Posts in category: Currency

Euro update

The last month brought a major development, not in the reality of the global financial situation but in the way investors perceive it. Several months ago the Federal Reserve chairman said he would consider winding down the Fed’s $85bn-a-month quantitative easing programme when the US economy was in better shape. He said it again in late May to a congressional committee and the world’s investors suddenly realised that, sooner or later, the money tap would be turned off.

As well as sending bond yields higher and shares lower, the effect was to further dampen demand for commodity-related and emerging market currencies. In the last three months the South African rand has fallen by -15%, the Australian dollar by -14%, the Brazilian real by -13%, the Indian rupee by -11% and the NZ dollar by -10%. A major chunk of those losses came in the last month.

The effect on the dollar has not been as positive as might have been expected. Whilst investors can envisage an end to the Fed’s money printing in the future, for the moment the cash is still flowing. That is not the case in Britain, where better economic data have all but killed the chance of any further asset purchases by the Bank of England. In Frankfurt the European Central Bank made clear in early June that it had supplied as much stimulus as it felt necessary; investors should not hold their breath in anticipation of any additional “non-standard” measures.

With no new crises in Euroland and Britain’s economy gathering a little momentum, investors were happy to give the European currencies the benefit of the doubt and leave them alone. The Swiss franc put in the best performance, adding two cents against sterling, and the euro strengthened by one cent. But the pound had nothing to be ashamed of; except against those two currencies and the yen it was higher on the month against everything.

Euro update 2013

December and early January were generally kind to the euro. The first two weeks of January were particularly so, despite getting off to an uncomfortable start as a result of distractions in Washington. Negotiations to avoid the “fiscal cliff” went right to the wire, only delivering an agreement in Congress at the thirteenth hour on New Year’s Day, and a half-baked one at that. It resulted in a brief rally for the euro against the dollar that was quickly reversed.

The real euro rally began the following week. A series of events worked in its favour. The European Stability Mechanism (ESM) rescue fund launched its first round of short-term bonds to eager investors, who accepted a negative yield of 0.0324% to buy the paper. Ireland and Spain also held successful auctions of government bonds. European Central Bank President Mario Draghi encapsulated the improvement in sentiment at his press conference when he talked of the “positive contagion” that was helping to deflate the peripheral debt crisis.

Sterling and the dollar both fell by half a cent in the first two weeks of January. The UK economic data did the pound no favours, with manufacturing and industrial production both falling in November. That particular news sparked a sterling sell-off that took it to its lowest level in nine months against the euro. Investors are not overjoyed at the anti-EU sentiment being expressed by parliamentarians. Nor are they optimistic about the prospects for Britain’s AAA credit ratings.

“Renewed confidence” rallies for the euro have been ten a penny during the last couple of years. Until now, each one has preceded a new development in the peripheral debt crisis. The latest one, however, has more of a feeling of durability about it. If Sig. Draghi’s idea of “positive contagion” takes hold it could be good year for the euro.

Euro update

Euro vs dollar

There is a depressingly repetitive cycle to the Euroland sovereign debt crisis. A country (or its banking sector) loses money. The government’s borrowing costs rise above 7%. The finance minster denies the need for a financial rescue. The prime minister denies it. He then concedes that his country needs a bailout. The EU/ECB/IMF troika hit-team visits to hammer out the austerity terms. The citizens set fire to banks.

From start to finish it is all about confidence. An abundance of confidence makes banks lend money to borrowers who can’t pay it back and encourages people to spend their house on fancy cars, holidays and groceries. It often results in an economic boom. A lack of confidence makes banks reluctant to lend money to anybody for anything and scares people into reducing their debts instead of buying stuff. It often results in recession.

That same lack of confidence is making investors reluctant to lend money to the Spanish and Italian governments. Yesterday (metaphorically) they were okay; today they aren’t. The challenge for EU leaders is to regenerate that confidence, especially with regard to Spain. If they cannot do it – and quickly – Spain will need a full-scale bailout. If Spain falls, Italy will be the next one in the crosshairs. It’s scary stuff.

