Currency Information for Euros
Did somebody give the Pound a Monopoly set for Christmas? If not, where did the
"Get out of jail free" card come from? For more than a month Sterling managed
to avoid the big drop even though, time and again, the audience held its breath in
anticipation of a horrible accident.
The principal reason for
Sterling's ability to hang on was the Euro's failure to
make progress beyond US$1.50. It almost got there but almost is not good
enough in this market. There were plenty of sellers lined up to take advantage of the Euro's
record high in late November and they will be feeling quite pleased with themselves
as they trouser their Christmas bonuses. Ten days before the holiday week there
was another run on the Euro, this one sparked perhaps by the sore losers who had
missed out on the November top.
In both cases the Pound also felt the selling pressure against the Dollar but the
usual price action means that Sterling/Dollar follows Euro/Dollar, it doesn't lead
the way. So a strengthening Euro tends to depress GBP/EUR; a falling Euro loses
out to Sterling as well.
It was all a big relief to supporters of the Pound because things
could have been
much worse. A taste of just how much worse came the day before the Monetary Policy
Committee sat down for its December meeting. The catalyst was the HBOS/Halifax house
price index for November. It marked the third consecutive monthly price fall and
completed a series of similarly negative numbers from other researchers. Investors
looked at the Halifax figure, extrapolated it into 12.5 per cent annual drop and
came to the conclusion that the MPC would have no option but to cut the Bank Rate,
maybe even by half a percentage point. There was much dumping of Sterling. Fortunately
for the Pound,
so much pre-emptive selling had gone on that the bears had run out
of ammunition by the time the MPC announced its quarter percentage point cut. A
burst of volatility threatened to push Sterling down
through long term support at
€1.38 but nothing came of it.
Looking ahead to 2008 it is depressing to observe that nobody really has a good
word to say about the Pound. Even the Bank of England keeps telling us what a dismal
state the British economy is in. Nationwide, the RICS, Rightmove and the rest of
them all see house prices falling. Base rates are heading lower even though the
reductions are only selectively being passed on to borrowers. On the face of it
the tales of doom and gloom can have only one outcome for Sterling. And it will
not be a good one.
Don't forget though that Britain is not alone in this waterlogged economic ship.
North America and most of our continental neighbours are feeling the effects of
the US mortgage industry's problems. They too are struggling with the liquidity
and credit crunch that the sub-prime implosion has provoked. Even though the European
Central Bank still talks the talk about higher Euro interest rates, among analysts
there are grave doubts about whether the ECB will ever have the opportunity to walk
the walk. The bottom line is that whilst the gloom and despondency may have been a tad overdone, Sterling is still vulnerable. A break below €1.38 would set up a
potential target
of €1.20. Investors planning to put money into Euro zone real estate in 2008 should therefore hedge a decent proportion of their exposure; at least half.
If the cover is arranged as a "forward" purchase of Euros it will only tie up some
10 per cent of the nominal amount. The other 90 per cent will not be needed until
settlement day. A forward purchase of Euros is a cost-effective way of avoiding
the risk of a Sterling collapse. Given that the
chance of Sterling achieving a great
leap forward is vanishingly small, the hedging strategy is well worth a look.
The cost is modest, the protection is priceless.
For more information and expert guidance on the currency markets, call
Moneycorp
today on +44 (0)20 7589 3000. Alternatively go to
www.moneycorp.com
where you can open a free, no obligation Trading Facility.
Make your money go further!