Spanish bailout fears drive Exchange Rates

Thursday 31st May 2012
Good morning. So far the week had been fairly flat, hence the lack of updates since Monday morning. Pound/Euro rates had been stuck at €1.25 and Pound/Dollar rates range bound in the $1.56 to $1.57 range. This all changed yesterday however and we saw market movement on the back of developments from Spain…

Spain concerns spook markets

Further concern in the Eurozone has caused the Euro to drop further, boosting GBP/EUR rates slightly. Concerns grew yesterday that Spain may be forced to seek a bailout, which caused the Euro to plummet yet again. It’s all to do with Bond yields; they are trading above 6.5%, very close indeed to the 7% level beyond which borrowing costs are deemed unsustainable over the long-term.

A rate consistently above 7% is considered to be unsustainably high and an indication that markets think a country will be unable to pay its debts; Greece, Portugal and the Republic of Ireland were at that level when they received international bailouts.

Spain’s economy has become the focus of investor concern due to the uncertainty surrounding the fate of its banking system. On Friday, Spanish banking group Bankia, which was formed from the merger of several struggling regional lenders, asked for a 19bn-euro bailout, a much larger amount than had been expected.

This of course has not been focused on too much due to the more publicised problems in Greece, but the fact is Spain, Italy and Ireland are also facing significant problems. These concerns in Spain have caused the Euro to fall, hitting its lowest rate against the US dollar for two years, falling to $1.2433. Pound/Euro rates rose slightly to €1.2530 on the uncertainty.

Pound falls against US Dollar

There was an inverse effect on GBP/USD rates, as we saw Sterling fall to a 4 month low on the worries about Spain’s banking sector problems and its rising borrowing costs. This has caused a flight to safety, with investors selling currencies that are perceived to be risky to the safety of the Dollar. This caused it to gain strength, making it more expensive to purchase.

Summary on where Pound/Euro rates may go

It’s still the EU problems driving rates at the moment. A weak Euro means people want their funds in perceived safer currencies such as Sterling and the US Dollar. This is keeping the Pound nicely supported against the Euro, however it has meant the stronger USD has become more expensive to purchase.

Moving forwards, many analysts are worried that the UK will need to pursue more Quantitative easing, indeed the Bank of England and International Monetary Fund both warned as much last week.

If they do pursue QE, it could weaken the Pound and make it a less attractive alternative to the Euro. This could well start to pull GBP/EUR rates back down.

But won’t the EU problems mean the rate will keep getting better?

Not necessarily. Many clients reading the news are holding off buying their Euros on the expectation Europe will continue to have problems, the Euro will continue to weaken and thus become cheaper to purchase. I do happen to think the Euro will weaken more, but what most people are not factoring in is how the UK may be affected by the crisis, and by how much Sterling could weaken if we do see more QE.

While nobody can predict where rates will move in the coming weeks and months, I would caution that in holding out for an inch, you could very easily lose a yard. Rates to buy Euros are currently just shy of the best in over 3.5 years. Now of course they could go even higher, but it’s just as likely we could see things plummet back below 1.20 again, as forecast recently by Deutsche Bank. If you need to buy or sell Euros, simply hoping the rate will move your direction could prove very costly indeed. It’s simply gambling and speculating and could cost you dearly.

You therefore have several options:

  • Fix your rate now so you know where you are and are protected against any decline in the rate. With the current uncertainty this is what I would do, but then I am risk averse and don’t like gambling!
  • Wait and see and buy your currency later; this could result in a win or lose situation and is no more than a gamble.
  • Hedge your bets; convert half your funds now, and take a gamble on the other half. This strategy gives you some level of protection regardless where the market moves
  • Use Currency Options – Stop Loss and Limit Orders allow you to instruct us to buy your currency if the rate drops below, or rises above, a certain level. This means you can still take advantage of gains in the rate while having a worst case scenario.

Each person’s requirements and attitude to risk are of course very different, so the best course of action is to discuss the options available, the market forecasts and to see how good our rates are.

So, get in touch now and send me a free enquiry. We can have a brief chat regarding your options and I can explain the mechanics of how our service works. I look forward to hearing from you.

Send me a free enquiry now to make the most of your currency.

* Please note we can only assist with bank to bank transfers for transfers of £5000+
I’m afraid we don’t deal in cash, or holiday funds at all.

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