Euro monthly round up
Apr 4th 2012, 1:22 pm
#1
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Euro monthly round up
This story will by now have become a familiar one to regular readers: The sterling/euro exchange rate is spending most of its time in a narrow corridor between €1.19 and €1.21. It first took up residence there in mid-December and investors have come to the conclusion that it is perfectly suited to its environment. That has not prevented them trying to take it off in one direction or the other. However, since the beginning of March there has been only a handful of those excursions and none has carried as far as a cent beyond the boundary.
Both during the Euroland sovereign debt crisis and in the uneasy peace that has followed the second bailout for Greece, the attitude has been that Britain's economic success depends on the euro zone. The one cannot prosper if the other fails. As someone famously put it; "we are all in this together".
That assumption looked more questionable in early April after the monthly Purchasing Managers' Index (PMI) shootout. PMIs are calculated nationally from questionnaires filled in by a broad range of companies, sorted by business sector. In essence, if every aspect of activity is getting better the firm scores 100%; if everything is deteriorating it scores a zero. Average the scores and the result is somewhere between zero and 10. A 50 means equilibrium; business is neither growing nor shrinking. Zero would be a wipe-out and 100 the unachievable maximum.
Surprisingly, the most recent results, for March, show Britain performing appreciably better than Euroland. In the services sector the UK scored a 55.3, trouncing Germany's 52.1 and Euroland's (negative) 49.1. For manufacturing the comparison was even starker. Britain was in the growth zone at 52.1, wiping the floor with the euro area where every country - including Germany and France - was below 50 and shrinking.
It has yet to be seen whether the UK performance is bankable or just a flash in the pan. Nevertheless, for British manufacturers to be considerably more upbeat than their competitors in Rhône-Alpes and the Ruhr cannot pass by unremarked by investors.
The improved sentiment towards sterling could provoke another foray to the north of €1.21 but significant progress beyond there would be hard to come by, if only because there will be a queue of buyers trying to pick up euros at a 21-month low. Otherwise, look for more of the same between €1.19 and €1.21.
If you would like more information please contact me directly or check out our BE currency page
Both during the Euroland sovereign debt crisis and in the uneasy peace that has followed the second bailout for Greece, the attitude has been that Britain's economic success depends on the euro zone. The one cannot prosper if the other fails. As someone famously put it; "we are all in this together".
That assumption looked more questionable in early April after the monthly Purchasing Managers' Index (PMI) shootout. PMIs are calculated nationally from questionnaires filled in by a broad range of companies, sorted by business sector. In essence, if every aspect of activity is getting better the firm scores 100%; if everything is deteriorating it scores a zero. Average the scores and the result is somewhere between zero and 10. A 50 means equilibrium; business is neither growing nor shrinking. Zero would be a wipe-out and 100 the unachievable maximum.
Surprisingly, the most recent results, for March, show Britain performing appreciably better than Euroland. In the services sector the UK scored a 55.3, trouncing Germany's 52.1 and Euroland's (negative) 49.1. For manufacturing the comparison was even starker. Britain was in the growth zone at 52.1, wiping the floor with the euro area where every country - including Germany and France - was below 50 and shrinking.
It has yet to be seen whether the UK performance is bankable or just a flash in the pan. Nevertheless, for British manufacturers to be considerably more upbeat than their competitors in Rhône-Alpes and the Ruhr cannot pass by unremarked by investors.
The improved sentiment towards sterling could provoke another foray to the north of €1.21 but significant progress beyond there would be hard to come by, if only because there will be a queue of buyers trying to pick up euros at a 21-month low. Otherwise, look for more of the same between €1.19 and €1.21.
If you would like more information please contact me directly or check out our BE currency page
May 3rd 2012, 2:30 pm
#2
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Joined: Mar 2012
Posts: 142
Re: Euro monthly round up
April was a good month for sterling: It reached a 20-month high against the euro and the Bank of England's trade-weighted index was at its strongest since August 2009. It would be an exaggeration to say the gains came easily to the pound; for almost every half-cent of upward progress it had to fight its way through the technical resistance implicit in previous interim highs. Nevertheless it ended the month three cents above its starting point and spent the early days of May trying to build on its gains.
The euro's handicaps were the old familiar ones; sovereign debt, especially of the Spanish variety, lack of economic growth and political disunity across the EU. The run-up to elections in Greece and France gave birth to new anti-austerity pressures not only in those countries but in Spain and Holland, leading to the collapse of the Dutch coalition government. The gist of the objectors is that squeezing out the budget deficit also means squeezing out growth, as Spain is finding to its cost. With the dissolution of the Merkozy axis the Chancellor now finds herself if not isolated (the True Finns are all for austerity) then at least no longer in the driving seat. Even the European Central Bank president has openly advocated a Growth Compact.
For now, though, it's austerity as usual. Confidence in Spanish government bonds is so low that almost the only buyers of it are Spanish banks. Given that they are already nursing bad debts of more than 8% of their assets the situation looks uncomfortably incestuous. Confidence in the Euroland economy is similarly stretched. Most of the data to emerge in April were either softer than the previous month, below expectations or both.
The UK economic statistics were by no means bomb-proof but they had their moments. Retail sales did particularly well in March (and not only because of cautious motorists filling their tanks before the tanker drivers' non-strike). Unemployment went down, as did the number of jobseeker claimants. The one that fell spectacularly by the wayside was first quarter gross domestic product. Instead of rising by the predicted 0.1% it fell by -0.2%, thus constituting a recession within the meaning of the act.
