Wild gyrations, slashed interest rates, central bank U turns.jpg

Wild gyrations, slashed interest rates, central bank U turns

THIS HAS been one of the most extraordinary periods in the financial markets in most traders’ memory.

As you are probably aware, the financial markets are largely populated by young traders and brokers and that, in some eyes, is one of the problems when things turn sour.

When the markets are booming, shares are rising and charting is relatively predictable, it isn’t hard to make money. It’s a bit like becoming a property millionaire; buy it and own it for long enough and it will come to pass. However, just as with house prices, when the market turns down and the rose tint wears off, making money and avoiding risk is a much trickier prospect. So it is no wonder that in the recent weeks, when the financial data has taken a turn for the worst and the ugliness of impending recession has hit the headlines, headless chicken trading patterns have dominated world markets.

Young traders with no memory of the last global downturn simply aren’t prepared for these events and when share traders saw ‘short selling’ their only tool in such environments taken away from them, things became even more fractious. One of the results of these panic trading conditions was a Pound which spiked to 1.30 euros on October 20 and then plummeted to 1.18 euros by November 13 and a Euro-US Dollar exchange rate which went from 1.38 euros on September 11 to 1.48 euros just 11 days later and then plunged to 1.23 euros less than one month after that.

When you are in the midst of overseas property investment or planning to migrate, such wild gyrations don’t help one iota but within this melee there are always opportunities. Those moving funds from the UK into Portugal would have been delighted to be able to convert their funds into euros around the 1.30 level after six months of 1.27 and 1.23 levels providing the high and low for this pair. On the other hand, those who were moving funds back to the UK, perhaps from property sales or in order to return home and become ex-expats will be revelling in the lowest and therefore most lucrative exchange rate available to them since well before the Euro was fully fledged. In fact the last time the Pound was so abjectly weak was 1995.

What is less clear is the path for the future of these exchange rates. The fact that the Bank of England slashed the cost of UK borrowing by two per cent in just two months while the European Central Bank moved only half of one per cent in the same period should make the Euro more attractive to overseas investors than the Pound, purely on the basis of interest rate yields. Certainly that has happened but the prospects of much lower UK interest rates as suggested by the Bank of England and the sharp increase in the forecast rate of economic decline in the UK alongside the highest unemployment level for more than a decade have magnified that move.  

But at least the Bank of England has finally U-turned its way into reality. There are many traders though who have been alarmed by the escargot-like pace of the European Central Bank’s response to the global downturn. Especially in light of the fact that Italy and Spain are complaining that their hands are too tightly bound by ECB and stability pact regulations for them to be able to resuscitate their domestic economies, but these factors have not yet begun to be priced into the value of the Euro. When markets wake up to the repercussions within Europe of the lack of pro-action by the ECB, I have a strong feeling the Euro will weaken, and weaken against currencies other than just the US Dollar.

Until that happens, we have to expect the Sterling buyers to be the ones with the smiles on their faces and the increasingly attractive bank balances and the Euro buyers to be the ones shuffling in the corner and muttering incoherent expletives. They will be in good company though; there are a lot of young inexperienced traders in financial trading floors doing likewise.

But when they are old duffers like me and they have been through the recession wringer and emerged in one piece, the next bust following the next boom will be slightly less traumatic and perhaps a little less unexpected.

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