Falling sterling

[P]

Are there any finance gurus out there?

Why has the sterling v euro suddenly fallen from its high?

I had thought that the BoE increase might have strengthened it - but finance was never my strong subject.

Paul

[Benjamin]

The problem with the sterling/euro rate at the present is that before the recent BoE rate rise the financial markets had already anticipated the move and had built that into the exchange rate.

I can't just find the statement that was issued when the rate was increased but it didn't firmly indicate that a further rate rise could be on the cards in approximately February 2007. The financial markets therefore decided to take this as a possibility that this latest increase could be the last for some months and as a consequence sterling has fallen back against the euro.

Complicated isn't it?

What you have to remember with all financial markets is that information which comes into the public domain for the likes of you and me has probably been well known or ar least well anticipated by those markets for some time before. Hence leave financial descisions to the professionals.

Benjamin

[Eslier]

Yes, it was the Bank of England Inflation Report that seems to have caused much of the damage, indicating that a further rise in interest rates between now and Februay is less likely. This coupled with the expectation of an interest rate rise from the European Central Bank early next month.  There is some hope for the pound however with the publishing of the  Retail Sales  figures today. An increase in this figure is likely to refuel hope for a further Bank of England rise in interest rates in the near future, on the other hand if the figures aren't good then you can probably expect the pound to sink back a little more.

[Deimos]

I always understood that rates adjusted in the "expectation" of something, then returned when the expected event takes place. Seems a bit weird but does seem to happen (sometimes at least).

Probably more complex these days as the Eurozone economy does seem to be picking-up a bit.

Ian

[Cat]

The rate is at about the average for the year, so I suppose it has settled  to its normal figure.  I always thought that speculators buy sterling when it is weak, and sell when it is strong, creating a kind of wave effect, as the very act of massive buying or selling tends to push the rate up or down.

 

[Gastines]

After 4 successive bank rate risesI'm wondering when it will filter through to us savers? The banks/building societies are usually pretty quick off the mark the other way around!

Regards. 5mins St. Malo

[Benjamin]

If I've seen nothing in the newspapers/online two weeks after a BoE announcement I start sending emails asking WHEN? Don't be passive with banks-attack.

Benjamin

[Cassis]

[quote user="Benjamin"]

What you have to remember with all financial markets is that information which comes into the public domain for the likes of you and me has probably been well known or ar least well anticipated by those markets for some time before. Hence leave financial descisions to the professionals.

[/quote]

Indeed - that way they can screw up your investments professionally.  [:D]

Do you remember, very early on during the last long and protracted UK market slide, a different professional investment advisor would announce daily that the market had "bottomed out"?  The slide continued for months after the first of these gems of wisdom was broadcast!

[Benjamin]

[quote user="Cassis"][quote user="Benjamin"]

What you have to remember with all financial markets is that information which comes into the public domain for the likes of you and me has probably been well known or ar least well anticipated by those markets for some time before. Hence leave financial descisions to the professionals.

[/quote]

Indeed - that way they can screw up your investments professionally.  [:D]

Do you remember, very early on during the last long and protracted UK market slide, a different professional investment advisor would announce daily that the market had "bottomed out"?  The slide continued for months after the first of these gems of wisdom was broadcast!

[/quote]

Cassis

Please stop now or else I'll start having the nightmares again!!!!!!!!!!

I remember when Vodafone shares were about 350p and analysts suggesting that a price more in the region of 540p would be correct. They're probably 135p or so today - haven't looked.

Benjamin

[Cat]

Looks like the rate might be on the up again, yesterday's was 1.49127, which is the highest it's been since early November.

[Gluestick]

It is not only interest rates which predicate values on the Forex (Foreign Exchange) market.

Obviously, rates have a bearing, however the most crucial aspect is what is called Exchange Risk Exposure. This is the investor's risk that the currency will depreciate too far in a capital sense.

If the interest rate was say 10%, but the exchange rate fell by 25%, then the investor has lost money.

In other words if the investor's home currency was say Swiss Francs, he would find that when swapping back into Swiss Francs he had lost 25% of his capital, but received 10% interest, then he has nominally lost 15% of his capital. It could even be more, as the rate normally slides gradually before any big loss (such  as a revaluation by government) and his periodic interest, would increasingly buy less and less Swiss Francs.

The big speculators, such as George Soros - Quantum Fund - tend to buy and sell in the Forex market when they can see signficant capital gain. This may be up or down, as you can buy currencies in three ways: spot - here and now: forward contract fixed: exchange at a specified time in the future, say one month: and forward contract option; which means you can exchange at any time from the day you agree to the last day on the contract, which may be three months or even more. there are many other ways to trade and invest in currencies and gamble too! Derivatives (Artificial Paper Transactions) offer far more ways than even regulators can keep abreast off!

