St Mary Axe view

Morning Brief – Friday 16th

Rate cuts in the Mexico and US and the whiff of a Canadian political cover up

 

Following Mexico’s rate cut last night in an attempt to inject life into its flagging economy, it looks as if the market is increasingly pencilling in two further cuts by the Federal Reserve this year: in September and December with Pimco confirming that that is indeed their prognosis. Canada is transfixed by the latest Justin Trudeau scandal with tv channels endlessly sifting through the supposedly simple question as to who intervened politically in the SNC Lavalin corruption case. Trudeau looking sweaty and uncharacteristically dishevelled in tv interviews. The Loony (Can$) weaker on Teflon Trudeau looking anything but.

 

 

Trump: not just for Christmas

 

The short term stock market rally due to POTUS postponing 10% tariffs on goods as he did not want to spoil Christmas shopping is understandable on thinly manned trading desks at this time of year. However when the more seasoned hands came back to their desks and pointed out that those tariffs are only temporarily off and are still planned, the market needed more than the promise of tinsel to maintain that positivity. As of late last night the US market was managing to close a bit higher than it opened which is fragile comfort but nonetheless encouraging.

 

 

Texas Hold’em

 

200 years ago Texas was part of Mexico supported by Britain as a spoiling tactic against the emerging USA and was largely populated by Apache and Comanche Indians. 40,000 settlers from the USA arrived in the 1820s and ten years later they had grown to 150,000. The newly independent from Spain Mexican government watched all this from Mexico City and a number of battles ensued with the Texans determined to create their own country. This history explains plenty about the Mexican population of Texas today and plenty more about the spirit of Texas, the Lone Star state of America.

 

 

Not all nuts are equal – unlike Compliance

 

Sgm-fx’s self appointed health guru Compliance king Alex briefed us all at HQ on the fact that some nuts are much better for us than others: Almonds, Pistachios, Walnuts, Cashews, Pecans, Macadamias and Pine Nuts all made the cut.

The rest of us spent time working out that what was not included were Brazils, Chestnuts, Peanuts and Coconuts which we subsequently learnt are just less good for us. So not a bit like Compliance where it’s all good in fact, essential-thanks Alex!

 

 

 

Discussion and Analysis by Humphrey Percy, Chairman and Founder

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team discussion

Morning Brief – Thursday 15th

Recession?

 

About a decade ago you could pick up virtually any newspaper (with perhaps the exception of the Daily Star or the Sun) and see the phrase Double Dip Recession or equivalent brandished on the front page. Whether it was accompanied by a vitriolic attack on the incumbent Conservative government, a backward-looking blame on Gordon Brown’s Labour Party or a picture of a Panda from Edinburgh Zoo depended on your choice of paper… but regardless, we spoke about recessions day after day. Markets cared too, the Pound suffered an awful time losing about half of its value against the Euro and the Dollar during the latter half of that decade partially on recession concerns. The risk of that happening again deepened yesterday.

 

If you chose a financial news bearer this morning, then you would have been hit in the face by headlines of bond yield inversion and fixed income market chaos. Others went directly for the link to recession suggesting one is now on the cards not only in the UK but in Germany and the United States of America. So, what happened? Well investors yesterday for the first time since 2007 (the starting and focal point of the Great Recession) demanded a lower yield for loaning money backed by the full weight of the respective nation’s government over a 10-year time horizon than over a 2-year duration. Let me explain briefly why you should care:

 

If someone said to you that you can have £1000 or $1000 in two years’ time or in ten years’ time, I think you’d decide to have it in two. I shan’t make assumptions on your choice of currency given the looming threat of parity! In fact, given almost any time differential I’m convinced you’d rather have the money sooner – you don’t have to take the risk of receiving it any longer than necessary and you can start to do stuff with that money – no brainier! Well, that’s no longer the case today for bond market investors. The reason why market players take this deal despite it seeming like an idiotic idea is because they trust the central bank’s rate to determine the so-called ‘front end’ of the curve – the one most affected by incumbent monetary policy.

