Weekly Euro exchange rates and comments - week commencing 24th September 2007

 

 

A very difficult week for sterling. The Northern Rock saga dragged on and even when the government stepped in to secure the savers funds, the U-turn by the Bank of England in pumping additional liquidity into the market led to further pressure on sterling. Some semblance of stability seems to have returned by the end of the week. I still think that sterling is over sold [i.e. too low] but, short term, any bad news will have a greater effect than good news.  Looks like a good time to repatriate funds to the UK.

 

The € sits at €1.436/£1 inter bank and continues to be in the ascendancy hitting all time highs against the US$ and hitting levels not seen for 18 month against sterling. The Euro has gained nearly 5 cents against sterling in the space of two weeks. This is a very significant move and I suspect an excessive response to the mishandling of the liquidity crisis by both the BOE and the UK Government. It should also be noted that market sentiment is that the European Central Bank will now not increase interest rates as indicated. This would be a significant change if proved correct. We will have to wait and see if it is true. It certainly seems a good time to repatriate funds to the UK especially when compared to the exchange rates of two weeks ago.

Euro rates and comments - week commencing 17th September 2007

Northern Rock did for sterling. Even though Northern Bank is profitable it got caught by having short term funding to cover long term loans to clients. Given the credit crunch it found it very difficult to borrow from the inter bank market. Other banks are having to hoard cash for the huge amounts of funds they have lent to large private equity deals and which they are unable to on sell to other financial institutions. Hence the need for the Bank of England to supply short term funding to Northern Rock. Sterling had been falling ever since the BOE decided to hold UK interest rates at its meeting in early September. I suspect that the situation has been over dramatised and that sterling is oversold but it may well take time for sterling to recover.

 

The € is in the ascendancy hitting €1.429 inter bank. The European Central Bank still believes that the Euro interest rate is too low and this has led the market to believe that interest rates will be increased by at least 0.25% by year end. The Euro land economy is still robust and the Euro has gained 5 cents against sterling in just over week. This is a very significant appreciation and may be relatively short lived and as such could well be a good time to sell Euros.

 

 

Weekly Euro rates and comments for the week commencing 10th September

We still live in interesting times. The banks are very cautious about lending to each other as they are still unsure where the losses relating to the bad US home loans finally end up. Also the banks are having to hoard cash as they are likely to find it very difficult to offload all the debt they have taken on funding the numerous private equity deals we saw in the first half of this year. In the midst of this uncertainty the Bank of England took the prudent approach and kept interest rates on hold. The BOE did take an unusual step by making an announcement stating that they were concerned about the credit markets and thought this uncertainty would dampen inflation in the short/medium term and this has led the market to believe that increased UK interest rates are also unlikely in the short to medium term. Since this announcement sterling has steadily lost ground against the Euro.

 

The Euro is the main beneficiary in the current climate gaining against sterling strengthening to €1.472/£1. The European Central Bank did meet last week and the ECB held Euro interest rates. However the ECB did announce that it felt that interest rates were still too accommodative [i.e. too low] and therefore would need to be increased sometime. This increase is unlikely in the short term but was more bullish than the BOE's announcement on sterling. The Euro land economy still continues to move along nicely. However, it still has a degree of dependency on the US and that means that it will be concerned about what is happening in the US. Again would seem to make sense to buy when we see a bit of weakness from the Euro as it could well be short lived.

 

Weekly Euro Rates and Comments - Week Commencing 3rd September 2007

The markets became a bit calmer in the last few days as the news flow was less scary. But we shouldn't get complacent as I suspect there are still significant problems out there just waiting to see the light of day and when they do the markets will move very very quickly. Debt funding is going to be a problem for the medium term which is going to constrain growth. The Bank of England has not had to pump in the huge volumes of liquidity into the market place that the Fed had to in the US and the European Central Bank in Europe. This has enhanced the BOE's reputation but sterling is not looked at as a safe haven asset and as such will be under pressure when problems arise. The BOE meets this is week and is expected to keep interest rates on hold.

 

 

A bit of strength for sterling against the Euro towards the end of the week and it has pushed up to €1.48/£1 inter bank but please remember this is the holiday season and volumes are low. The German banks have suffered greatly from the problems with sub prime loans being significant buyers of the securitized sub prime debts that were distributed around the world and have proved to be near enough worthless. We have truly become a global market and this has increased the volatility resulting from the recent credit crunch. The European Central Bank is meeting this week. It had indicated at the press conference following the last meeting that it would raise € interest rates. However, this is now considered unlikely given the problems already noted. I would still consider buying on any short term weakness in the Euro, such as now, as it may be short lived.