Additionally, speculators can "seed" the market to drive it both up and down by buying or selling large tranches of exchange. Thereafter they can ride the market up or down to make their profits.

Finally it must be remembered that a Forex investor only has one underlying assurance: the strength of a country's economy: since there is nothing else to back up currency value. All major tradeable currencies these days are what is called "Fiat Currencies": their value is predicated and underwritten by the relative value of the issuer's economy and its debt (Both Internal - i.e. budgetary: and External - Balance of Trade).

I suppose that one has to realise that not only are forex markets as fickle as all other markets: they are not wholly predictable, nor are they rational!

Whilst the core buyers and sellers, which are the results of trade, i.e. importers and exporters, are usually quite predictable and stable, the speculators, wheelers, dealers and arbitragists are usually short termists too. As was Soros when he made $1,000,000,000 on the back of Abnormal Lamont's stupidity over the UK's withdrawal from the ERM.

 

[allanb]

[quote user="Gluestick"]I suppose that one has to realise that not only are forex markets as fickle as all other markets: they are not wholly predictable, nor are they rational![/quote]

Why do you say they are not rational?  They are based on expectations, which may be wrong: but it is perfectly rational to base a decision on whatever information you have, recognizing that it may not be reliable.

Incidentally, you missed one of the most important determinants of any FX rate, which is the expected difference in price inflation between two economies.

[Gluestick]

[quote user="allanb"][quote user="Gluestick"]I suppose that one has to realise that not only are forex markets as fickle as all other markets: they are not wholly predictable, nor are they rational![/quote]

Why do you say they are not rational?  They are based on expectations, which may be wrong: but it is perfectly rational to base a decision on whatever information you have, recognizing that it may not be reliable.

Incidentally, you missed one of the most important determinants of any FX rate, which is the expected difference in price inflation between two economies.


[/quote]

To me, making a decision on unknown factors is not rational: it's gambling.

What's price inflation? Depends whom you believe! For example, do I believe, well, the present UK stats? [:P] Not really, since they tend to be politically driven. Additionally, they suffer from reporting lag: and as I'm sure you would agree, Forex markets are probably the most volatile of all capital markets: and the most short term for the bulk of transactions. And with the smallest spread.

In any case, my earlier comment about economic potential:

[QUOTE]

Finally it must be remembered that a Forex investor only has one underlying assurance: the strength of a country's economy: since there is nothing else to back up currency value. All major tradeable currencies these days are what is called "Fiat Currencies": their value is predicated and underwritten by the relative value of the issuer's economy and its debt (Both Internal - i.e. budgetary: and External - Balance of Trade).[/QUOTE]

surely factors in inflation/deflation /stagflation forecasts? If not, then it is not much of an analysis!

 

[Owen]

Hello Paul,

Sterling is quite strong against the Euro at the moment at around 1.4925. it has been higher but not much. It was a touch under 1 .46 on 1 January 2006. The Euro/Sterling cross has traded in a relatively tight range in the last 3 years a 10% difference maximum between high and low. Nothing is certain for the future but it strikes me that to gain (or lose) a lot on this currency cross in the near term will be tough. Even if the Euro does strengthen, sterling interest rates are still higher than Euro ones although they have narrowed this year. Comparative interest/inflation rates are certainly a factor in the Forex markets and is a major reason for the comparative weakness of the yen. If only it was so simple.

Unfortunately sentiment can be also a major driving force and can push yield considerations to the background and this can play havoc with forecasts - even those of professionals. Warren Buffett was dreadfully wrong with his weaker Dollar against the Euro forecast at the beginning of 2005. The dollar gained 15% last year although it has clawed back around 10% this year.

We are now entering the season when "experts" make their forecasts for 2007. It is worth keeping copies of some of them to give some idea just how random these markets are. In December last year Deutsche Bank forecast an end of 2006 dollar/euro rate at 1.27 which looks as it will be pretty accurate. At least they have forecast the right direction. However they also forecast the yen/dollar cross at Y102 which looks to be way off the mark. In fact I think such forecasts a year ahead are pretty pointless apart from selling financial products.

Regards

Owen

[P]

Thanks everyone for your replies.

We have now taken the plunge and ordered our currency for the 'big bit' of the purchase price.

Saw the rates high yesterday morning [:D] and then fall greatly as the day went on [:(].