 

So, take the US, investors won’t accept less than a 2% yield to loan money to their government because they could just go to their central bank, the Federal Reserve, and pick that up immediately with truly almost zero risk. But over a ten-year horizon, the promise of 2% today starts to fade. Markets have now priced the value of a 10-year duration bond higher than the 2-year contract (meaning that it confers a lower yield) suggesting that they believe economic activity and growth will grind to a standstill over those years. There’s certain value in market players’ opinions but I’ll be the first to admit it’s limited. The really worrying part is that this inversion witnessed yesterday can be a self-fulfilled prophesy; markets could have made a recession a foregone conclusion. 

 

Every recession in the US and UK, in the 1980s; 90s; 2000s, has been preceded by domestic yield curve inversion. The signal they sent yesterday will firstly cause fear in the short run and the immediate sell off in equities yesterday confirms a withdrawal of investment and a preference for low risk. So, if people stop spending you’ve delivered yourself a recession, job done. On top of that, and secondly, if it’s cheaper to borrow money for a longer period of time than over two years you’re far less likely to consume now and instead put it off for cheaper long term money, again, delivering you towards an imminent recession. 

 

In response to yesterday’s action emerging markets have sold off severely. The Rand in particular has taken a battering and trades cheaply this morning. The Euro and Pound failed to pick up any defensive demand particularly because the move yesterday was spurred by negative German quarterly growth data and, on Sterling’s side, due to the risk of Brexit and Westminster’s turmoil. The Dollar admittedly enjoyed limited relief but the simultaneous threat of recession on that side of the Atlantic limited the greenback’s advance. The Yen was one of the only serious winners yesterday given its status as an ultimate safehaven. Volatility ticked up with the VIX, a popular market traded instrument measuring volatility and risk, topped the important 20 level. Timing becomes even more important in these conditions and our desk is on hand to guide you through yesterday’s shakeup and the path forward. 

 

 

 

Discussion and Analysis by Charles Porter

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SGM-FX handshake montage

Morning Brief – Wednesday 14th

UK PLC

 

Great news is that the employment rate of 76.1% is the highest since (meaningful) records were kept and even though unemployment has edged up slightly, it is still only 3.9%.With 32.81 million people in work and an extra 425,000 jobs created in the past year, the UK employment figures are very good and not enough is made of them. Those who watch wage levels are getting increasingly mindful of how wages are moving: up 3.9% which is enough to concern those with longer memories and especially so when one remembers that inflation is stuck at 2%. Very simply wage increases reflect both the tight labour market and a long period of zero to micro increases and wages are playing catch up. With growth at either side of zero this is not sustainable. A cheaper exchange rate means that our exports are cheaper but in the domestic economy, clouds are forming.

 

 

Zimbabwe

 

At the other end of the inflation spectrum, at the end of June annual inflation in Zimbabwe was running at 98%; by the end of July it has increased to 200%. Cooking staples have doubled in price, bread has gone up five times and the price of electricity has tripled. Chronic underinvestment in the power industry has caused frequent power outages. What happens? People are unable to afford not just luxuries but basics and supermarkets have few goods and fewer customers. Just for good measure Zimbabwe is suffering from its worst drought for many years. This situation has been building for decades and for the poor people of Zimbabwe it is difficult to see it getting better, before it gets worse.

 

 

Australia and Joeys-AUD steady.

 

Not silly season but really true: yesterday saw snowfalls causing traffic jams on the outskirts of Sydney with road closures, power cuts affecting 10,000 people and multiple flight cancellations all quite unusual but less so was the sight of a herd of kangaroos on a golf course playing in the snow-presumably not golf. SGM-FX’s Charles was wistful about this and only wishing that his July performance at Stoke Park Golf Club could have been put down to snow…or kangaroos…or both!

 

 

 

 

Discussion and Analysis by Humphrey Percy, Chairman and Founder

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SGM-FX buildings

Morning Brief – Tuesday 13th

Excuses

 

Argentina as a nation, with the exception of war, and provided we’re not talking about a specific key national export, is not a global market mover. To be frank, its spending power, population, financial market participation and share of global trade are all too small for the South American nation to move markets in good (or even normal) times. But give an already spooked market a headline like Argentine debt default and it’ll quite happily take a risk-off tone everywhere. 