The euro has recently touched a 2-year low against the US dollar and a 3 1/2-year low against the pound. It is not impossible to imagine Frau Merkel and her colleagues on the European Council coming up with a swift solution to the crisis of confidence that permeates Euroland. However, the experience of the last three years suggests it is not the most likely outcome, especially as they are all on holiday until September.

Sterling is close to the €1.30 barrier that held it down in autumn 2008. It will be a tough obstacle this time around too, but it would not be a huge surprise to see it move higher eventually.

Euro update 2012

A visiting Martian might well wonder why, with all the euro’s problems, it is unchanged from a month ago against sterling and the US dollar. And a good question it would be too.

Greece has at last got itself a pro-euro, pro-bailout, pro-austerity coalition government but tax revenues are going down while the spending cuts and privatisations are not happening. Spain and Italy are having to pay 7% and 6% to fund themselves with ten-year money while Germany has investors throwing cash at it for the same period at 1.5% and Britain can borrow at 1.7%. Spain has bowed to the inevitable and asked for a bailout of up to €100bn in order to keep the country’s banks afloat. Cyprus wants one as well but has not yet done the sums and the amount remains uncertain. As unions go, the European one doesn’t look particularly unified.

But investors have issues with sterling too. In particular they are unhappy with the lack of growth in Britain and they fear another round of quantitative easing – printing money – from the Bank of England. They are not even particularly happy with the dollar. Growth and job-creation have both slowed in the States. There is also concern – in the background so far but gaining in importance – that November’s election could leave the country with a budget disagreement between Congress and the White House that would trigger automatic spending cuts, tipping the economy off a “fiscal cliff” and back into recession.

None of it looks great. Investors are hoping against hope that the upcoming EU summit meeting will produce the all-embracing solution to the Euroland crisis that its 29 predecessors failed to deliver. Seven days before the meeting the Italian prime minister said there was “a week to save the euro”. If his assessment was correct, time is running.

Euro update 2012

The beginning of May brought yet another turning point for the euro, created as usual by Greece. This time it was the rebellious populace, rather than earlier spendthrift governments, who put the boot in. The general election vote went squarely against austerity. Establishment parties – New Democracy and Pasok- suffered a severe erosion of support and the upstart anti-austerity Syriza party took third place behind them.

Syriza wants to renegotiate the austerity conditions imposed by the EU as a condition of the February bailout of Greece. Its refusal to co-operate in a coalition with any pro-austerity group forced a re-run of the election, which will take place on 17 June. Opinion polls make Syriza the favourite to win next month’s election. It raises the spectre of a new Greek government refusing to toe the austerity line and provoking the cessation of bailout payments from the EU/ECB/IMF troika – Greece’s only source of funding.

With its income cut off, Greece could not repay its borrowings and would have to default, perhaps leading to departure from the single currency and perhaps from the EU. The repercussions would be hugely expensive, not just for Greece but for Euroland and even Britain too.

Although this catastrophic outcome is far from a certainty, investors can see the writing on the wall and they have been deserting the euro. Since early May its biggest losses have been against the US dollar and Japanese yen but it has also fallen against the pound, touching its lowest level since November 2008.

EU leaders must pull something out of the hat to persuade investors – and Greek voters – that they have the will and the ability to fashion the proverbial silk purse out of this sow’s ear. If they fail to do so the euro will fall further.

Euro update 2012

In view of the resurgence of concern about southern European – in particular Spanish – government debt, the euro could consider itself fortunate to have been able to hold its own against the US dollar. Its range of more than 15 cents between early October and late April was perhaps too wide for comfort but net movement over that period was zero.

At a pinch, the same could be said about the euro’s performance against the British pound over a rather longer period: on St George’s Day the euro was back to its position in August 2010. But where investors preference for the euro or the dollar was evenly distributed, sterling has recently attracted more support than both of them.

