Sterling and Euro dancing.

Sterling and the Euro have been dancing between the 1.1650 – 1.1950 range for the better part of the last fortnight.  Compared with the splurge of information released at the beginning of both May and June, July has seen an evenly weighted battle between these two currencies; UK growth has kept the euro under pressure, and the most recent stress tests for European financial institutions have brought inconsistent sentiment to the market.  We don’t really know what stresses we tried on Europe’s banks, or the criteria by which a bank might pass or fail.  City pundits have suggested that the stress tests themselves are a hollow exercise that serves only to suggest that the Eurozone is prepared to address reckless risk taking; but what is being tested? Have these steps gone far enough, and what will happen to those banks who are primed to reveal losses and liabilities later in the year but meet the requirements of these tests at the moment?

These questions are just some of those which have undermined confidence in the euro over the past week to ten days.  The decision rests with investors and traders and after Europe and London’s closes on Friday 23^rd sterling was seen to improve taking its high for the day up to 1.2019.

Monday will be interesting.  Politically and economically the UK can adopt the high ground as our GDP figures do show some positive signs, and our austerity measures have been applauded globally; however the market is fickle, and over the next two weeks we will have to weather attacks from European regulators, speeches from the BoE’s Govenor and housing figures that may reveal just how averse to risk high street lenders have become…

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The future’s bright? No, it’s lukewarm

Sterling has done its best to hold form above the 1.18 level before Friday’s close, but the slide from 1.20 over the last 12 hours is symptomatic of a market uncertain about the worth of imminent stress tests, and the long term implications of European regulatory changes such as the Alternative Investment Fund Management directive.

Germany and France have adopted something of a ‘dog in the manger’ attitude, and seem willing to risk the movement of key fund and asset management services to the Far East in order to provide a more even European playing field. Measures like the AIFMD will have a negative effect on European and London based trading, and wealthy tax payers will leave the EEA and UK for softer structures off shore in countries like Singapore and Hong Kong.

Key figures in the banking sector have firmly stated that the upcoming ‘stress tests’ will not, if weathered, signify a clean bill or health; and issues such as deflation, high levels of government debt and a spike in investment interest rates because of said sovereign liabilities still plague the markets and undermine confidence.

Sterling has settled to the 1.18 level, and this was to be expected after such a frantic rally following the May election and the Budget in June. 1.20 is still achievable, but with lukewarm economic data it will be difficult for us to find support above this key level in the coming weeks.

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Climb aboard…

What a headline, and why such an optimistic tone surrounding the pound?

Well we now seem to be in the camp of a global double dip recession and the markets are now worried about China slowing down….aggghhh! Also the evidence shows that President Obama’s strategy of “if it looks broke lets throw at least a trillion dollars at it” has failed to spur on the US economy. If anything it is storing up not only problems for the US economy, but also the fate of the dollar that could see a rush for the door if the US economy trips back into recession.

The pound however at the moment is the least ugly of the three ugly sisters with the Euro and the Dollar being the other two. The coalition government has so far kept the ratings agencies, which are backing the austerity cuts in last month’s budget and believing that growth won’t be affected, at bay. Currency markets can be something of a smoke and mirrors affair and the pound has been given a bit of the Paul Daniels magic despite showing the same symptoms as both the US and Europe; namely a huge fiscal deficit. Abracadabra… the markets are choosing to ignore this and are happily buying the pound.

Now the problems occur when the markets realise that potentially its all just an illusion, and then the pound could be in for a rough ride. But with the problems growing at a daily rate for the Eurozone, it’s unlikely that the market will fancy buying the single currency.

Here’s a thought for you, its impossible to rent a safety deposit box in Madrid, those in the know are hoarding their wealth outside of the banking system.

My prophecy is this: the pound in the past 18 months has been undervalued by about 30%, and as long as the collation government can continue to persuade the market that they are in fact Paul Daniels than one of the ugly sisters, then sterling shall radiate beauty….

…and the pound could soar!

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This weeks currency update with Keith Spitalnick

‘Stress test’ and ‘double dip’ have been the key phrases of the last week.  Banks need to bring back confidence to the money markets and financial equities, and the way to do this is to synthesize strains on the bank capabilities.  Pundits have argued that these tests don’t put on enough pressure and some have questioned the value of a stress test that all the banks can pass; nonetheless these tests and the measures the ECB are bringing to the fore have strengthened the euro by a fraction.

Sterling closed down at 1.1937, with a trading spread of 70pts showing that cash and money market swaps have not attracted traders, but with the ECB ceasing its bond buying drive and Jean Claude Trichet commenting that it is “too early to declare an end to the financial crisis”, there could be further damaging data to come from across the Channel. The UK simply has to cross its fingers that it can weather its current economic storm.