This morning I called up the BBC website that shows rates and changes. It then started to climb and when it was at 1.49something I thought 'let's go now otherwise it might fall'.

So the phoning around of the dealers as well as having an online one on the screen that shows the actual rates that they offer.

A call to one dealer (incidentally the one we used for the deposit and that went without a hitch). I was quoted a rate which was lower than the online rate. I said that I needed to phone a few more. 'Are you just researching at the moment' I was asked. 'No, intending to buy today'. I was then asked what I had been quoted and by who. I read out the price on screen and told him who it was. 'Just a minute I will talk to one of my directors - sometimes we have some large deals going on'. A minute of so later he came back to offer a far better rate than the online dealer so the deal was done.

For the rest of this morning I have been watching both the BBC site and the online dealer site watching things go down and then back, just a little, but the rates not getting near what I got this morning.

We had taken a gamble (and I do not like taking gambles) - we had not gone for a forward deal but had made enquiries. We ended up with a better deal than we were quoted for a forward deal.

So, if you have got this far through his post, and you are in need of currency exchange, certainly with one dealer they can do better - I saved over £1,200 on the original spot that I was quoted[:D].

Paul

[Gardian]

Paul ...............

What you've done seems to me to be as good a piece of advice as you can get.  It ought to go up as a 'stickey'.  Wish I'd negotiated in the way you did.

Best thing now is to look forward to the finalisation of your purchase and resist the temptation to keep checking those rates!

Best of luck for the completion. 

[P]

[quote user="Gardian"]

Paul ...............

Best thing now is to look forward to the finalisation of your purchase and resist the temptation to keep checking those rates!

[/quote]

Gardian

Will not be able to resist looking the rates. However, hopefully I will be gloating unless something major happens and the euro tumbles.

Paul

[AnOther]

I did a deal yesterday for the Euros for my forthcoming purchase.

I use HiFx and had been watching their realtime graph to decide exactly when to go for it. I needed the money to be at the Notaire's by mid January and was a bit nervous about the market going defensive over the holiday period so bit the bullet @ 1.4912 (1.4817 actual after commission) which is better than the rate when I agreed to buy so the house is costing less and I'm happy enough.

For dedicated Euro watchers the chart can be found at:

www.hifx.co.uk

Click Private Foreign Exchange/Property/Market Information/Charts.

On the graph toolbar under Time Scale you can choose a range between 1 minute (real time) and 1 month (the Euro from 1997 to date).

Interesting to see that the Euro fluctuated from 1.20 in mid 1995 to 1.75 in mid 2000 which is nearly 50% but has only varied by about 6% since big falls in the first half of 2003.

Unfortunately buying Euros will always be a cat and mouse game and the sad fact is that there are really only 2 guaranteed excellent times to buy - yesterday and tomorrow...!

[Llwyncelyn]

It was both the best and worse time of my life when I had to pick up the phone confirm the rate and then fax the deal to then Currency4Less.  Are they still around.  This was in the autumn of 2001 and the rate was 1.6775.

There was a tendency afterward to check the foreign exchange rate between the £ and the euro but what the heck was the point the deal was done.

Fairly similar to the C and W shares (I used once upon a time work for them) and participated in every save as you earn share option that I could lay me hands on.  To be fair they proved a good investment in the early years and helped buy me a Volvo pay for holidays extra AVC's etc etc.

At the time we were run by Sir Eric Sharpe and later Lord Young old-fashioned yes but the city liked them.  Then new guard lets throw everything we have done over 100 years out of the window and go for the data market forget about our customers who like using the phone forget about the West Indies lets go down the route of buying data boxes.  At one time the shares were £15.25 today they are some £1.49.

At the time thought well this is good strong company old-fashioned but they are safe.  Watched share price do down and down did not set a bottom for myself.  What happened lots of white share certificates here in the draw of my study in France.

Still leave them in my will to the children..........we shall see.

As they say shares can go up as well as down.

 

regards

[Mark]

[quote user="ErnieY"]

 bit the bullet @ 1.4912 (1.4817 actual after commission)

[/quote]

We got 1.47ish with HiFX yesterday, so yours sounds very good indeed, Ernie.

[AnOther]

5 minutes can make the difference...!

Perhaps I should modify my statement that there are only 2 excellent times to buy to say 5 minutes ago and in 5 minutes time...!

[Mark]

It's impossible isn't it?  I was perfectly happy with what we got though.....

[AnOther]

Absolutement!

As I said, because the rate I got is better than when I agreed to buy the house I'm quite content.

I just hope I can strike it right when I do a 2 year deal!