French Entrée Foreign Exchange
Among the major currencies the euro had the best week, adding a third of a cent against the pound and a full cent against the US Dollar. They were not the most active five days in FX history: the range for sterling/euro was less than a cent and euro/dollar only covered a cent and a half.

The main themes were, as usual, Greece, Spain and the US fiscal cliff. Investors blew hot and cold on the fiscal cliff. First they were optimistic that Washington politicians would reach an agreement to prevent it happening. Then they were put off by a negative comment from Harry Reid, the senate majority leader, who said he was disappointed at the lack of progress. Then the optimism returned as a deal began to look more likely. As their mood changed, so did investors’ attitude to the US dollar. The greater the likelihood of a cliff-avoiding compromise, the less is their need for the protection of a safe-haven currency.

It was this risk-off/risk-on pendulum that accounted for most of the euro’s movement but there were developments at home too. Following the previous week’s failure to deliver an agreement between the International Monetary Fund and the EU regarding Greece’s bailout, finance ministers had another go. They took part in a conference call at the weekend and headed back to Brussels on Monday for another meeting. After 11 or 12 hours they reached a compromise that all parties could live with. Details are typically sketchy but the plan appears to involve charging a lower rate of interest on Greece’s borrowing, allowing a buy-back (at a discount) of outstanding Greek bonds and handing to Athens some of the “profit” made by the European Central Bank on its holding of Greek bonds. The assumption is that EU leaders are preparing the way for an eventual write-down in the value of their loans to Greece but politically they are unable to say that in so many words.

Meanwhile, the European Commission was finalising its approval of a €40bn loan to Spain, to be used for the restructuring of its troubled banks. There were strings attached of course. Thousands of bank employees will be laid off, with Bankia alone shedding 6k staff.

Investors were not totally convinced by either of the agreements but they are increasingly confident that EU Leaders share a political will to keep Greece in the single currency and to provide Spain with whatever support it needs. For now, the anticipation of those positive outcomes outweighs any negative thoughts about how much it will all cost, where the money will come from and what will be the effect on Euroland’s economy.

It certainly isn’t looking too clever at the moment. Figures released this week showed fading consumer confidence, falling retail sales (except in Ireland) and rising unemployment. That is not to suggest that Britain’s economy is forging ahead but most of the week’s few data were at least mediocre. The first revision to third quarter gross domestic product (GDP) left growth unchanged at 1.0%. Nationwide reported no change in house prices between October and November and said “the predominant theme remains one of stability”. The CBI’s assessment of retail sales in October was the strongest for five months and GFk’s index of consumer confidence came in at -22, its highest level in 18 months (but what a pity it still has a minus sign in front of it).

As the week draws to a close, the pound finds itself at a tricky technical nexus. A rebound would open the way for a return to Tuesday’s high, but a downward break would probably lead to a further fall to the lows of six weeks ago.
Courtesy of Moneycorp, FrenchEntrée Recommended Partner, www.moneycorp.com

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