 

Yesterday, results of the primary to Argentina’s forthcoming general election were observed and showed disturbing signs. Incumbent President, Mauricio Macri, took a beating at the ballot box versus his opponent Alberto Fernández. Markets don’t know much about the latter presumed underdog and that’s largely why they reacted so violently to the news that his campaign (including running-mate and former left wing Argentine president, Cristina Fernández de Kirchner) had taken 47% of the vote. What they do know is that the market friendly Macri is what they want, but a defeat of 15% at the polls isn’t what’s going to get him another term in office. 

 

 

IMF-up?

 

Argentina is currently in receipt of the biggest single bailout program that the International Monetary Fund has ever offered. As recently as April this year, Christine Lagarde (at the time managing director of the IMF and now incoming ECB President… oops!) boasted of the positive and tangible impact that the set of reforms associated with the bailout package is having in Argentina, implemented and propagated by President Macri. Markets therefore priced out – changed their expectations – for the possibility of Argentinian debt default. But who knows if this reform program would survive even a minute (or progress be unwound) with a change to the leftist and arguably populist challenger.

 

Argentinian default is a sore subject in markets. When the nation defaulted on its debt back in 2001 the credibility of the fiscally ailed nation was damaged forever. Global markets yesterday blamed the spillover risks of an IMF backed program going down the pan as a systemic risk that would limit the credibility and efficacy of the Fund which plays the role of the ultimate monetary backstop across the world. But, seriously, they’re just scared! Coming only a few days after a huge market upset that saw global equities lose trillions and safehaven bonds and gold reach record highs, what should have been a ripple caused a big splash.

 

In Argentina, the risk of default on debt over the next 5 years (measured by a fancy instrument called a credit default swap that I’m sure you’ve all heard far too much about thanks to films like the big short amongst others) priced a 75% probability that loaned money is not restored to creditors by the Argentinian authorities. But take a look at the United States, a nation that claims a relative naff all in annual bilateral trade with the nation: bond yield spreads between two and ten year durations hit their lowest level since mid-2007! Every recession for the past half century at least has seen the spread between the two invert (a case where investors’ demands for lending money over a 10-year time horizon are less than those over 2 years). In other words, given yesterday’s pathetic excuses for an excuse, the probability of a recession in the world’s largest economy increased dramatically because the leader of Argentina might change in a couple of months’ time. Give me a break!

 

So what does this mean for us? Well those assets that suffer during periods of elevated perceived risk (emerging market currencies like the Rand and Lira, and these days the Pound) could have been oversold in preference of safety. So a convicted trade to buy them now instead of waiting for investors’ August blues to pass could pay off. With Sterling just off 2 and a half year lows and the Rand having sold off almost every day for the last month there’re bargains all around. 

 

 

 

 

Discussion and Analysis by Charles Porter

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SGM-FX office view

Morning Brief – Monday 12th

Negative Interest Rates

 

Some of our readers have been asking what this means as they are struggling to get their heads around the concept. Essentially it is akin to a storage charge but imposed by banks for your money rather than by Big Yellow for your goods and chattels. Fortunately in the U.K. at least there are not negative interest rates-yet. However it is not inconceivable with rates falling sharply globally that at some point everyone will have to understand what the concept means. In Denmark a mortgage backed note has been issued with negative interest rates. Follow that through and instead of everyone paying to borrow to finance their homes secured by charges on their properties, in this Alice in Wonderland world, they will actually be paid to borrow money. Far fetched? Not at all and not (shortly) for the Nordic region!

 

 

Real Wealth

 

Those negative interest rates are a real headache for the world’s richest families: Walton, Koch, Mars and the House of Saud to name but four. However it’s not holding them up much if at all with the Walton family earning an extra $4 million an hour…every hour or $100 million every day. The least wealthy of the top four dynasties is the House of Saud at just over $100 billion or rather a lot more by the time that you have been reading this! Just imagine the storage charges for that kind of wealth if it was left in cash and deposited with Swiss banks- it’s not of course all in cash but it would be eye watering!

 

 

Oil

 

Russia is shortly to overtake Saudi Arabia in terms of oil wealth influence having managed to save despite spending elsewhere in that vast territory. While symbolic it is only marginal and depends on a number of factors including new discoveries, the oil price and future exchange rates. WTI at $54.50.

 

 

GBP

 

Another lurch downward over the weekend as the market concludes that PM Johnson means it when he says that Brexit will take place with or without a deal.

Meanwhile focus is on the USD and the unfolding currency war between USA and China which is impacting….everyone.

