The pound is on the brink

[Sprogster]

The problem is not just the weak £, but that the euro at the same time has become overvalued, reaching a record high against the US$ yesterday. At the meeting of Eurozone Chief Finance meeting yesterday, concern was expressed about exchange rate movements and Trichet even had a surprise press conference to express the same concerns  Bloomberg Link:  http://www.bloomberg.com/apps/news?pid=20601087&sid=aAB81XFxq2P4

The risk for the Eurozone is that if the rise in the value of the euro continues it is going to be very damaging for their export competiveness, and weaker eurozone countries like Spain could start to see civil unrest as umemployment approaches 20%, putting a great strain on the eurozone.

I would not expect anything dramatic to change overnight, but in the longer term the current strength of the euro is not sustainable if unemployment levels in the eurozone are going to be contained to acceptable levels.

 

 

[Quillan]

[quote user="Sprogster"]

The problem is not just the weak £, but that the euro at the same time has become overvalued, reaching a record high against the US$ yesterday.

[/quote]

This is where I get annoyed. The Euro has not reached an all time high against the Dollar, the Dollar has reached an all time LOW against the Euro. Those that 'love' the dollar always do this. Its not the Euros fault, its the rubbish economy in the US thats the problem for THEM.

Some areas of European industry have suffered more than others, some have actually done better and the overall drop in Euro exports to the US was 3% in August (source HIGHBEAM ). UK exports to the US went up by 5% but then thats because the Pound lost to the Dollar.

I see that the uplift in production throughout the Euro Zone has enabled those like DailyFX to say that recovery is 'just round the corner'.

 

[Chancer]

€1.10 Yippeee!!!!!!!!!

[Jako]

Enjoy the blip while it lasts.[:)]

King will be speaking tonight, BOE minutes tomorrow... [geek]

[Jay]

[quote user="Jako"]Enjoy the blip while it lasts.[:)]

King will be speaking tonight, BOE minutes tomorrow... [geek]

[/quote]

King always looks so down – a bit like those dogs with the droopy sad eyes, no wonder everyone wants to sell sterling. Why is it he comes out with his depressing statements just before they calculate my end of month pension? Do you think he knows when I get paid and does it on purpose?

[mint]

You bet he knows.  What does he care about your pension?  His own is gold-plated and inflation-proof.  Besides, he gets a real kick out of being in a position to affect the life style of millions.

I dare say he enjoys his position of power and invincibility........

[powerdesal]

[quote user="Quillan"][quote user="Sprogster"]

The problem is not just the weak £, but that the euro at the same time has become overvalued, reaching a record high against the US$ yesterday.

[/quote]

This is where I get annoyed. The Euro has not reached an all time high against the Dollar, the Dollar has reached an all time LOW against the Euro. Those that 'love' the dollar always do this. Its not the Euros fault, its the rubbish economy in the US thats the problem for THEM.[/quote]

I dont often find myself in agreement with Quillan   [Www] but in this case I most certainly am. Everyone seems to assume that the USD is a stable baseline against which all else is measured, .....its not.

A low value dollar works for me in some ways, I am paid in Euros but converted to a dollar linked currency each month, however, at some stage I will need to BUY euros, I hope the dollar has improved by then.

[Sprogster]

Quillan, in the longer term if the ECB do not relax their tighter fiscal policy which is the main reason behind the stronger euro, the chances are they will be forced to politically by eurozone governments that are more concerned about the impact of unemployment on their re-election chances.

Unemployment in countries like Spain at nearly 20% are dire and latest forecast growth figures for the UK are actually no worse than France and Germany.

[Quillan]

We always have this 'debate', the Euro has not got stronger, its the Dollar (and the Yen and Sterling) that has become weaker. Look at some of the other world currencies, Australian Dollar, Canadian Dollar etc.

Spains problems, like Ireland, was not caused by the current recession but it is fair to say that the recession has compounded their problems. In the case of Spain it's down to the construction industry in as much as supply has out stripped demand and has done for some time from before the recession. Theres simply too many houses and apartments and too few people wanting them. You only have to visit the place and see that the building industry is at standstill, its nothing new and it really started two years ago. OK, sure the fact that a weak pound means its more expensive for those outside the Euro Zone to buy and of course the major traditional buyers are the Brits. There has also been many problems with corruption with regards to the building industry which has scared people off as they see on the TV people having their housed demolished and loose all their money. On top of that much of central Spain where food is grown has moved over to automated, computer assisted farming in massive green houses where the temperature, feeding and watering is all computerised and there is no need for loads of people to tend the crops. This is why, as I said, the recession does not help but its not the total cause of their demise.

