February Outlook

February 2012

In this month’s issue:

Where to next for sterling, the US dollar and the euro?

Contents

Euro zone . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 3

United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 4

United Kingdom . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 5

Other Currencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 6

Forecasts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 7

Graphs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 9

Client Support – Contact Details . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 12

Smart Currrency Business

Where to next for sterling, the US dollar and the euro?

The Euro zone government and debt crisis continues to be front page news. Government debt

in the UK has hit the £1 trillion level and a double dip recession seems a real possibility. The US

economy is moving forward at a reasonable rate but the Federal Reserve has made it clear that it

expects to keep interest rates on hold until 2014.

The US$ seems to be the strongest of a bad bunch and the euro is at the bottom of the pile.

But caution still seems to be the order of the day for banks and their forecasts. Sterling is expected

to hold its own against the US$. The euro, the worst of a bad bunch, is forecast to lose some ground

against both sterling and the US$ over the coming months. Total capitulation by the euro is not

expected but who knows what will happen if Greece and other southern states of the Euro zone

default on their debts.

Monthly Outlook February 2012

3To further discuss the forecast and the options available to mitigate your

currency exposure, call the Corporate Team on 0207 898 0500

Euro zone

Summary

Any light at the end of the Euro zone debt crisis tunnel seems to be someway distant. It is difficult

to see any significant appreciation for the euro against most currencies in the short term unless the

currency it is being paired with suddenly develops significant problems of its own.

Any further progress?

We asked the same question last month and I wonder if we will be asking the same question next

month. You almost feel that a state of ambivalence has been reached where news, whether good or

bad is met with the weariness of the shell shocked as the news flow has been relentless over the last

few months. Nine countries within the Euro zone had their credit rating downgraded and although

there was an initial period of weakness for the euro it wasn’t as prolonged and dramatic as may

have been the case if the downgrade had been announced in say July of last year. Having said that

the euro has lost ground in the last month as the markets see there is still a great deal of ground to

be covered if a long term solution is to be found for both the Euro zone bank and government debt

problems. Against sterling the euro weakened at one stage in January to €1.2165/£1, its lowest

level for over a year.

Short term liquidity

Uncertainty did bring one very serious consequence and that was mistrust between the banks

when lending to each other. This resulted in the banks being very short of funds and reliant on

getting liquidity from the European Central Bank. To be able to do this the ECB had to change the

security it was willing to take when making funds available to banks. The ECB had to lend over

€480 billion to the banks in short term funds in January. This has stabilised the situation in the short

term. However the feeling is that the quality of the assets now taken as security is far from perfect.

We may well see double this figure next time.

The never ending Greek debt problem

The Greek debt position rumbles on. Negotiations continue on what levels of write offs the banks

have to agree to. There is also talk of the Greek budget being controlled by the ECB. The chances

of Greece leaving the euro still exist. Default day for the next round of Greek bonds is 20th March.

Hopefully all will be resolved well before that date.




United States

Summary

The US economy is growing. This increases risk appetite which perversely is negative for the US$

given its safe haven status. Against sterling the US$ is trading in a narrow range [US$1.53-1.58/£1]

and we need a catalyst to drive it one way or the other. Uncertainty over what this will be means

it could be a sensible to either buy towards the top of the current narrow range or sell towards

the bottom.

Interest rates on hold for ever!

The Federal Reserve met in late January and announced that interest rates would be held at their

current low levels until 2014. This is not a surprise for a number of reasons. Their economy is moving

forward, growing in the last quarter of 2011 by 2.8%, slightly under expectations but way ahead

of growth in the UK and the Euro zone. However unemployment is still at very high levels and this

is something that needs to come down before the US can claim that the crisis is over. Quantitative

easing has also been a key tool that the Federal Reserve has used to keep funds flowing into the

economy. As a result debt levels have increased exponentially. If interest rates did increase then

the amount that the US government would have to pay on its debt would increase significantly. At

the moment it is relying on its safe haven status to support the low levels of interest being paid.

This can’t last for ever.

Problems in the euro zone

The euro zone debt crisis has seen the US$ gain significant ground against the euro. Less than

8 months ago we saw the US$ closing in on US$1.50/€1. Now we are around the US$1.30/€1

level and the prediction is for further euro weakness with the US$1.20/€1 a real possibility.

This highlights how rapidly things can change.




