Unfortunately, for all the talk about a solution to the European debt situation in 2011, no satisfactory rescue plan is yet to emerge.  As a result, fear over a euro break-up is guaranteed to be the main market story of 2012. We have received a fair few questions from clients as to what would happen to the euro, euro contracts and such in the event of a breakup.

The truth is that no one knows for sure exactly what will happen in the Eurozone in the next few months. However, we’ve pulled together this quick guide to help you understand the risks involved and, hopefully, ease any fears that you may have about a complete collapse being just around the corner.

What will cause the euro to break-up?

A litany of events could push the Eurozone closer to a break-up, with one or more member states leaving the single currency.  For the most likely culprit you have to look at where these problems began; Greece.

It is almost certain that the Greeks will default on their debt, but this is not the problem. The problem is containing the risk of contagion from Greece to other economies. European leaders need to make sure that the mechanisms, funds and programs administered by the various economic bodies (the ECB, IMF, EFSF, ESM and others) are in position to deal with the situation should it emerge.

At the moment that is simply not the case. This has resulted in an increase in yields in peripheral debt, the rise of CDS (anti-default insurance) prices and continuing euro weakness.

Do we expect the euro to fall apart completely?

In the event ascribed above, no. The Greek problem is not large enough to drag the euro down with it. For that we would need another catalyst, probably in the form of Italy, to experience deep political problems and a bank falling apart that would combine to form a crisis without response.

At this point, combined with an expected recession in Europe, the interbank markets would freeze ‘a la Lehman Brothers’ and the world would tip into crisis. It’s important to note that we are not expecting this to happen, however, and affix a 10% probability to this scenario.

What would be the impact on UK businesses in the unlikely event that the euro collapses entirely?

This is difficult to say but we know of a few law firms who are exploring contract laws between European counterparties in the event that the euro ceases to exist, and a “New Drachma” is introduced for example.

Any re-introduced currencies (like the Drachma) would naturally depreciate versus the euro in the first instance. So, hypothetically, any contracts struck under Greek law would be resigned with an agreement that EUR 1 = 1 ‘New Drachma’.

However, a significant deprecation (likely to be double digit in % terms) in the value of the ‘New Drachma’ would unfold, as it became freely available on the markets.

To make sure that there is no disconnect between euro payments and new currency distributions, new terms may be needed with local suppliers. Companies may also need to “off-shore” cash so as to not fall under any governmental line in the event the state defaults and nationalises bank assets.

Conclusion

The Eurozone debt situation is a constantly evolving nightmare and while the European political classes will take the world to the edge of disaster before they put a solution together, we expect the situation will be clearer in a year’s time, and that in the end, the euro will remain as a trading instrument.

The apocalyptic scenarios are great for headlines and terrible for businesses, but we believe that the risks of these playing out in reality are minimal; a currency just doesn’t disappear overnight

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For more information about managing your exposure to the Eurozone crisis click here to receive a free copy of our hedging whitepaper

Britain’s output will fall by 0.1% in Q4 of 2011 and by 0.6 % in the first three months of next year, before picking up during the rest of the year fulfilling the textbook definition of a recession of 2 consecutive quarters of contraction. Growth will only total around 0.5% in 2011 as a result, which is a significant downgrade from the 1.8% that they had forecast in May.

Obviously this comes only a day before the Office of Budgetary Responsibility issues its latest forecasts for the UK economy, with journalists expressing surprise at the amount of briefing they are receiving before the report. Normally a sure fire sign that the actual product is likely to be a bit of a bloodbath. In June, they said that the structural deficit would be wiped out by the end of 2014/2015. However, it is expected to revise its forecast, and state that this target will only be met if the government maintains the real-terms freeze on spending until 2017. Not what Osborne wanted to hear at all.

Sterling has been relatively resilient in the past few weeks versus the euro, but it has really had some lumps taken out of it versus the dollar and yen as the moves into haven currencies increases.  Flows into typical safe havens in currency markets, such as USD and JPY, have been strong – as have moves into USTs and JGBs alongside UK gilt purchases. While the UK is seen as a safer asset than most European products, the pound is getting killed against the havens. 10 days of falls on equity markets are expected to continue next week and we have to remember that GBP rarely trades well in low liquidity environments – the past four December’s have seen GBP lose 3.3% on average versus the USD (which would equal 1.5050 at the time of writing). The trade below is ideally placed to make sure this does not hurt you going forward.