Whilst the economic links between Britain and the euro area are as close as they ever were, investors have begun to differentiate between the two. Part of this distinction is based on relative credit and political risk. The UK enjoys AAA credit ratings from all three of the main agencies: Only four of the 17 euro zone countries can say the same (Finland, Germany, Holland and Luxembourg). Investors believe the UK government will achieve a balanced budget through spending cuts and tax increases: They have minimal faith in Greece or Spain being able to do the same.

The other distinction between the UK and Euroland is in economic performance. Although Britain was technically in recession between September 2011 and March 2012, most of the recent UK indicators have been positive. Where Euroland reports slowing activity in manufacturing and services, Britain shows growth. The latest figures show retail sales rising and unemployment falling in the UK while the reverse happens in the euro zone.

The auspices favour the pound over the euro. Nevertheless, those needing to buy euros against sterling should consider taking advantage of a near 40-month high to fix a price for at least a proportion of their requirement. The euro could fall further; there is no guarantee that it will.

Euro update 2012

The efforts of EU leaders in hauling Greece back from the brink of bankruptcy have not done the euro too many favours. Against both the US dollar and the British pound it is a cent lower than a month ago. The euro-gloom should not be overestimated though: to an extent the losses are an accident of timing. EUR/USD is trading at a similar level to January, October and December last year. GBP/EUR is close to the top of a range that has contained it since November 2008. It is not that the Greek rescue has scuppered the euro, more that it has failed to re-establish investors’ appetite for it.

But although they have swept the Greek debt problem under the carpet for the time being, the recent economic indicators from the euro area have been far from edifying. In a single day in late March, Germany’s manufacturing sector purchasing managers’ index (PMI) swung from slight growth at 50.2 to undeniable contraction at 48.1. The German services sector PMI was still positive at 51.8 but still a point down on the month. For pan-Euroland the equivalent figures were 47.7 and 48.7, both still negative and both lower than February’s readings. Industrial new orders were down by -2.3% in January and by -3.3% on the year. Numbers like these are unhelpful to the euro, especially when they arrive within an hour and a half of each other.

The figures also make it more likely that the Euroland economy will have shrunk, for a second quarter, in the first three months of this year. In Q4 2011 it contracted by -0.3% (Britain -0.2%, USA +0.7%). Confirmation – or otherwise – of that is at least a month away but it is a fair bet that investors will not flock to buy the euro if they see a minus sign in front of the Q1 gross domestic product growth figure. Recession is a big turn-off.

Having said that sterling is not bomb-proof either. Although the market is enthusiastic about the Chancellor’s deficit-reduction campaign, investors remain nervous about its dampening effect on the UK economy. Sterling/euro is within three cents of its highest level in more than three years. It could rise further, of course, but sterling’s track record is not illustrious when faced with such a situation. Again and again it has demonstrated an uncanny skill for snatching defeat from the jaws of victory.

Euro update 2012

With the threat of an imminent Greek exit from the euro zone having now lifted, foreign exchange markets have breathed a huge sigh of relief. Whether this is a permanent or temporary respite remains to be seen but for the moment at least some calm has returned.

Much credit for the improved sentiment must go to the European Central Bank. Taking a far more activist policy stance under the Presidency of Mario Draghi, official interest rates have been cut twice and enormous liquidity injections have been sent into the banking system. Both the price and the quantity of money have been changed, leading to significant falls in bond yields and credit spreads across Europe.

Economic data across the Continent still point to a challenging near-term outlook, with some Southern countries in recession as formally defined by two consecutive quarters of negative growth. Nonetheless, financial stresses have eased considerably and there are genuine grounds to believe this will help the real economy in the second half of the year.

The fact of lower tensions in wholesale money markets and the hopes for an increase in economic activity have combined to lift the external value of the euro. It is almost 6 cents off January’s low against the US dollar, at a four month high of 106 against the Japanese Yen, and is just beginning to claw back some of its earlier losses against the British Pound.

At the beginning of the year, sterling had been seen as a “safe haven” for those investors looking for European exposure without the attendant euro uncertainty. Sterling/euro climbed to its best level in more than a year.

