironically, its familiarity to the dominant London market traders, and
b) There is a strong argument to suggest Sterling is now becoming chronically under-valued on any purchasing parity measurement.
However, history shows us that this does not mean that markets will automatically buy or sell a currency swiftly back towards this equilibrium measure.
• In the short-term we therefore resort to respecting the underlying trend, meaning Sterling could easily continue to fall against the Euro, with parity an obvious target and 0.95 likely to be a step too far. But the current levels of volatility, in every asset class, suggest a recovery towards 1.15/1.20 would:
a)not be unexpected, and
b)not break the underlying trend.
• As with every currency hedging strategy at the moment, little and often and lots of caution is required. Sterling staged a remarkable recovery in the first full week of trading in 2009 rising 9 cents in a week to 1.13 and almost 11% since the 1.02 low on New Year’s Eve. Monday’s the 5th of January, trading had seen the largest daily percentage rise in 9 years and this momentum was maintained when the first of the big retailers, Next and Debenhams, announced results that qualified as ‘not as bad as feared’. Subsequently, Marks & Spencer’s worst trading results for a decade and UK manufacturing slumping by 7.4% over the year were shrugged off by the sprightly Pound.
• GBP/EUR was also aided by events across the English Channel where the Germans finally faced up to the economic realities confronting them. Having been vociferous critics of the UK and US’s plans to borrow and spend their way out of recession, Germany announced a fresh EUR 50 billion fiscal stimulus plan. No doubt the advanced warning of a string of dire economic releases helping to remove the rose tint from their spectacles and galvanising them into action.
• Firstly, German unemployment rose for the first time since 2006, adding to the EU numbers that have swollen to 7.8% of the workforce. But perhaps the most influential was the slump in German exports by a massive 10.6% in November. With their economy underpinned by a huge successful export sector, it is no wonder that this figure prompted the Germans to act. Sterling’s mild recovery against the Euro was partially reversed at the end of the month as the UK Government grappled with round 2 of the banking crisis. Barclays share price collapse had encouraged a swift announcement of the enlarged and revamped bank bailout package which, by popular demand was to include a loan guarantee element designed to kick start domestic lending. However, just as the announcement was being made, prior to London market opening, RBS revealed a UK record corporate loss of £28 billion, completely overshadowing the Government’s initiative and triggering a 67% decline in their share price. As other UK bank shares tumbled, Gordon Brown was left to rant at RBS’s irresponsible risk taking in losing £8 billion in complex derivatives and £20 billion taking over Dutch bank ABN-Amro.
• The impact on Sterling against the Euro was limited at this point, a slide to 1.10, with the recent downgrading of some of the Club-Med countries with the EU and the nationalisation of Anglo-Irish Bank providing some counter-balance to the UK banking situation and the rumour that the UK would suffer the same fate as Portugal, Spain and Greece. However, when the investment guru Jim Rogers warned investors to get out of Sterling, the impact on GBP/EUR in the thinner Far East markets was immediate, sending it lower to 1.07. As UK banking shares continued to fall, subsequent UK data heaped pressure on Sterling. than expected.
Central bank rates:
UK : (MPC) : 1.50%
US (FED): 0.00 – 0.25
EU (ECB): 2.00%
Going forward most industry analysts expect continued volatility. No surprises there!
Whilst FX isn't the most thrilling of subjects, the sooner you begin to think about your money transfers, the more likely are to make your money go as far as you do.
Best Regards
Mark Bodega
Director - HiFX
Last edited by Windsor2; Feb 5th 2009 at 10:02 am. Reason: layout
