20th July 2010 Pension Foreign Exchange Report QROPS & QNUPS
We continue our daily look at factors affecting currencies allowing some insight into market conditions affecting exchange rates. Cash and income timing for UK Pensions and QROPS should be considered to maximise the Pension, QROPS and investment income and benefits taken.
Investment market volatility and currency exchange remains a challenge. Things are still very volatile and we are in unique global influencing territory. In conjunction with investment returns, currency exchange continues to concern many expats with UK Pensions, QROPS and now QNUPS.
The pound fell yesterday against the dollar and dropped to a seven week low against the euro. Investors decided to ignore ratings agency Moody’s decision to downgrade Ireland and Hungary’s financial difficulties opting to cut their short euro positions against a basket of currencies most noticeably sterling.
A large euro buy order early in the session helped to suppress any negative feeling towards the euro as another Eurozone member state received a reduced credit rating to AA2 citing a “significant loss of financial strength”.
The euro has been performing well recently and optimism that the release of European bank stress-test results this week on the 23rd July will show strength in the region’s banking sector, easing concern that the debt crisis will worsen.
European regulators are examining the strength of 91 banks to determine whether they can survive potential losses on sovereign-debt holdings. Spanish officials including Finance Minister Elena Salgado last week said they are confident about the results of the stress tests on Spanish banks.
Without any significant data releases in the UK until tomorrow’s Bank of England’s minutes and Friday’s 2nd quarter GDP figures, all the attention was focussed on euro movements. Despite hawkish comments over the weekend from Bank of Englands policymaker Andrew Sentance and merger talks between France’s GDF Suez and Britain’s International Power, the pound lost 1% during Monday’s session falling as low as €1.1727 in the afternoon.
Against the dollar, the pound fell 0.4% to $1.5226, well below a high of $1.5351 reached early in the session.
The euro fell from the highs of $1.30 against the US dollar but remained within striking distance well in the late $1.29’s throughout the session. The 9.5% gain to $1.3008 from a four-year low on June 7 reduced speculation the region’s debt crisis would break up the single currency. At the same time, the head of Spain’s Exporters Club says the stronger euro will make it harder to counter a “paralyzed” domestic market.
Where has this recent euro rally come from?
Bets on a drop in the euro climbed to an all-time high earlier this year as so-called peripheral nations from Greece to Spain struggled to sell debt to trim their deficits. The reversal of this sentiment is where the rally stems from.
Bond yields in the peripheral nations began to retreat after the EU and the IMF announced an aid package worth almost $1 trillion on May 10, easing concern governments in the region would default.
Rising demand at bond auctions by Greece, Spain and Portugal in recent weeks and decreasing bets by hedge funds on a drop in the euro suggest that the region’s sovereign debt crisis won’t lead to a breakup of the shared currency.
Greece sold €1.6bn of 26-week Treasury bills July 13, the government will pay less than the 5% charged by the EU for its bailout funds. Spain sold €3bn of 15-year bonds on July 15, attracting bids for 2.57 times the amount offered, up from 1.79 times in April. A day earlier, Portugal sold more 2012 and 2019 securities than it had indicated on July 8.
The difference in the number of bets by hedge funds and other large speculators on a decline in the euro compared with wagers on a gain, known as net shorts, fell to 27,050 on July 13 from a record 113,890 on May 11, data from the Washington-based Commodity Futures Trading Commission showed.
The banking sector troubles in Europe caused the significant decline in euro strength over the past 2 months.
Seemingly with majority of the troubles now passed, the euro has made a significant step to recovering most if not all of the losses it sustained.
Tomorrow may see some alteration to the trend as the Bank of England minutes are released. Last month, one policy member Andrew Sentance voted to raise rates by 0.25%. Sentance is viewed as a hawk, and his decision to increase surprised few. If Sentance has rallied up more support this month, perhaps a more interesting split may be published. If voting moves to 2 or 3 in favour of a rise, the pound will suddenly become a more interesting option to many as yield will undoubtedly increase sooner than expected.
Friday sees the release of the preliminary 2nd quarter GDP figures, consensus is for a rise to 0.6%, taking the UK firmly away from the clutches of recession
Gerard Associates Ltd advises expats and people considering living abroad on the technical and currency options available for Pensions, QROPS, QNUPS and investments in a clear format allowing all customers to make an informed choice. Our service encompasses Pensions, investments, currency exchange and guidance on taxation in most popular ‘sunnier’ climates. This with the re-assurance and security of UK authorised and regulated advice – essential tools for your security.