With a very disappointing fall in Q4 GDP, a shift to “negative outlook” on its credit rating and confirmation that some members of the Bank of England’s Monetary Policy Committee would like to do even more Quantitative Easing, the pound has already lost 3 cents against the euro. Ahead of the Chancellor’s Budget on 21 March it would be no great surprise to see sterling slip a little further.

Every exchange rate is, of course, a relative price. The euro may not be completely out of the woods, but in the short-term it no longer looks the worst of a bad bunch. And that, sometimes, is all it takes to push a currency higher.

Euro update 2012

The euro has generated seemingly endless heat and light in the last month but none of it has been translated into net motion. Against the pound and the US dollar it is essentially unchanged from its position on Christmas Day and New Year’s Day. The euro’s range against the dollar has covered four and a half cents during that time and two and a half against sterling.

Investors have proved surprisingly resilient in their support for the euro despite all it has thrown at them. Every time EU finance ministers gather, and following every summit meeting, the euro receives another burst of support. Apparently investors are desperate to believe that this meeting – the fifteenth, the umpteenth, it doesn’t matter – will be the one that delivers the goods. They see not the least irony in the hope that each new agreement will succeed where its predecessors failed. At the moment the market is pinning its optimism for the euro on three developments: the European Central Bank’s provision of unlimited, cheap three-year loans to the region’s banks, the downturn in Italy’s borrowing costs that this helped to provoke and the ongoing negotiations between the banks, the Athens government, the EU and the International Monetary Fund to reschedule Greek government debt.

As long as those carrots dangle before them, investors seem content not to rock the boat. After all, there really might be a rabbit in the Brussels hat and it would be a shame to walk away only to miss its triumphant presentation. Even those who don’t believe in rabbits are reluctant to leave the show; as with Father Christmas, you can never be sure

So the euro totters along, always treading gingerly on the edge but never falling off. Having managed to keep up the act for this long there is no reason to bet it will tumble tomorrow.

Euro update 2011

At the end of October investors were cock-a-hoop that EU leaders had agreed a rescue package that would provide Greece with a second lump of finance, recapitalise the region’s banks and beef up the financial stability facility to a trillion euros. The euro climbed two cents higher against the pound and rose by three cents against the US dollar.

Less than a week later the wheels had come off after the Greek prime minister decided he could not sign up for the deal without a referendum. In the confusion that followed, the referendum idea was scrapped the premier stood down. Italy’s PM left office only days later and both have been replaced by unelected “technocratic” economics professors. In mid-November there was a third change of government in Euroland when Spanish voters used a general election to sack the ruling party in favour of the opposition, hoping a change of austerity would be as good as a rest from it.

The euro ends the penultimate week of November three cents lower than a month ago against the dollar and a cent down on the pound. It could have been worse, given the low ebb of confidence in the single currency. However, investors are uncertain about the implications of a euro breakup because they have no idea whether, when or how it might happen. Would it make things worse than they already are? Or would the removal of weaker members – perhaps leaving a hard German-centric core – improve the situation?

Having taken two years to paint themselves into their current uncomfortable corner it is unlikely that EU leaders will rush to bring things to a head. There is no guarantee that we will be discussing this self-same uncertainty and lack of confidence in a month’s time but experience points that way

Euro update 2011

You would’ve had to have beenmarooned on a desert island, cut off from the outside world, not to have noticed that Euroland has had a debt crisis on its hands. It is difficult to comprehend how the crisis has managed to drag on for two long years, pretty much since the EU discovered that Greece had borrowed beyond its means. But it has. The solution from Brussels was to lend even more money to Athens and to hope the problem would go away. But it hasn’t.

At the time of writing EU leaders are hammering out a grand unified plan that will oversee an orderly partial default by Greece. At the same time they will reveal the scope and structure of a beefed-up European Financial Stability Facility that will prevent other Eurozone governments – notably Italy and Spain – finding themselves unable to fund their debts. A broad reinforcement of banks’ capital resources will also be part of the deal.

