Foreign Currency Report 14 November 2008

Well, what can I say, apart from the fact that it's Friday and we have the weekend to look forward to? We've seen another turbulent week in the financial markets and this snow ball is fast becoming an avalanche. The only hope is that the Government / Bank of England steps into save the ailing Pound, however these clowns are notoriously slow off the mark, and we have them to thank for this sorry situation.

Sterling

With no two ways about it, we will be in a deep and prolonged recession. The British Pound may allow "history to repeat itself"' by falling to 91 pence against the euro (1.09), equal to its all-time low versus the deutsche mark, said Neil Jones, head of European hedge fund sales at Mizuho Capital Markets recently. The Pound's declines are also reminiscent of those that preceded the U.K.'s exit from the European Exchange Rate Mechanism, or ERM, on Sept. 16, 1992, Jones said.  "There are definite correlations between now and the 1990s," Jones wrote in a note to clients yesterday. "We have rising unemployment, crashing interest rates and inflation beginning to come off. We also have the pound crashing out of bed like it did when it was forced out of the ERM. We are looking for history to repeat itself." Scary thoughts indeed, however the weakness in the Euro is likely to catch Sterling up and surpass it in the coming months. Prepare yourselves for a bumpy ride and keep within your budgets.

Euro

It would be easy to think that the Euro is one of the strongest currencies at the moment with the way it is performing against the struggling Pound. However this is not the case, the Euro is performing badly against all other majors as more bad news trickles out of the Eurozone. Yesterday we had further confirmation that Germany is in a recession, along with Italy. Italy is suffering from its fourth recession in a decade. Later today France will be releasing its GDP figures which are expected to be bad. This may cause a little respite for the Pound, but I would not hold your breath! It seems at the moment that any bad news in the Euro currency zone has already been priced in. For this reason very little Sterling gains are expected, in fact, many analysts expected the Euro to continue its strengthening against the Pound. The Dollar is still seen as a safe haven and coupled with more bad news in the Eurozone, further Dollar strength could be on the cards.

US Dollar

The Dollar fell sharply versus the Euro yesterday but extended its 6-year highs versus Sterling as traders reacted to what is perhaps a more sobering assessment of the US economic outlook from billionaire investor George Soros. Testifying at a U.S. House Oversight and Government Reform Committee hearing, Soros predicted that not only will the U.S. muddle through a "deep recession," but that hedge funds will be "decimated" by the current financial crisis. "A deep recession is now inevitable and the possibility of a depression cannot be ruled out," Soros said in prepared testimony.

The economic data was dire on both sides of the Atlantic Thursday. The tide of US foreclosures showed no sign of slowing in October, according to data from RealtyTrac Inc. There were more than 84,000 foreclosures last month, up 25 percent from October 2007, the data revealed. Meanwhile, the Department of Commerce released its report showing that the trade deficit narrowed to $56.5 billion in September from $59.1 billion in August. Economists had been expecting the trade deficit to narrow to $57.0 billion. Separately, a Labor Department report showed that jobless claims rose to 516,000 from the previous week's revised figure of 484,000. Economists had expected jobless claims to come in nearly unchanged compared to the 481,000 originally reported for the previous week.

So will the Dollar strength last?? Personally I think no as like the cheating student relying on the kindness of those sitting beside him during exam time for a passing grade, so too the US has relied on the kindness of foreigners for the maintenance of the American standard of living. But such fantasies can only last for so long. Like the parents of our little swindler, the American people, as well as America's foreign creditors, would soon learn that all was not what it was cranked up to be.

That is where we are now. The trillions borrowed by the US government and US consumer cannot be paid back with Dollars of equal value. A country with no domestic savings from which to draw, angry foreign creditors and with a collapsing tax base has few options. US debts will have to be paid back with printed money. Money printing will cause a severe inflationary depression in the US, meaning it is time for Americans to hunker down. Americans need to reduce spending, buy some gold, and get rid of the gas-guzzlers and vacation homes, downsizing could be survival in the years ahead.

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