 

 

 

Discussion and Analysis by Humphrey Percy, Chairman and Founder

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UK buildings

Morning Brief – Friday 9th

GBP

 

We have written about the various scenarios for GBP over the next three months several times in the past weeks and it is fair to say that the market continued at least until this week to ascribe a 10% chance of a NoDeal Brexit. That has now changed with 30% ie 3 times the probability now accepted by most market participants. This morning Blackrock has raised the likelihood of GBP reaching parity with the USD which of course implies somewhere between EUR 0.8 to 0.9. It is not a wise option to ignore this scenario and we are helping a rising number of our clients put hedges in place to guard against this eventuality.

 

 

Savings and Investments

 

The USD74 Trillion Investment management industry-a trillion is one million million or 10 to the power of 12:

Failure to outperform and having generated sub benchmark returns while charging substantial fees in particular in the past 10 years since the financial crisis, the industry is at a crossroads as investors desert managed investment in droves to follow passive investment strategies. Given the paltry returns, the thinking is that it makes sense not to pay fees and simply to use tracker funds: pick the benchmark index and pick up ALL the returns. If this continues as it appears to show every sign of doing, this will represent a major change in investor behaviour and will increasingly increase volatility as managed investments are redeemed.

 

 

Absolute 80s

 

Listening to this Los Angeles radio station through TunedIn Radio at an early hour this morning, I was treated to that old favourite by the Bluebells-Young at Heart: as you will see below, you really had to be there, but I have been trying to convince new SGM-FX recruit Nick that in the 80s this was a club standard guaranteed to get everyone throwing shapes. Fresh from a Thursday night on the tiles socialising with, he claims, “100 of my closest friends” while making up for 4 years study in Edinburgh, he seemed to be coming round to it (over his hangover) although the only likely celebratory Bells in prospect at present for Nick are out of a bottle….:

 

Young at heart, Young at heart

Young at heart, yet what a start

Old before their time, they married young

For love at last was their only crime

 

 

 

Discussion and Analysis by Humphrey Percy, Chairman and Founder

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Morning Brief – Thursday 8th

Gold Wednesday

 

Yesterday didn’t quite resemble the events of 16th September 1992, black Wednesday, when market chaos ensued and the British Pound was forced to drop out of the Exchange Rate Mechanism. However, there were dangerous currents afoot across bond, foreign exchange and equity markets showing a widespread flee to safety: perhaps it’ll go down as Gold Wednesday?! The Rand and Pound were hurt alongside emerging markets with the Euro, Japanese Yen and other defensive safe-havens weathering the storm admirably. Gold in particular, currency pair XAUUSD, rallied to a 6-year high, breaking the important €1,500 per Ounce level.

 

Markets were spooked when the Indian, Kiwi, and Thai central banks all unexpectedly cut rates signalling an acceleration of defensive global monetary policy in anticipation of the residual risks that each of these nations could face as a result of global economic conditions. The foremost in each bank’s mind was the trade war which today shows little sign of slowing down. Last night, the PBoC set its USDCNY rate fixing above 7 for the first time since 2008. Whilst this was below analysts’ expectations given the previous day’s price actions, the event is unusual and does suggest Chinese monetary authorities aren’t afraid of Yuan devaluation. 

 

We found out on Tuesday that the US was not keen on this defensive move against the imposition of tariffs and a relentless move to devalue the domestic Chinese currency despite international (US) condemnation creates the expectation in investors’ minds that further trade confrontation is to come. Trump expressed anger once again at China, claiming they are an anchor on the US economy. Officials failed to calm the market’s concern when they claimed that they still anticipate Chinese negotiators to travel to Washington in September. The real fear driving investors to Gold and away from risk is that of a global recession: the fear that the economic world slows down.

 

Emerging markets require a lot of support and spill over from favourable global economic conditions in order to ensure external demand for the primary goods that they typically export. Expectations that global growth will suffer weighs on emerging markets so, during these times, assets that are backed by economies that are perceived as riskier require strong institutions. In particular, emerging market currencies require a strong politics and an integral central bank. Queue South Africa… Yesterday, in the middle of a mini market meltdown, the governor of the South African Reserve Bank chose to bring the question of the bank’s ownership and mandate into the foreground creating two expectations: 1) who should the bank be serving given its stake/shareholders; 2) what should/could the bank even do to serve these stakeholders if it knew who they were? The bright idea to remind markets of the fragility of the South African monetary authority during a time when investors and traders are selling risk off in droves in a flight to safety unsurprisingly led the Rand to underperform versus its peers. Down nearly a percent on the day yesterday in European trading, the Rand consolidated some strength overnight but risk sentiment remains fragile as we progress through this morning’s session. 

