Foreign Exchange - UK Weekly Update - Tuesday, August 31, 2010 15:00 - 0 Comments

World First Sterling Update 31st August 2010: I’ll huff, and I’ll puff, and I’ll blow your house down

Data out recently is showing that the UK housing market appears to be slowing down. House prices rose slightly in July but the rate at which this recovery is occurring has fallen 6.7% from last May where growth was at 8.7%. This was according to the UK land registry which are often considered to be a lagging indicator of house prices as they reflect transactions prior to the purchase. Mortgage lending is also continuing to fall, apparently activity in the housing market continued to drop in July even after the weak year we have seen so far.

The BBA reported that approvals for new house purchases fell 34,600 to 33,700 in July. New buyer enquiries have also fallen in the last three months and remains far below the levels seen a couple of years ago. On top of this consumer credit flow has been very weak with the growth rate of unsecured lending to households close to its record low levels. Whether this is a  complete downturn or just a hiccup is an important point, there are not really very many reasons to worry as it was understandable that the housing market would trip up around the election as well as the economy actually being stronger than the start of the year. I wouldn’t say it something to ignore, as there must be something behind these falling figures.

Last week it came to light that the economic growth of the UK has zoomed ahead by 1.21% in the second quarter of this year. This is the fastest expansion since 1999 and was faster than the estimated of 1.1%. This news is understandably very comforting to the Treasury, and in their own words they are ‘cautiously optimistic’. They are treading cautiously because the pessimists are having a field day. The revision of the growth figures has much to thank the 8.5% construction output, which is unlikely to continue, add this to the planned government spending cuts and we have a parachute effect on the rapid growth.

On the topic of government announcements Osborne is at it again, he is planning to cut treasury staff numbers by about one quarter, to show the rest of them how is it done. He also wants to speed up the comprehensive spending review which will see about 25-40% cuts from most departments.

Jeremy’s Trade of the Week

This week’s trade of the week is not a particular strategy or structure but simply the advise to hedge

We believe that sterling is likely to lose ground in the near term as the October spending review looms in the distance. We doubt that the market will be willing to back the pound in the weeks before the announcement much like it did prior to this year’s election. Near term targets for GBPEUR are 1.18 while for GBPUSD are 1.48. We would suggest that a mixture of forwards and options are the way for the average corporate to deal with these moves as both protect against GBP falls while the option component provides the ability to benefit from upside.

Regardless of your position we recommend you give us a call on 020 7801 9050 or  email corporate@worldfirst.com to discuss how we can protect your business. Don’t let these recent gains slip away.

Have an enjoyable week