Foreign Exchange - UK Weekly Update - Written by rick on Tuesday, February 10, 2009 16:56 - 0 Comments
Euro suffers as Congress stalls - World First’s Sterling Update - 9th February
A proactive stance by the BoE lifted the pound to its highest level of the year against the Euro, and returned it from the brink of disaster against the dollar. The 50bp cut on Thursday signalled to the markets that the Central bank was serious about supporting the economy, which in turn reaped rewards for the pound throughout the week.
The Euro however endured a tougher week, plummeting against its major pairings as concerns were raised about its exposure to the worsening economic situation throughout Central and Eastern Europe. Russia’s economy in particular was in the limelight, after its credit rating was downgraded on fears that its dwindling supply of foreign exchange reserves are coming to an end. Falling commodity prices and a risk of capital flight has left the bank defending a clearly overvalued currency which it has already spent over $200bn of its reserves on. On Jan 22nd, the Russian Central Bank widened its trading band to 26-41against a USD and EUR currency basket; however the rouble finished the week at the bottom of this band (41), a fall of over 25% since November. This cast a dark shadow over other parts of Europe with the Polish Zloty, Czech Koruna and Hungarian Forint also down heavily across the board.
Meanwhile the dollar was affected by appalling employment figures on Friday. Nonfarm employment figures were worse than expected and the ongoing trend looks set to continue in a downward spiral. This woeful result would normally increase risk aversion and in turn strengthen the dollar across all pairings, but paradoxically this was not strictly the case. Instead, the figure managed to add weight behind Obama’s fiscal stimulus bill and has thus increased chances of a speedy approval of the bill through congress. Stock markets were buoyed at the prospect of this increase in cash washing through the economy, and as a result were up strongly throughout the week. Commodity currencies rebounded against the dollar due to this reduction in risk aversion, with the Aussie and Kiwi up strongly.
Equities were further encouraged by figures from the manufacturing and service sectors worldwide. This was in unison with bullish bank lending data from China showing promise for an emerging market rebound.
The US should unveil its stimulus package early on Tuesday, the details of this will dictate broad direction of equity and currency markets for the week. The major piece of data out this week in the UK is the BOE inflation report due on Wednesday, while the Euro zones troubles may continue with advance GDP figures due on Friday expecting a contraction of 1.3%. The US also has trade balance and advance retail sales figures to contend with late in the week
Trade of the Week
This week’s trade of the week is a Reduced Premium Risk Reversal on GBP/USD This Premium Paid option gave the client a hedge rate of 1.45 and a best case rate of 1.65 for an upfront premium of 3% of the total contract amount. If, on expiry, GBP/USD is below 1.30, for every cent that the rate is below 1.30 the hedge rate (1.45) also falls by a cent. If, on expiry, GBP/USD is below 1.45, and higher than 1.30, the client will receive 1.45. If the rate is above 1.45 and below 1.65 the client will buy at spot. If the spot rate is at or above 1.65, the client has an obligation to buy at this level. For full details of this structure please contact one of our options traders on 0207 801 9050.
Enjoy the week ahead
———————-
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.
To view any past or present currency blogs please click on the following link www.worldfirst.com/blog
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.
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.
There are a number of charges that we will levy if you enter into a hedging strategy. The nature of these charges depends upon the specific strategy, but may include an up front premium . We recommend that you read carefully the details of these charges which are set out alongside the description of each strategy.
For your protection, telephone calls are usually recorded.
Leave a Reply