In the case of Ireland they received billions of Euros in grants to upgrade their infrastructure. The problem is there are only so many roads to be built/rebuilt and only so many new railway lines to be upgraded etc. Now thats done you have mass unemployment because those that worked on these massive projects have no more to do and there is no alternative work for them. Other industries have been effected as well and the Irish econamy is going through a boom and bust cycle which again is not helped by the recession.

There are also political issues at stake especially with the completion of the Lisbon Treaty being just round the corner which effectively makes the United States of Europe the number one player in the world (both monetary and size wise) and the US being relegated to second place. The US wants to try and get the EU to 'tow the line' and are absolutely petrified of what will be happening over the next few years. By keeping the exchange rate where it is puts pressure on Europe to 'tow the line' as it were.

Still it nice to see the financial chaps are keeping their bonuses and those that bailed them out (the UK tax payer) won't even be able to borrow the money back under the new regulations proposed. It seems to me that the banks are making shed loads of money out of all this (as reported on TV and in the press) but unfortunately it seems to be at the expense of 'joe public' yet again. I don't think they give a hoot about us they just want to line their own pockets but then nothing has really changed there I suppose. I still don't understand how they are able to make so much money yet my pension pot shrinks year by year. Somebody somewhere is making a bomb and it ain't me nor anyone I know unless I am simply unlucky [:(] .

[baypond]

The problem for the Euro is that it is seen as an alternative reserve currency to the (weak) dollar. China has reserves now of over $2.2 trillion (built up to keep the CNY weaker than it would be). For China to keep reserves just in the dollar when the USA economy is in long term decline could be suicide financially, so they diversify, as do all China's trade partners.

Here is the current cycle (and it is probably here to stay while China supports the world economy by importing massive ammounts of commodities):

China buys commodities and at the same time has a massive trade surplus by utilising the cheap labour force to produce cheap good for re-export. Because of their trade surplus, they buy USD/CNY and then convert a significant portion in to Euros (by selling dollars). At the same time, all those exporters to China (Asia, Brazil etc) buy massive amounts of dollars against their own currencies to prevent their currencies from appreciating too far and causing competetive issues vis-a-vis their competitors. All these central banks are currently diversifying out of just dollars to Euros (along with some GBP,AUD etc). This means that while China continue to import, their partners will earn dollars, which they sell. The central banks buy these surplus dollars to protect their export economies, and buy EUROs to diversify. This vicious circle of EURO buying will not dimish until China stop importing, or to put it another way, EURO will continue to appreciate while the dollar is intrinsically weak.

Simple isn't it.

[baypond]

[quote user="Quillan"]

Still it nice to see the financial chaps are keeping their bonuses and those that bailed them out (the UK tax payer) won't even be able to borrow the money back under the new regulations proposed. It seems to me that the banks are making shed loads of money out of all this (as reported on TV and in the press) but unfortunately it seems to be at the expense of 'joe public' yet again. I don't think they give a hoot about us they just want to line their own pockets but then nothing has really changed there I suppose. I still don't understand how they are able to make so much money yet my pension pot shrinks year by year. Somebody somewhere is making a bomb and it ain't me nor anyone I know unless I am simply unlucky [:(] .

[/quote]

Strange isn't it that the politicians want banks to lend, when all they have said is that banks lending criteria was wrong and caused the credit crunch in the first place. Strange also that if you look at banks profitability right now, they are still losing massively on loans (my bank lost $8bn last quarter on their loan and credit card portfolios). The banks are making huge returns on marking up all those assets that the authorities forced them to mark down last year, and also in M/A, cash management and trading. The Federal reserve stands to make many billions for selling their stakes in the banks they semi-nationalised so what is happening? Politicians will not recognise that they created unsustainable growth (bubble) by refusing to legislate against banks and the parameters under which they operate. Gordon Brown spent spent spent while times were good, and has nothing left when the economy reverts to long term trend. Now it is easy to blame greedy bankers rather than take responsibility for his own mess. People forget Northern Rock, was that greedy banking? No, it was poor regulatory framework. Funny no one mentions them any more.

[dragonrouge]

I just wonder whether if Cameron gets in that the Bank of England Governor will change his approach or indeed will the new Government bring the BoE back into house. I seem to remember that when Brown gave the BoE its independence to organise interest rates et al it was greeted as a master stroke.

