Euro loses ground as reality sets in

- Noyer promises ECB action "very soon"
- But when might that be?

Three months ago Facebook, a marginally profitable software firm with millions of users around the world, offered its shares to investors at a multiple of around 80 times earnings. Since then the share price has fallen by nearly half and a profit shortage has pushed up the price/earnings ratio to 117. Today Manchester United, a loss-making clothing retailer with millions of supporters around the world (and several in Lancashire) will attempt the same trick. The current owners need the money for some nice cigars and a new bizjet and hope the shares, which have minimal voting rights, will be snapped up by sentimental fans.

Sentimentality will not be enough to persuade investors to snap up euros, other than in the short run. A week after the European Central Bank president set out his vision of a new Euroland, where the strong countries look after the weak, the single currency is falling back into disfavour. The euro lost about a cent against the US dollar and half a yen yesterday.  

It did so despite fighting talk from Christian Noyer, governor of the Banque de France. He told Le Point magazine not to have "any doubt about the determination of the [ECB] governing council and its capacity to act within the terms of its mandate... We should be ready to intervene very soon, prioritising short term debt markets." Investors identified two shortcomings in his comment: First, it is the long end of the Club Med government bond market (10-30 years) that needs support, not the short end; second, the concept of "very soon" is not particularly exciting when Euroland and its institutions operate on a geological time scale.

As an illustration of the euro's problems, it performed worse than the pound on Thursday, even after the UK posted its biggest trade deficit since comparable records began in 1997. Investors appeared to pay little attention to the figures. The pound was already moving lower against the US dollar when the data were announced, dragged down by the euro, and Cable* is more than half a cent lower on the day. Against the euro, however, it is half a cent stronger.

It is firmer against the commodity dollars too. Investors took more notice of China's trade figures this morning than they did of Britain's yesterday. After increasing for four consecutive months, China's trade surplus shrank from $31.7bn in June to $25.1bn in July. Imports were up by 4.7% on the year but exports rose by just 1.0%. The impact on the Australian dollar was ameliorated by a higher growth forecast from the Reserve Bank of Australia.

If yesterday's UK trade figures counted for little, today's producer price index data ought to have even less impact. They are likely to show manufacturers' margins widening, as costs fall and factory gate prices rise. Italian and Portuguese inflation rates are the only statistics from Euroland. North America's sole contribution is Canadian employment.

The lack of top-tier data today ought to mean a quiet end to a quiet week. That does not necessarily mean no movement for currencies, but it does mean that too much should not be read into those movements. Have a good weekend.
*Cable: Jargon for the GBP/USD exchange rate, so known because quotes were once transmitted on the transatlantic submarine cable.