Combine this with planned strike action on Wednesday and it is easy to see that this week may well be the most testing for the coalition government yet.

Jeremy’s trade of the week
This week’s trade of the week is a Leveraged Windowed Convertible Bonus with the client wanting to hedge their dollar exposure Jan to June 2012. He buys dollars and sells sterling and wanted to protect a budget level of 1.55.

The structure gave the client a protection rate of 1.55 (forward price) to buy dollars however should spot on expiry be below 1.55 your worst case rate is ‘boosted’ by the cent difference between the spot rate and 1.55 i.e. if spot on expiry is 1.50 then the client receives 1.60. This applies as long as the rate is not below 1.46 in that month, If it is then your bonus doesn’t exist that month and you are simply protected at 1.55. Obviously this structure gives you a benefit to the upside as well and the client is able to benefit up to a level of 1.66. If the rate touches the 1.66 during the month before expiry however he must buy 2.0x the amount of dollars at 1.55.

This strategy requires no premium, and the use of leverage allowed the client to increase both his level of protection and the barriers that he can benefit up to.  As there is a potential further strengthening for sterling in the future the structure allows for a large amount of beneficial movement whilst always protecting against adverse moves.

Take a pinch of negative retail sales, a dash of high unemployment and add to a £15.9 billion public sector net borrowing requirement. Be sure to squeeze household spending then rub in high inflation, low wage growth, public sector job cuts and crippling austerity measures. Combine the two mixtures, bring to the boil for a few months and serve on a platter of Eurozone debt contagion and a slowdown in global growth. If that isn’t a successful recipe for a recession I don’t know what is.

The IMF told us little that we don’t already know when they lowered their growth forecasts for the UK last week and there are certainly more tough times on the horizon. So, surely we can expect swift and decisive action from central banks and governments alike in an effort to baton down the hatches in the eye of the storm? Well, not necessarily.

The Bank of England minutes revealed that only one MPC member, Adam Posen, voted for further QE at the September meeting. All of the MPC elected to keep interest rates unchanged but when it came to the crucial question the minutes say “for some members, continuation of the condition seen over the past month would probably be sufficient to justify an expansion of the asset purchase program at a subsequent meeting”. Translation – we need to see a poor Q3 growth estimate, the final nail in the coffin, before we will agree to act. Most market participants believe more QE will come through in November although some believe we will get an extra £50 billion as soon as October.

It is difficult to gauge the potential effect of the program given the current state of the global economy. The good news is that it will definitely have a positive impact which is a boost the UK economy is long overdue.

Key releases for Sterling this week

Please note that movements on currency markets will be dominated this week by the unfolding sovereign debt crisis in Europe. If you would like to take advantage of our free rate watch service please contact your dedicated dealer.

Mortgage approvals are out on Thursday at 9.30am – we are expecting a fairly flat to mildly positive reading which will be bullish for Sterling.

Gfk consumer confidence out on Thursday at midnight – we are expecting a poor reading which will be bearish for Sterling.

Jeremy’s trade of the week

This week’s trade of the week is a ‘2x Leveraged Seagull’. This trade is a close cousin of the risk reversal in that it allows you to hedge yourself close to the market but in turn for a reduced upfront cost, it gives you 100% benefit up to a pre-determined level. We also include a liability below a certain level that allows your hedge rate to be that much closer to the market for no additional upfront cost.

The client will benefit in all upward movement up to a cap level of 1.64. If on expiry the rate is above your cap level then you must buy 2x the amount at that cap. Should the GBPUSD rate be below 1.5300 and above 1.3950 on expiry they are able to buy dollars at 1.53, if it is below 1.3950 however, then for every percentage point below 1.3950 they lose the same off their strike of 1.53. If the rate is between 1.53 and 1.64 then the client’s hedge can be bought at spot.

