CURRENCY
ANY QUESTIONS?: CURRENCY
THE EURO’S GOT STRONGER, THE US DOLLAR WEAKER: WHAT DOES THIS MEAN FOR YOU?
T
he past few weeks have yielded considerable movement in the currency markets; announcements from the European Central Bank, and speculation as to the Federal Reserve’s intention towards more
stimulus, has seen speculators shift focus from the US dollar to European assets. In this month’s column we will consider both the reasons for these movements and the potential implications for the pound/euro and pound/US dollar rate.
SO WHY HAS THE EURO BECOME STRONGER?
The euro’s recent strength can be traced back to the ECB press conference on September 6th where Mario Draghi announced his intention to implement uncapped purchases of troubled European Sovereign Debt. The plan, in essence, is to allow such nations to apply for stimulus which will consist of the ECB buying their bonds, with monies redirected from other parts of the European Union, in return for those countries agreeing to more stringent austerity measures. The effort was designed to lower the borrowing costs for struggling nations and the markets quickly took to the news; Spanish 10-year bond yields fell by 35 basis points and the euro started to strengthen.
WHAT DOES THIS MEAN FOR THOSE BUYING OR SELLING EUROS? The news has seen the euro grow stronger against its major counterparts. Whilst
many commentators believe the announcement is in no way a fi x for the current crisis, the plan has bought the eurozone time to work towards balancing its books. The sterling/euro rate has been steadily falling since then, creating an opportunity for those selling euros, and an important decision for those buying them. There was enormous demand for forward contracts across the trading fl oor for those needing euros as the rate started to fall. A ‘forward contract’ allows you to lock in the current rate for any period up to two years helping to protect against adverse exchange rate movements, and allowing you to budget effectively. Those needing euros for a property purchase in the coming months should give “forwards” serious consideration.
SO WHAT’S NEXT FOR THE EURO? Predicting the fi nancial markets is a challenging task at
the best of times, and with so many irregular variables, it is impossible to know what will happen to GBP/ EUR rates moving forwards. Whilst market sentiment is more bullish for European assets at the moment, there is still a very real element of risk, and any news from the region will undoubtedly affect currency prices. Part of the European strengthening can be attributed to concerns over the Fed’s plan for monetary stimulus, which we will consider next, where speculators have preferred the propped-up euro to a potentially diluted dollar. In a nutshell, this means the pound/euro rates could now continue to fall.
This month Joe Mayhew of Foremost Currency Group weighs up the two key currencies of the moment
SO WHY HAS THE US DOLLAR WEAKENED?
Part of the dollar’s weakening has stemmed from the European announcements discussed above. The US currency is traditionally seen as a safe-haven in volatile markets and the European debt crisis saw investors fl ock to the greenback as a means of avoiding assets that were perceived as yielding more risk than reward. Draghi’s plan, however, has seen many reverse their positions; leading speculators to be less bearish on Europe. This move away from the US currency was further exaggerated when further quantitative easing was announced in early September. Quantitative easing (or QE3) is essentially where the American Central Bank prints more dollars in the hope of stimulating the economy. The problem for their currency is, in implementing such a plan, the Fed would effectively dilute the value of the dollar. This has caused the GBP/USD rate to go up as the Dollar weakens.
IS IT BEST TO BE BUYING OR SELLING DOLLARS AT THE MOMENT?
The Sterling/Dollar cross hasn’t been this high since May, and is very close to the best in a year, with the interbank price over the $1.60 mark at the time of writing. Many clients are taking advantage of ‘spot contracts’ which allows you to buy live to the market and ‘limit contracts’ which provide clients with the facility to set a fl exible level above the interbank price which is only bought when trading levels reach that point. The opposite of this is a ‘stop loss order’. This is where the currency will be converted as soon as the rate drops to a pre-agreed level; avoiding any further losses.
Whatever your requirements,
take the opportunity for a free consultation with the Foremost
Currency Group. In this way you can fi nd out all your options to help you make an informed
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