[Quillan]

[quote user="dragonrouge"]I just wonder whether if Cameron gets in that the Bank of England Governor will change his approach or indeed will the new Government bring the BoE back into house. I seem to remember that when Brown gave the BoE its independence to organise interest rates et al it was greeted as a master stroke.[/quote]

I also thought it was a master stroke. At the time I was thinking that when they have over borrowed and interest rates go up to double figures etc that GB could simply turn round and say "Not me mate its the BoE, I don't control the interest rates they do". Seems I got the scenario ever so slightly wrong but it still leaves the BoE as the whipping boy along with the other banks in all this. Don't know if you should laugh or cry really [;-)]

[Quillan]

[quote user="baypond"]The problem for the Euro is that it is seen as an alternative reserve currency to the (weak) dollar. China has reserves now of over $2.2 trillion (built up to keep the CNY weaker than it would be). For China to keep reserves just in the dollar when the USA economy is in long term decline could be suicide financially, so they diversify, as do all China's trade partners.........
[/quote]

So, having read it twice now, and hope I have understood, you are saying that China has shed loads of dollars because thats what its buying (and selling probably) goods in on a day to day basis. But, they also see the Dollar as a bad investment long term so they keep exchanging their Dollars to Euros because its more stable and probably get a better interest rate on their savings?

[Sprogster]

Spot rate back over 1.11. What ever the whys and wherefores the fact is that the ECB and Eurozone ministers are now trying to talk down the euro, though whether this will be effective or not only time will tell. If not they can always surprise the markets by reducing the ECB base rate!

 

[just john]

According to the report in the DT the pips are squeaking in Euroland and they may be obliged to do something about it;
Hang on in there! [8-|]
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/6389779/Euro-at-1.50-is-disaster--for-Europe.html

[Sprogster]

Could be a seismic shift in the fortunes of the £, as shock horror, Mervyn King boosts the £ by forewarning of increasing £ interest rates!

For all the numerous posts on the fortunes of the £ and $, one of the most important influences has been largely ignored and that is the difference in interest rates between central banks and the influence of carry trade speculators.  

Bloomberg link;  http://www.bloomberg.com/apps/news?pid=20601087&sid=aLz26bpPOx4E

 

 

[Jako]

This gave a big blow to the pound today:

UK Economy Contracts for Record Six Straight Quarters

Analysts had expected a 0.2 percent growth for the UK, not another contraction.

Eurozone growth figure is also adjusted, but to the upside.[8-|]

[Chancer]

Yep it fell tuppence immediately.

[JMB]

1.0898. The plain fact is that the pound cannot rise in the next few weeks because I am waiting for a new engine to be built for my MGB and will have to pay in pounds. So it will only go down until after I pay up for the engine.[:D]

[Alan Zoff]

Could try putting in a Deux Chevaux engine instead, perhaps?

[baypond]

Quillan wrote: "So, having read it twice now, and hope I have understood, you are

saying that China has shed loads of dollars because thats what its

buying (and selling probably) goods in on a day to day basis. But, they

also see the Dollar as a bad investment long term so they keep

exchanging their Dollars to Euros because its more stable and probably

get a better interest rate on their savings?"

Think of it as more that China is hedging it's bets, diversifying it's reserves away from just dollars means it has less exchange rate fluctiation in the value of it's reserves because as one currency goes down, the other may compensate by rising.

[just john]

[quote user="JMB"]1.0898. The plain fact is that the pound cannot rise in the next few weeks because I am waiting for a new engine to be built for my MGB and will have to pay in pounds. So it will only go down until after I pay up for the engine.[:D][/quote]

Its inevitable that it will rise for the forseeable future since I have returned from France, but will fall again in time for me to pay the bills due to the macon in February.[8-|]

[Sprogster]

For those looking for light at the end of the tunnel regarding the decline in the value of the £, the attached Bloomberg link might cheer you up, as Goldman Sachs amongst many other leading currency analysts have turned bullish on the £ saying it has been over sold and is now way undervalued against the Euro by about 22%.

Nothing will change overnight but analysts like Goldman Sachs are very influential in the markets.

http://www.bloomberg.com/apps/news?pid=20601087&sid=a5htvXN3wFLc

 

 

 

 

[Alan Zoff]

If markets didn't move - up or down - traders wouldn't make any money. So a bit of talking up or talking down is good for business, especially if you are "very influential in the markets".