 

 

 

Discussion and Analysis by Charles Porter

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SGM-FX View of london

Morning Brief – Wednesday 7th

Swiss Private Banks: Serving their Clients

 

As everyone knows, the feelgood factor of leaving surplus cash with a Swiss Private Bank is worth something. Well, recently Credit Suisse quantified that something by charging their well heeled clients with EUR 1 million a 0.4% fee. Now UBS has raised the game by charging their clients with more than EUR 500K a fee of 0.6%. Just think of it as an up market storage fee. Alternatively, feel better by doing business with SGM-FX: we charge nothing for holding client funds prior to trading and meanwhile keep them secure in a UK clearing bank account. Not so posh, but definitely better value!

 

 

British Airways and the Pilot Strike

 

BA has the following on their website regarding the pilot strike: “ BALPA has yet to issue any strike dates, so we are continuing to run a full schedule. By law they must give us at least 14 days’ notice of any disruption to flights.

So for those of you who are planning to get away on BA before 21 August, you should be OK….coming back may be another story. Plus…there is still the threat of a walk out by 4000 members of Unite who plan to strike on Friday 23 and Saturday 24 August and disrupt Heathrow.

 

 

Global Fashion and Main Street

 

Yesterday’s offer for the on line business of Karen Millen and Coast by Boohoo is interesting for a couple of reasons: firstly fashion is increasingly sold on line and Boohoo’s success since it was founded in Manchester 14 years ago is proof of that. Secondly Boohoo aspires to lead the fashion e commerce market globally. No mean ambition for a company that started by selling own brand clothing, shoes, accessories and beauty products.

Other news just out is that Barney’s the US luxury department store chain has filed for Chapter 11 bankruptcy and is for sale in the face of rising rents and the very challenging Main Street retail environment. Mireille, SGM-FX’s CEO and devotee of international fashion is disappointed to learn that she will not be able to shop in Barney’s Chicago when she visits later in the month, as it will be shuttered alongside their Las Vegas and Seattle stores.

A sad day for the family of Barney Pressman who founded the chain in 1923 having pawned his wife’s engagement ring and used the proceeds to open a store in NYC with the slogan; “No Bunk, No Junk, No Limitations.”

 

 

 

 

Discussion and Analysis by Humphrey Percy, Chairman and Founder

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SGM-FX London skyline

Morning Brief – Tuesday 6th

Sevennnnn!

 

Yesterday the exchange rate between the US Dollar and the Chinese Renminbi broke through the 7.0 threshold for the first time since 2008. An initial glance at market action yesterday: Pound down, global equities some 2% off their opening price and defensive havens rallying might seem like overkill as a reaction to the Yuan falling by around 1.6% in a day. After-all, the move didn’t even violate the People’s Bank of China’s constraint of a 2% move versus the day’s rate setting! But, trust me, it’s a big deal:

 

7 Chinese Renminbi, onshore or offshore, to one US Dollar has been a huge psychological barrier and has only broken a handful of times in decades. Most recently it took the full weight of the financial crisis to provide conditions under which the Chinese currency could devalue to these levels. Authorities have blamed trade tariffs as a cause for a lack of international demand for the domestic currency but data shows otherwise. Even though pressure is mounting on China exports have remained resilient. So it’s a move then, a retaliation of a country against the wall yet again in negotiations with President Trump that, guess what, has largely run out of US exports to China to slap its own tariffs on! The reason for the severe global market correction yesterday is that turning to currency explicitly brings another weapon into the trade war. 

