Good Afternoon,

BoE reveals further QE

 

It was a week that the Bank of England (BoE) decided to take action.  In recent months the climate of fear with the British economy has been such that the central bank has gone to great lengths to make markets as aware as possible of their next move in before they announce it.  As such, their decision on Thursday to unveil a further purchase of £50bn of long dated gilts without so much as hint before hand was to economic policy what blitzkrieg was to military doctrine.

 

The week began with GBP in its strongest position of 2009 as it appeared that sterling had made the most of the Bank Holiday.  As the pound has been reclassified in recent times as within the ‘risky’ currency basket, it was no surprise that Monday’s positive fundamental releases encouraged movement towards risk.  Macroeconomic data continued to provide glimmers of optimism throughout the week, with sterling benefiting from better than expected US Jobless claims and Non Farm payrolls on Friday, revealing a 539K decline against the 600K loss expected. 

 

The main action of the week was centred on Thursday’s BoE announcement, which revealed a further release of £50bn into the market, in addition to the existing £75bn quantitative easing (QE) programme already in place. It added that the QE programme in place would run for a further three months until the end of August, as it was due to end this month.

 

Initial reaction was sterling negative, as investors were nervous that this signalled further economic weakness and that further downgrades in growth forecasts would be due. However, market appetite for risk remained strong, as banking stocks were driven higher in anticipation of the results of the banking stress tests. The results of the tests revealed that over $75bn of capital is required to be injected into 10 of the 19 banks. This was digested as a largely positive result; however some have questioned the validity of the underlying economic assumptions.

 

The Euro zone experienced an almost reciprocal week to sterling, beginning it on the ropes in part due to Axel Weber (an ECB member) commenting that German GDP wouldn’t pick up until the second half of 2010. The ECB meeting saw the eurozone join the QE club, as it unveiled plans to purchase €60bn of covered bonds in eurozone companies.  This was in addition to the 0.25% cut in interest rates. The single currency strengthened as a result of this proactive stance, sending it soaring against the dollar

 

Commodity currencies had a positive week, with AUD, ZAR, CAD and NZD particularly strong.  The RBA held rates at 3%, and despite the RBA also downgrading growth prospects for the year, AUD managed to gain over 4% against the dollar, and breakthrough the psychological $2 mark against the pound.

 

To the week ahead and tomorrow sees a raft of data from UK with Industrial and Manufacturing production and DCLG house price indices out. The showpiece event of the week for sterling is the BoE quarterly inflation report.  Initial whispers indicate that Mr King will dispel concerns of deflation and may even revise up UK Growth figures.  However, if last week taught us anything it was to make sure the chickens hatch before we count them.  We expect risk environment and news from other regions to drive sterling towards the back end of the week.

 

The Euro zone anticipates German Consumer Price Index (CPI) data on Tuesday before Industrial production data on Wednesday, but it will be the ECB Monthly report on Thursday that will attract most attention this week. The week is rounded off with EU CPI and GDP data.

 

The Greenback is this week’s busiest currency with Bernanke speaking at 23.30 BST tonight  followed by Lockhart speaking tomorrow at 12.20 BST, before the release of trade balance, budget statement and ABC consumer confidence. Wednesday’s retail sales figures will be hotly anticipated, and the week is rounded off by Thursday’s PPI data and Friday’s CPI data respectively.

 

Paradoxically, it appears that the surprise move by the BoE to release unexpected data of such magnitude may actually provide sterling with the proof of resilience it needed.  If it can continue to consolidate current levels it looks as though the sterling bulls may have the jump on the bears, for the moment at least.  

 

Trade of the Week

The trade of the week is relevant to a seller of sterling and a buyer of euros. This zero premium structure enabled the client to hedge their exposure for a six month period through a ‘window convertible forward extra’.

 

The client has a worst case rate (WCR) of 1.07 and can benefit 100% of any and all upside up to a rate of 1.20 during the relevant window period. Should GBP/EUR hit 1.20 at any point in the window period, the structure reverts to a forward contract at 1.07. This structure also provides an extra ‘boosted rate’ whereby if the rate doesn’t fall below 1.05 for the window period, the client will receive a WCR of 1.11. 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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Disclaimer: The above comments are only our views and should not be construed as advice. You should act using your own information and judgement. Although information has been obtained from and is based upon multiple sources the author believes to be reliable, we do not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute the author’s own judgement as of the date of the briefing and are subject to change without notice.

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