This strategy didn’t cost the client anything and allows a hedge with a nominal WCR of only 1.5 cents from current market price while a risk reversal without the additional liability would see the cost increase by an additional 0.5%. We believe this is a balanced trade as although it is not a true hedge you are avoiding any barrier levels should GBP rebound during the lifetime of the trade. It is also relevant for buyers of sterling and sellers of other currencies.

Have a great week

At the end of what was another eventful week on financial markets a lot of us were left thinking “how on earth could a trader rack up losses of $2.3 billion and no one notice until now?” If the UBS rogue trader, Kweku Adeboli, could pick anyone’s brains as to how to structure his defence, George Osborne would probably come top of the list.

Our chancellor seems to have overlooked a £12 billion funding gap in public finances just two months prior to his autumn statement on 29^th November. The word you are looking for is “whoops”. Forget about debating the 50p tax rate, the coalition now faces either prolonging austerity measures or hiking taxes. The issue with increased austerity measures or hiking taxes is that both tactics take money out of the economy and put a greater squeeze on the average household. Data released last week would indicate we need the exact opposite to happen and therein lies the conundrum.

Unemployment rose to 7.9% and retail sales contracted by 0.2% in August. Part of the drop in retail sales has been attributed to the nationwide riots that forced shops to close early and kept consumers off the streets. The hope is that September’s figure shows a significant bounce back. However, unemployment is due to remain stubbornly high for the foreseeable future. It’s not just rising unemployment but also low wage growth that is making a significant dent in consumer’s buying power. The consumer price index pushed on to 4.5% in August, way above the 2% target rate which has a similar effect as falling wages. The figure is still forecast to peak at 5% and then start to fall throughout 2012 in line with VAT returning to the 17.5% level. But if the government now has to plug a £12 billion size hole, an increase in VAT may be a more likely scenario.

Thankfully it looks almost certain that more QE is on the way. Published today, the BoE’s quarterly bulletin concluded that “the full effect of QE was equivalent to a 150 to 300 basis point cut in Bank rate, a significant reduction”. The report aside, what else could we do?

Key releases for Sterling this week

Nationwide consumer confidence out on Tuesday – we are expecting a poor reading which will be mildly bearish for Sterling.

Bank of England interest rate meeting minutes out on Wednesday at 9.30am – we are expecting 3 of the MPC to have voted in favour of further QE. This will be bearish for Sterling but bullish for the FTSE.

Jeremy’s trade of the week

This week’s trade of the week is a ‘Participating Forward Out’. This differs from the usual participating forward in that, for an increased risk, your strike improves from 1.1250 to 1.15 against a forward rate of 1.15. The client decided to hedge his next 6 months of exposure via this trade.

The client will benefit in 50% of any upward movement i.e. should GBPEUR be 1.23 on expiry, 8 cents better than the strike rate, the client receives 1.19 averaged, 4.00 cents better than the strike rate. Should the GBPEUR rate be below 1.1500 and above 1.0800 on expiry they are able to buy euros at 1.1500, if it touches 1.08 however within the monthly window then protection at 1.15 is lost and you are un-hedged for the month.

This strategy is premium free and allows a hedge at the current forward rate while a normal participating forward would see a worst case rate a further 2.5 cents lower.  This structure has proved popular for 2 reasons. Firstly it allows the client to obtain a strike at current market and secondly, with markets volatile at the moment provides a balanced risk/reward as part of a hedging portfolio. As such we would recommend that this trade is taken alongside a structure that provides a concrete worst case rate.

Have a great week

Could the unthinkable double dip happen? The UK economy is showing signs of fragility yet again. The services sector, which accounts for 75% of economic output, showed its biggest decline in a decade in August. Industrial and Manufacturing production are also on the slide, having propped up the economy for the past 2 years they now appear to be running out of steam.

So, the question is where can we turn for help in an effort to kick start the UK again? It certainly won’t be coming from our major trade partners. At a speech on Friday George Osborne defended the spending cuts saying the deficit reduction plan was “the rock of stability on which the recovery was built” – no help there then either.