United Kingdom

Summary

Since the start of the New Year sterling has been trading in fairly narrow ranges against most

currencies. Sterling gained a lot of ground against the euro in late 2011 hitting €1.2165/£1 at one

stage and has been consolidating these gains around the €1.1950/£1 level. But the Euro zone

crisis has been negative for the UK economy, reducing business confidence and growth. Caution

continues to be the watch word for sterling.

Recession – “here we go again”

Growth in the final quarter of 2011 was negative. Business confidence in the UK and elsewhere in

the world slipped away as worries about a Greek default and other euro countries being unable to

service their debt became front page news. If there is negative growth in the first quarter of this

year we will be in another recession. Not good news. We have also “hit” £1 trillion of debt. Unsure

how many “0”’s that is but it is a lot.

Quantitative easing – another “here we go again”

The likelihood of further quantitative easing from the Bank of England has increased significantly.

The final tranche of the £375 billion of quantitative easing announced will be spent by early

February. Although inflation is falling, unemployment is on the increase and the possibility of a

recession will be such that the Bank of England may well announce a further tranche of quantitative

easing sooner rather than later. This will be negative for sterling.




Other Currencies

Australia

This has been trading towards the lower end of its 12 month range against sterling. This is on

the back of increased risk appetite. All commodity backed currencies are very dependent on the

continued growth of China. Fourth quarter growth figures for China showed growth at 8.9%. Still

very good but the jury is out on whether the Chinese government can deliver a soft landing for their

economy or whether it will be a hard landing which will be disastrous for the commodity backed

currencies.

Japan

After thirty years Japan announced its first monthly trade deficit. Quite remarkable. The reason

given for this was the fall out from the tsunami in the first half of 2011 and reduced export demand

following the fall in demand resulting from the euro zone debt crisis. There is a possibility that the

Japanese government may try and devalue the Yen so to encourage more exports.




Forecasts

Sterling is expected to make gains against the euro in the coming months, but it is worth noting

that this has been the story for the last three years and that sterling spent much of 2011 under

€1.15/£1. As a result it pays to be prepared and take advantage of better rates through hedging

strategies. Against the US$ the expectation is to stay at current levels although UBS are forecasting

a much stronger US$ over the coming months. Call in now to speak to one of the team for a live

update on current market expectations.

Our expectations for 2012

1 Month 3 Months 12 Months

GBP/USD 1.56 1.55 1.52

GBP/EUR 1.20 1.23 1.27

EUR/USD 1.30 1.28 1.25

Barclays Capital forecasts for 2012

3 Months 6 Months 12 Months

GBP/EUR 1.19 1.22 1.25




GBP/USD Bank Forecasts for 2012


Barclays Capital 1.57 1.55 1.50

BNP Paribas 1.59 1.58 1.59

HSBC 1.55 1.56 1.60

UBS 1.46 1.44 1.44

RBC Capital Markets 1.55 1.55 1.59

TD Securities 1.53 1.52 1.57

Source: FX Week

EUR/USD Bank Forecasts for 2011


Barclays Capital 1.35 1.30 1.20

BNP Paribas 1.30 1.28 1.40

HSBC 1.33 1.35 1.44

UBS 1.20 1.15 1.15

RBC Capital Markets 1.32 1.30 1.26

TD Securities 1.30 1.22 1.25

Source: FX Week




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Client Support - Contact Details

Research Team:

Nick Ryder +44 (0) 207 898 0503 [email protected]

Corporate Sales:

Alex Bennett +44 (0) 207 898 0502 [email protected]

Nick Ryder +44 (0) 207 898 0503 [email protected]

Ricardo Morgan +44 (0) 207 898 0500 [email protected]

Bryan O’Connell +44 (0) 207 898 0500 [email protected]

Terry Moles +44 (0) 207 898 0500 [email protected]

Corporate Trading:

Carl Hasty +44 (0) 207 898 0501 [email protected]

Siobhain Barry +44 (0) 207 898 0500 [email protected]

Address:

Smart Currency Exchange Ltd

One Lyric Square

London

W6 0NB

United Kingdom

Tel: +44 (0) 207 898 0500

Fax: +44 (0) 207 898 0557

Disclaimer:Smart Currency Exchange Ltd is authorised by the Financial Services Authority under the Payment Services Regulations 2009 (FRN 504509) for the provision of payment services.

Smart Currency Exchange Ltd is authorised and regulated by HM Revenue and Customs under the MLR no 12198457.

The information in this report is provided solely for informational purposes and should not be regarded as a recommendation to buy or sell. All information in this report is obtained from sources believed to be reliable and we make no representation as to its completeness or accuracy.


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February Outlook