 

China has still been defending their currency this month. In fact, data shows that the PBoC managed to ditch $107bn in exchange for Yuan in order to defend the level. There’s plenty left in the tank but persistent pressure from a financial community that had believed 7 would be broken as a result of the bilateral political dispute has afforded China a blanket to hide behind as it brings out its weapon. China has devalued to make its exports cheaper and therefore more competitive. Consider a case in which Trump slaps 25% tariffs on everything to force China’s hand into a trade deal with the United States. With USDCNH at 6.9 as it was a few days ago, a 1m Yuan Chinese export to, say, the United States not under the influence of tariffs yet costs a few tenners short of $145,000.00. Now introduce tariffs, assuming the exchange rate stays stable, the cost of the good is just shy of 160k under the 10% tariff, 167k under a 20% tariffs and under the highest threshold of 25%, the export costs a US importer >181k, at which point other nations’ exports start to appear cheaper (probably). But, if the PBoC allows the Renminbi to gradually devalue as the trade war ratchets up, Tariff Man’s questionable weapon of choice becomes impotent. For tariffs of 10; 20; 25% just devalue your currency to 7.59; 8.28; 8.625 Renminbi per US Dollar respectively and Trump will have to go and pick on someone else! There are risks to this strategy but China looks to be bringing currency to the table. 

 

It seriously freaked markets out, the yield on a US ten year treasury fell and the spread between different durations of US treasuries, a key indicator of economic risk, in one case fell to levels not seen since 2007. This move is a clear sign that investors are fearing that the trade war could seriously hurt global growth and simultaneously increases the likelihood of a recession. The decrease in US yields gave net support to the Euro as spreads between negative-yielding Eurozone debt fell as treasuries plunged. Trump’s not happy, he’s already told us that, and he thinks China’s apathy to the FX events that yesterday brought amounts to currency manipulation. Let’s see if the rally in the Japanese Yen amongst other safehaven currencies is justified and if the trade war kicks off even further. It’s worth noting that traders yesterday moved to price in a 40% probability of another rate cut during the Federal Reserve’s September meeting. Remember what we said last time they cut..? That markets forced the Fed’s hand and that’s why Powell flinched..? Well similar price action is happening once again suggesting the Dollar could weaken off in the medium term. 

 

 

 

Discussion and Analysis by Charles Porter

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Morning Brief – Monday 5th

GBP and What is the Outlook over the next 3 months?

 

A number of our clients both private and corporate are asking us what the outlook for GBP is with the differing probabilities of outcomes on Brexit: No Deal is given a probability of 30%, a Deal by 31 October 15%, a delay to the 31 October date 30% and a General Election 30%. NB probabilities do not add up to 100%

So in the event that one of the three 30% probabilities above indeed transpire and GBP moves lower/higher on hard Brexit, delay, General Election or (even) greater uncertainty, how low is low and more positively though less likely how high is high?

The answer is that we are in uncharted territory and therefore the market has dusted off the history books and lit on the previous low versus the USD which was in 1985 when GBP bought just $1.10. That is the level for hard Brexit. A General Election will mean $1.19 so not much change. Perversely a delay is seen as being a positive on the basis that further talking must be better than no talking so 1.26.

And now for the big one: in the event that Boris pulls it off and there IS a deal by 31 October, then 1.40 is the initial target. But the balance of probabilities does not reflect this outcome.

 

 

Ferrari and the super car market

 

Following Aston Martin’s poor results last week and it’s share price falling to 468 from its issue price of 1700, Ferrari was the latest super car marque to feel the pinch with Q2 production lower and its share price dropping sharply on Friday. It makes one wonder that if a brand like Ferrari is unable to make the profits demanded by its investors with average prices of just under EUR300,000 for its cars, then what future does the top end of the car market face at these prices for manufacturers? SGM-FX clients buy and sell both super cars and classic cars and judging by the recent opening of the new HR Owen franchise in Mayfair’s Berkeley Square, there is still plenty of interest in owning these cars.

 

 

Annual Budget

 

This is the time of year when preparations are being made to submit the first cut of next year’s corporate budgets. This is more than usually challenging for UK Finance Directors with international businesses or those foreign companies with U.K. operations given the uncertainty highlighted above.

We have been preparing these annual budgets for many years and the last time I can recall it being so difficult was in different circumstances 27 years ago in 1992 when the U.K. was teetering on the edge of crashing out of the ERM.

SGM-FX continues to offer assistance to our clients on this key plank in the annual budget process , so if you wish to discuss exchange rate budgeting and or hedging, please contact us.

 

 

 

Discussion and Analysis by Humphrey Percy, Chairman and Founder

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