Foreign Exchange - UK Daily Update - Written by rick on Monday, April 6, 2009 15:17 - 0 Comments
Sterling has a Riot - World First’s Sterling Update - 6th April 2009
Sterling has a Riot
News for sterling was bright over the week, the best performer of the major currencies, a rare phenomenon of late. Risk appetite returned with a vengeance, after data from around the world provided room for some optimism, and the G20 meeting provided momentum for a risky asset rally.
Purchasing Manager Index (PMI) results set the tone early in the week, with better than consensus results from the UK, US and Chinese economies. But it was the outcome of the G20 meeting that returned some much needed risk appetite to the market, as the final communiqué turned up some positive agreements. The centrepiece was an additional $1.1 trillion of additional resources pledged to the International Monetary Fund (IMF), a dramatic increase in funding to lend to struggling countries. Other points addressed were a focus on continued trade and protectionism, and a crack down on tax havens and banking remuneration.
Curiously, the IMF also moved to increase the amount of SDR’s (special drawing rights) held at its disposal by $250bn, a tenfold increase in the amount of SDR’s currently held on reserve. This moves away from the heavy reliance on the dollar as a currency of reserve, although it does not provide a tangible alternative as SDR’s are a synthetic paper currency. This meant that safe haven demand for the dollar evaporated somewhat throughout the week.
Emerging markets currencies were buoyed, as new measures to give them support saw their respective currencies rising by over 4% during the week. In a move that essentially amounts to global quantitative easing, the SDR funds held by the IMF will be available for each country to draw down on in Dollars, Euros or Sterling. Member states that don’t require the funds can donate some of their allocation to countries that do need them, reducing the risk of default for the riskier emerging markets.
The International Monetary Fund (IMF) also stated over the weekend that the Eastern European countries hit by the crisis should scrap their currencies in order to join the Euro. Even though they are not full members of the Euro zone, they could become quasi members of the single currency, if the ECB approved. This would help to restore confidence in the region, and resolve the foreign currency debt overhang that persists.
The ECB meeting on Thursday managed to surprise the market, reducing interest rates by only 25bp, less than the consensus view of 50bp. US nonfarm payrolls arrived at a close to expected result of 663K jobs lost, sobering general sentiment towards the end of the week.
This week sees the Bank of England and Bank of Japan with rate decisions, where most of the action will be around proposed changes to the level of QE within the economies, as there is hardly any headroom left for rate cuts. In the land down under, the RBA also have a rate decision, with the result being too tight to call as markets are currently predicting a 44% chance of a 25bp cut and 56% chance of a hold. This decision will affect how favourable the commodity currencies are to be treated over the coming weeks.
Trade of the week
The Target Accumulator Redemption Note (TARN) is an attractive option for a seller of GBP and a buyer of EUR over a 12 month period.
The client is given a strike rate of 1.16 with 16 big figures (euro cents) to use over the 12 months. The strike rate a TARN provides is significantly better than the current spot and forward rate of 1.10 The client is obligated to sell £100,000 at expiry per month for 12 months at the strike rate of 1.160 until either the benefit of the 16 big figures has been used, or until the end of the 12 months. E.g. if spot at expiry is 1.12 for the first month they will sell at 1.16, and have used 4 cents of the total benefit of the 16 cents (leaving 12 cents of benefit to be used over the remaining 11 months). However, if spot at expiry is above the strike rate, the client is obligated to buy at the strike rate. Once the 16 cents are exhausted, the TARN ceases to exist.
Please note that this cannot be considered a hedge as it doesn’t carry a worst case rate. This product is suitable for clients currently un-hedged due to the low value of sterling. Like all of our option structures, this is also available in other major currency pairings. For full details of this structure please contact one of our options traders on 0207 801 9050.
Enjoy the week
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Please feel free to contact me (rick.roache@worldfirst.com) if you have any questions or thoughts regarding these updates or if you are interested in a particular event in the calendar. If you would like to discuss your foreign exchange requirements, please contact our:
Corporate Foreign Exchange Team on 020 7801 9050 or our Private Client Currency Exchange Team on 020 7801 9080.
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Any rates given are “interbank” i.e. for amounts of £5million and thus are not indicative of rates offered by World First for smaller amounts. E&OE. Definitions of jargon/market terms can be found in our Glossary of Foreign Exchange Terms.
This financial promotion is issued in the United Kingdom by World First Markets Limited which is authorised and regulated by the Financial Services Authority (“FSA”) to provide advice on and execute trades in derivatives. Please note that other activities that may be referred to in this material, such as the execution of spot foreign exchange trades, do not fall under the remit of the FSA. World First Markets Limited’s FSA Firm Reference Number is 477561.Investing in any of the hedging strategies contained in this material involves certain risks, for example that the exchange rate at expiry of the contract is less favourable than if you had entered into a forward contract. Please ensure that you fully understand these risks before investing. If you are in any doubt as to the nature of these risks, please speak with your financial adviser or an adviser at World First Markets Limited.
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