Let’s consider what the plan could mean.

First, and essentially, it will mean losses for the holders of Greek government bonds. There is no point in lending more money to Greece when it cannot even cope with its existing borrowings. It will mean more government money for European banks and more disgruntled voters, especially in Germany. It will mean higher borrowing costs for Euroland governments in general, especially for France, which could well lose its AAA credit rating as a result of increased commitments to the EFSF pot.

As for the Euro itself, it is likely that the debt resolution will achieve little or nothing. There will still be nervousness about Italy and Spain and the Euroland economy will be held back by the diversion of cash to the various bailouts. Intriguingly, after all the fuss, the Euro, the Pound and the US Dollar are in identical positions today to those they occupied a year ago. There has been movement along the way but no net change. It is not impossible to imagine that the new EU plan will perpetuate that stability.

Euro update 2011

In the last two months, sterling has predominately been stuck in a horizontal trend between €1.1250 and €1.550. However as the early days of September ticked by, the rate moved above €1.16 for the first time since early March, resulting in a 6 month high. The rate even briefly peaked above €1.17 on the 12 of September before falling sharply only a few days later.

So, once again we sit in the range above €1.12 and below €1.16 and Greece is back in the spot light. Merkel and Sarkozy did well to calm investors’ nerves with comments stating they are convinced Greece will remain within the euro mechanism, but this confidence did not last long. A Greek default now looks inevitable as the mid October deadline for much needed funding draws ever closer and the chances of Greece meeting the conditions set out to receive the next instalment of the bailout package moves further away.

Greece said it was close to a deal with the Troika*, but that confidence seems very one-sided as the IMF, ECB and EC were so frustrated with Greek failures that they didn’t even attend the meeting – instead opting for a conference call. The IMF has raised fears further by announcing that the global economy has entered, “a dangerous new phase” of slow growth in relation to the euro zone debt crisis.

With the ECB lowering growth and inflation forecasts, this suggests that the euro zone is suffering an economic slowdown and speculation is increasing that that the ECB will be forced to cut interest rates in the area during the final quarter of the year. This represents a quick turnaround following two interest rate rises since June and will do nothing to alleviate concerns that a single monetary policy across such a diverse range of economies doesn’t work.

The problems in the euro zone continued when S&P fired a shot across the bow of Italy, downgrading the country one notch to A/A1 and blaming political infighting for an ineffective reaction to its financial problems. The bad news for Europe and its banks continued, with a report that Siemens recently withdrew more than €0.5 billion of cash deposits from an as-yet-unknown French bank, and transferred the funds to the ECB due to fears about the health of the bank.

As expected the Bank of England’s Quarterly Bulletin suggested that the UK’s QE policy was a considerable success, adding 1.5-2.0% to GDP (and up to 1.5% to CPI inflation). Whether correct or not, the market has interpreted this as part of a communiqué that more QE is on its way, which could be viewed as either GBP-negative or reassuring that the bank stands ready for action, depending on your side of the fence.

The direction of the sterling/euro will largely depend on how euro zone leaders and the International Monetary Fund deal with the debt crisis and whether the markets view it with optimism or scepticism.


*The Troika refers to the group consisting of the European Commission (EC), the European Central Bank (ECB) and the International Monetary Fund (IMF) that coordinated the financial bailouts of Greece, Ireland and Portugal.

Euro update 2011


During the compilation of last month’s edition of this column the euro traded at €1.1335 to the pound and at $1.4450. It has visited those exact same levels today. To take the comparisons a stage further, euro/dollar has crossed the $1.4450 line more than a dozen times since April and sterling/euro has passed through €1.1335, at a rough count, 16 times since March. As with a football match that goes to penalties after extra time, with the teams drawing 6-6, that does not mean nothing has been going on.

The southern European sovereign debt crisis continues to fester, although with three quarters of the continent’s politicians and bankers on holiday it has been festering more slowly in August. The European Central Bank has been holding things together, buying Spanish and Italian government bonds to prop up the market, but that is no more than a short term tactic. Without a proper solution things will get nasty.