Astonishingly, investors didn't care. For once they appear to embrace the pound rather than simply tolerating its presence. Were it not so, the negative GDP figure would have been grounds for giving sterling a good spanking. As long as that enthusiasm survives, the pound has scope for further upward progress.
The euro's handicaps were the old familiar ones; sovereign debt, especially of the Spanish variety, lack of economic growth and political disunity across the EU. The run-up to elections in Greece and France gave birth to new anti-austerity pressures not only in those countries but in Spain and Holland, leading to the collapse of the Dutch coalition government. The gist of the objectors is that squeezing out the budget deficit also means squeezing out growth, as Spain is finding to its cost. With the dissolution of the Merkozy axis the Chancellor now finds herself if not isolated (the True Finns are all for austerity) then at least no longer in the driving seat. Even the European Central Bank president has openly advocated a Growth Compact.
For now, though, it's austerity as usual. Confidence in Spanish government bonds is so low that almost the only buyers of it are Spanish banks. Given that they are already nursing bad debts of more than 8% of their assets the situation looks uncomfortably incestuous. Confidence in the Euroland economy is similarly stretched. Most of the data to emerge in April were either softer than the previous month, below expectations or both.
The UK economic statistics were by no means bomb-proof but they had their moments. Retail sales did particularly well in March (and not only because of cautious motorists filling their tanks before the tanker drivers' non-strike). Unemployment went down, as did the number of jobseeker claimants. The one that fell spectacularly by the wayside was first quarter gross domestic product. Instead of rising by the predicted 0.1% it fell by -0.2%, thus constituting a recession within the meaning of the act.
Astonishingly, investors didn't care. For once they appear to embrace the pound rather than simply tolerating its presence. Were it not so, the negative GDP figure would have been grounds for giving sterling a good spanking. As long as that enthusiasm survives, the pound has scope for further upward progress.
Jun 1st 2012, 9:40 am
#3
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Joined: Mar 2012
Posts: 142
Re: Euro monthly round up
Spain's fourth largest bank, the improbably-named Bankia, was formed a year and a half ago from the broken remnants of half a dozen regional "caja" savings banks. In those 18 months its losses are such that it needs a €19bn injection of capital, more than four times its market value. And Bankia's solution? It made severance payments of €14m and €6m to two of its discredited management team and promised a Spiderman towel to young savers brave enough to leave €300 in their account until the end of the month. Investors looked on and wept.
Bankia needs more and there are others behind it in the queue. The Spanish government would dearly love to provide the money itself but it cannot raise funding from the bond market at any sensible rate of interest. One way or another Spain is going to need a bailout from the EU. The only argument is about where it comes from and what it is called. Unfortunately that argument has been going on for longer than investors would like. Specifically, Germany must sign up for whatever scheme emerges and so far Chancellor Merkel has not found one to her taste.
Meanwhile in Greece, citizens have been agonising about whether or not to stick to their austerity medicine. In essence they want to dump the austerity measures which are condition of the EU bailouts that keep them going. Were they to do so the payments would probably be cut off and the country would go bust, forcing it out of the single European currency. A re-run of May's indecisive general election in mid-June might clarify the situation.
Failure of the Spanish banking system or Greece's departure from the euro would be enormous individually. For the two to happen at the same time would be catastrophic (probably - nobody really has a clue). It is therefore probable that EU leaders will put their differences behind them and cobble together last minute solutions.
Whatever the short-term outcome, it looks increasingly likely that it will be unhelpful to the euro. An unruly dissolution would be expensive and messy: To preserve the currency's integrity at any price would involve printing a great deal of money and would leave dangling the possibility of a repeat of the current pantomime.
EU politicians are growing reluctantly accustomed to the idea that without fiscal union there is bound to be a repeat. Whether they can sell it to their voters is a different matter.
Bankia needs more and there are others behind it in the queue. The Spanish government would dearly love to provide the money itself but it cannot raise funding from the bond market at any sensible rate of interest. One way or another Spain is going to need a bailout from the EU. The only argument is about where it comes from and what it is called. Unfortunately that argument has been going on for longer than investors would like. Specifically, Germany must sign up for whatever scheme emerges and so far Chancellor Merkel has not found one to her taste.
Meanwhile in Greece, citizens have been agonising about whether or not to stick to their austerity medicine. In essence they want to dump the austerity measures which are condition of the EU bailouts that keep them going. Were they to do so the payments would probably be cut off and the country would go bust, forcing it out of the single European currency. A re-run of May's indecisive general election in mid-June might clarify the situation.
Failure of the Spanish banking system or Greece's departure from the euro would be enormous individually. For the two to happen at the same time would be catastrophic (probably - nobody really has a clue). It is therefore probable that EU leaders will put their differences behind them and cobble together last minute solutions.
Whatever the short-term outcome, it looks increasingly likely that it will be unhelpful to the euro. An unruly dissolution would be expensive and messy: To preserve the currency's integrity at any price would involve printing a great deal of money and would leave dangling the possibility of a repeat of the current pantomime.
EU politicians are growing reluctantly accustomed to the idea that without fiscal union there is bound to be a repeat. Whether they can sell it to their voters is a different matter.
