The Federal Reserve provided the big shock of the week, with the decision on Wednesday to join the ever growing Quantitative Easing club. The Fed committed to a program of buying $300bn of long dated treasury debt (as well as an additional $750bn in mortgage backed securities (MBS) and $100bn in agency debt), in order to try and jolt the US economy out of its slumber. The Fed’s strategy clearly was to “shock and awe”, and the initial impact saw equity markets giving it the thumbs up, whilst the dollar didn’t fare as well. The greenback spiralled downwards throughout the week, recording its worst weekly performance in a quarter century as a degree of risk aversion returned to the markets and the dollars position as safe haven favourite was put into question.

This left the ECB as one of the few major central banks that has not engaged in any form of quantitative or credit easing as yet, which has seen the Euro viewed favourably for the time being. The Euro managed to gain almost 5% against the dollar over the week, and 2% against the pound. However, the shine was taken off the Euro on Friday, as industrial production figures showed a massive decline in activity in the single currency zone.

The pound started the week on the back foot, after Tuesday’s UK unemployment figures exposed the worst increase in jobless since the early seventies, the result completely outstripping expectations for a February jobs figure of 85,000, rising to almost 135,000 for the month.

With all the currencies heavily under pressure recently, gold bounded ahead 3% for the week, as investors looked for a hedge against inflation and some safety from the drama. Oil also rose strongly, for greater than 10% gains for the week, as investors were optimistic that the outcome of the Fed decision would stimulate some global demand.

Looking forward this week, we will once again be focusing on the actions of Politicians and Central bankers; of particular interest is the actions of Treasury Secretary Tim Geithner, and details of the toxic asset plan set to be unveiled today. On the data front from the UK, we have RPI and CPI figures due on Tuesday, as well as retail sales figures later in the week. The Euro zone has no major data, whilst the US has existing and new home sales, as well as a PCE reading late in the week.

Trade of the week

Hot off the press this week, is the Target Accumulator Redemption Note (TARN) for a seller of GBP and a buyer of USD over a 12 month period.

The client is given a strike rate of 1.5250 with 28 big figures (cents) to use over the 12 months. The strike rate a TARN provides is significantly better than the current spot and forward rate of 1.45. The client is obligated to sell £100,000 at expiry per month for 12 months at the strike rate of 1.5250 until either the benefit of the 28 big figures has been used, or until the end of the 12 months. E.g. if spot at expiry is 1.4950 for the first month they will sell at 1.5250, and have used 3 cents of the total benefit of the 28 cents (leaving 25 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 28 cents are exhausted, the TARN ceases to exist.

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.

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.

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