In Washington the bloody-mindedness of party politicians has cost America its triple-A credit rating, at least as far as Standard & Poor’s is concerned. Having refused to agree on an increase to the debt ceiling they could well have condemned the country to spending cuts which will have an arbitrary impact on the rich and poor alike. Well, the poor, anyway.

Relatively, Britain is the saint in all of this. It has no credit or budget crisis. There is (albeit unenthusiastic) government harmony on the fiscal position. Economic growth in Q2 was at least equal to Germany and the euro zone. Together with an undisputed AAA credit rating it makes sterling a candidate for the world’s top safe-haven currency at a time when one is needed the most.

But life is not that simple. Sterling’s long record of boom-and-bust makes investors wary. So they don’t like the euro, they don’t like the dollar and they don’t trust the pound. It is not impossible to imagine having this very same conversation in a month’s time.

Euroland update 2011

The seemingly endless saga of Greece, Ireland, Portugal, debt and contagion is almost certain to run into a third year. Having initially assured investors that Greece was perfectly capable of supporting a huge and growing deficit, the EU admitted defeat last spring. The wealthy Euroland nations clubbed together to lend Greece even more money. This bailout, the EU insisted, would solve the problem once and for all. It gave the same assurance when it later had to rescue Ireland and Portugal on similar terms. Now, Greece needs to borrow yet more money and Portugal is waiting in the wings for a second handout. This July Eurozone leaders agreed on a new plan that will cover those three, together with any other country which might find difficulty in selling its government bonds to unwary investors (Italy? Spain?). This plan will solve the problem once and for all.

Not surprisingly, investors are sceptical. They have heard it all before. They are also now worried about a totally self-inflicted debt problem with which Washington has saddled itself. The Republican House of Representatives wants to cut public spending. The Democratic Senate and White House want to raise taxes. Withoutan agreement, there will be no sign-off for an increase in the “debt ceiling”, which limits the total amount the government can borrow. Without an increase the government will run out of money. Almost whatever the outcome of the negotiations, global investors’ trust in America and the dollar will have been damaged.

Britain’s economy grew by just 0.2% in the nine months to June. Technically, it amounts to a recovery. Practically, the growth is so minimal that only a statistician would notice it. Interest rates will remain low for an indefinite period.

Three basket cases; three currencies that nobody really wants to buy. It is less a matter of picking a winner than of avoiding the biggest loser. Faites vos jeux!

Euro update 2011

Most politicians and all national leaders in Euroland are adamant that the problem of Greece’s overdraft will soon be sorted. At the same time it is easy to find sceptics among Anglo-Saxon ex-politicians on both sides of the Atlantic: They see no sense in postponing what they see as the inevitable default and argue that lending yet more money to a spendthrift is like plying an alcoholic with booze.

Investors are doing their best to keep an open mind. On one hand they would much rather see the EU rescue attempt work than have to live with the consequences if it didn’t. On the other, they cannot help but fear what will happen when the EU handouts eventually stop. The uncertainty leads to frequent changes of sentiment towards the euro; the French president says it will all be alright and the euro goes up; an American investment bank says it will all end in tears and the euro goes down.

Sterling/euro has covered a range of six cents in the last six weeks with major changes of direction roughly once a week. Not all of those reversals have been down to the euro though. Sterling is still quite capable of shooting itself in the foot, as it did when the Bank of England’s monetary policy committee started talking again about increasing the asset purchase programme – quantitative easing or printing money if you would prefer.

At least the Federal Reserve has put a nail in the coffin of its asset purchase scheme. It will end in June and is unlikely to be repeated in the foreseeable future. It will mean one less downward pressure on the dollar; it will not necessarily reduce the volatility of euro/dollar, which has covered a nine-cent range in the last six weeks with half a dozen reversals.

Interest rates in Britain and the States are likely to remain very low beyond the end of the year. Euro interest rates are likely to go up. That distinction will tend to work in the euro’s favour but the advantage will be compromised by every new scare story about Greece.