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#1 30-03-2011 11:27:02

johnedward
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Forex trading: the euro defies logic

Forex trading: the euro defies logic

   
article by Liz Philips (UK Telegraph)

Despite Spain and Portugal edging ever closer to an EU bail-out, the euro seems to be going from strength to strength.

The world of currency exchange rates is a topsy turvy one. Sometimes it appears to defy logic.

Despite Portugal edging closer to the brink of needing a massive hand-out and Spain also looking shakier, the euro has gone from strength to strength.

Meanwhile Chancellor George Osborne’s austerity measures outlined in the budget did nothing to help the pound once our appalling retail sales figures were revealed. Sadly, the snow can no longer be blamed for shoppers staying away from the High Street and keeping their hands firmly in their pockets.

Sterling is now at a five month low against the euro and a two-month low against the dollar. Just as expats dared to hope that the days of a weak pound were over, the bloom came off.

That’s because currently currency is all about interest rates. The prospect of a rise in base rates trumps economic woes. Our weak figures threaten the chances of the Bank of England raising rates any time soon while everyone is confident that the European Central Bank will increase interest rates at next month’s meeting.

Chief economist of FXPro, Simon Smith, sums up the situation thus: “There are three over-arching reasons for the single currency’s vigour. The first is the weakness of both the dollar and more particularly sterling after soft retail sales numbers for February. Secondly, despite all the noise around the EU sovereign crisis it is still interest rates that are the primary driver of the euro right now.

“Finally, it’s difficult to negotiate a bail-out with an outgoing administration (and indeed, counter-productive), so the perception is that the re-financing required next month for Portugal will be covered by the tripartite arrangement of the Portuguese government, banks and ECB. It’s a sticking plaster, but one which will probably hold.”

The creation of a permanent crisis resolution fund, the European Stability Mechanism (ESM), by 2013 is also bringing some comfort. Under the new scheme, capital contributions to the ESM will total €80 billion, but paid in equal annual instalments over five years.

But Mark O'Sullivan at Currencies Direct pours scorn on the ESM. He says:

“The irony of asking both Greece and Ireland, who both had to be rescue last year, to contribute €31 billion to the newly formed ESM did not seem to bother eurozone leaders.

“This once again showed that eurozone leaders just do not get it: asking sovereign states who are in effect insolvent to actually borrow in the debt markets to contribute to their own rescue fund.

“The Portuguese are a classic case. They still refuse to ask for a bail-out, but are more than happy to bring down the government when the austerity measures that are needed are voted down, forcing the prime minster to resign, and pushing them ever closer to the bailout they are trying to avoid.

“So Portugal - now a government-free zone - is also being asked to stump up €18 billion towards the ESM, despite the fact they could be weeks away from themselves being bailed-out. The eurozone would be much better suited if the next rescue package had the acronym HELP, as until bondholders are forced to take a haircut the problems in Europe are being either ignored or compounded into an unworkable mess.”

In the meantime, the level that the euro is at has priced in an interest rate rise (even though it hasn't happened yet) as well as the threat of Portugal needing a bail-out.

As David Kerns of Moneycorp says: "There is a sensation that the market has been waiting so long for Portugal to go into receivership that it will be a relief when the deed is actually done."

Portugal is relatively insignificant within the eurozone. But Greece and Ireland are also small nations on the wider stage, and their crises caused the euro to plunge. Why not Portugal?

Nick Ryder, global currency analyst for Smart Currency Exchange explains: “Currency markets have essentially ignored the plight of Portugal and focussed on Spain. Spain is a far bigger player in the eurozone, and as a result means far more if it were to get into trouble. Aside from a few blips, the euro exchange rate has almost perfectly tracked what Spanish bonds are doing. Lower yields from Spanish bonds mean a strong euro and higher yields mean a weaker euro.

“Currently, we are seeing euro strength related to interest rate prospects. Markets are ignoring the Portuguese situation and investors feel happy taking risks and investing in euro-denominated assets.

“I don’t think that the UK is held in worse esteem than the euro zone, it is just that there is no return on investment available here at the moment. Give it 6-12 months, and assuming the UK grows as expected (despite last week’s Budget) sterling should be back on track.

“And a weak pound is not a bad thing. The UK needs inward flows of foreign investment to help grow even if it is painful for holidaymakers and those living abroad receiving their income in sterling.”

The euro will plummet if the expected increase in interest rates doesn’t occur - though that’s highly unlikely – and if Spain continues down its tricky path.

Chris Towner of HiFX explains: “The issues in Portugal are the same as the credit crisis knocking on the door of Spain. In fact last week we saw rating agency Moody’s downgrade the credit rating of 30 Spanish banks. The timing is perhaps a warning!

"However despite this, the euro has managed to maintain its footing. So the euro is struggling between vigilance of higher rates and vigilance of the credit rating agencies as they tear through Europe with their downgrades. If Spain starts to wilt, though, you may see the problem has become too big to ignore.

“At home in the UK we’re also not without issues and last week gave us a good insight to what these are: inflation and lack of growth.”

Richard Driver, currency market analyst, adds: “Sterling’s prospects look fairly bleak in the near-term. The market is unconvinced that the Bank of England will shift policy with the economy on such a fragile footing, and the rate could yet head lower in the absence of any positive figures from the UK.”

Mark O’Sullivan gloomily agrees: “Sterling is starting to look vulnerable and for all those looking for an interest rate rise to head off increasing inflationary pressure it could be slower UK growth that could even see another round of quantative easing. For these reasons I find it hard to make a case for a prolonged sterling rally.”


"Anything worth having is worth going for - all the way." - J.R. Ewing

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#2 18-08-2012 10:16:57

commonforex
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Registered: 18-08-2012
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Re: Forex trading: the euro defies logic

Most economists had expected the US dollar to fall when the depths of the global economic crisis became apparent. Forex investors consider the US dollar to be a safe haven in times of economic trouble and this risk aversion has benefited the dollar while hurting foreign trade. The dollar soared on currency markets defying conventional logic. In today's global economy the need for a Forex currency converter has never been greater. Currency markets have been especially volatile and consulting an FX currency converter has become second nature for many executives.

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