Foreign Currency News Updates

The real damage in this credit crisis can be seen in the relative time it takes for an index to fall on the back of poor news in relation to the time it takes for investors to regain confidence. Case in point can be seen at the height of the crunch when the FTSE lost 400 points in a day. Moving to more recent times, the currency markets are a clear indication of investor’s perceptions of asset value.

The EU summit for the last two days has agreed on aid for Greece through a mixture of bi-lateral loans and IMF funding, no sooner was this announced then we saw a rally in the Euro with session high after session high. At the close of play in London the Euro has climbed handsomely against both Sterling and the Dollar. However, should this rally not last longer than two days then we know there is trouble ahead.

Market sentiment suggests that the Euro will fall lower to $1.25 or $1.20 in the next 6 months according to currency strategists. The problem is that the bailout does nothing but provide a band aid for a bullet wound, the fundamental problems will not go away. There is a reason why other nations (the PIIGS) have been mentioned; they are in equally bad shape. In order for the Euro to recover all the nations with perilously high debt levels will have to fix their finances. Seeing as it has taken this long to sort out Greece, attending to perhaps four other nations will put a real strain on the ECB not to mention Germany who have led the bailout for Greece.

Portugal was recently downgraded and should they require aid then a certain Angela Merkel will no doubt voice her disapproval. Simon Derrick, at the Bank of New York Mellon, said this was a good indication of how rapidly fundamental worries were growing about the eurozone, “indeed this might well signal the point that we stop talking about a Greek debt crisis and start talking about a eurozone structural crisis instead. Every way you turn there is no way out, which is exactly why there is such a negative view on the Euro. Greece, being part of a single currency, cannot devalue its currency but leaving the eurozone is not an option. Instead it would have to raise capital through bond issuances, which it did. The problem with that is the interest is double the ten year German Bund equivalent, at 6.15%. So in the short term perhaps a solution, in the long term, no. In fact, despite the bailout agreement, the Greek bond yield narrowed to ‘only’ 6.28%. It is worth noting that the real problem in having a high debt figure is the cost in servicing said debt when investors are not willing to take lower payments and the money markets won’t offer funds at a rate Greece can afford.

The other option for Greece was an austerity package that was, once again, well met by investors initially but then viewed as unmanageable in the long term. Judging by the riots on the Greek streets the necessary spending cuts cannot be sustained. In my opinion the state of affairs is very serious but not serious enough for a collapse, the euro is weak but on the bigger picture the trade-weighted euro is only 7% below its all time high. In a worst case scenario the IMF will come in and order the restrictions and reforms that Brussels never could. The move would be very painful for the eurozone but it is not unworkable.

A long term bet would be to buy olive belt bonds after some particularly bad economic news then wait as the mess is cleared up, as it inevitably will be. Have a great weekend and expect no long lasting rallies for sterling just yet.