On Thursday, the Bank of England kept interest rates on hold and they announced that no further quantitative easing would take place at this time. The Bank of England minutes, released next week will give more insight into how the 9-strong MPC voted but I would be surprised if no more than 1 member favoured a cash injection. However, we may have to wait until GDP posts a negative value before we see any decisive action from the BoE.

But all is not lost! We may be on the verge of global collapse and an economic dark age but at least we’ll be able to work until we’re 70. It would appear that reforms to the pension age will be brought forward by 10 years. In response to an ageing population it is likely the pension age will shift to 67 as early as 2026, instead of 2036 originally planned. If you are searching the reasons to play the Lottery this weekend then look no further.

At least steps are being taken to prevent another financial crisis. Bank shares fell sharply on proposed ring fencing measures that will keep retail and investment banking separate in the future. It looks likely that the measures will be fully implemented by 2019, 11 years after the crisis first struck.

Key releases for Sterling this week

CPI (inflation data) out on Tuesday at 9.30am – we anticipate a figure slightly above expectation, bullish for sterling.

Unemployment rate out on Wednesday at 9.30am – we think unemployment will disappoint and increase again, bearish for Sterling.

Retail sales out on Thursday at 9.30am – we anticipate a reading below expectations which will be bearish for Sterling.

Jeremy’s trade of the week

This week’s trade of the week has proved very popular in the past few weeks as it gives you a strike rate well above current market while allowing a large amount of potential benefit and is called a Euro Barrier KIKO. This particular trade was for a client who imports goods from Holland and Spain and was looking to get a rate that would be unobtainable elsewhere to protect all of his imports through 2012. The below example is therefore in GBPEUR but the trade is available in other currency pairs and for sterling buyers (exporters)

The client received a strike rate of 1.1900 against a forward rate of 1.1600 and is protected at this level as long as the GBPEUR is not below 1.05 at 3pm on the day of expiry. If it is then he loses his protection at 1.1900 for that month. He also has the ability to take spot all the way up to a GBPEUR of 1.30. If GBPEUR is above 1.30 at 3pm on the expiry day then he will buy double the amount of euros at 1.19.

These barriers are different to normal barriers in that as long as the rate does not breach at 3pm on the business day of expiry then you are not penalised.

This structure has proved popular for 2 reasons. Firstly it allows the client to obtain a strike 3.00 cents above current market and secondly, with markets volatile at the moment provides a balanced risk/reward as part of a hedging portfolio. As such we would recommend that this trade is taken alongside a structure that provides a concrete worst case rate.

Have a great week

On Friday, the Office for National Statistics confirmed with its second estimate that the UK economy grew by 0.2% in the second quarter of 2011. George Osborne has come under fire from the opposition who claim that VAT hikes and overzealous austerity measures were hampering the recovery. However, the chancellor will feel relatively happy considering UK growth was ahead of France’s and Germany’s between April and June. The ONS also repeated its argument that one off factors such as the Tsunami in Japan and the royal wedding could have dented growth by as much as 0.5%.

The focus will now shift to the UK’s third quarter performance. Recent data from the manufacturing and retail sectors suggest that the economic climate is no more habitable than earlier on this year. Meanwhile, unemployment is on the rise and could continue to climb as the private sector struggles to accommodate public sector job cuts.

Consumer confidence unsurprisingly contracted in July and is largely to blame for the UK’s limited economic expansion. Spending will undoubtedly stay low in an environment of high inflation, job cuts and limited wage hikes.

The one glimmer of light came from mortgage approvals which are up slightly from last month. This was the third monthly increase in a row and means approvals were 3% higher than in July last year. Hopefully this will result in greater home sales in the not too distant future.

Key releases for Sterling this week

PMI Manufacturing out on Thursday at 9.30am – we anticipate a slight fall in manufacturing performance this week – bearish for Sterling.

PMI Construction out on Friday at 9.30am – a close call on construction, leaning slightly to the downside – moderately bearish for Sterling.

Jeremy’s trade of the week

This week’s trade of the week is a ‘Convertible Forward’. The client decided to hedge his Jan-Mar 2012 exposure for when he repatriates dollars from abroad and changes them back into sterling. He also wanted to obtain a strike level as close to the forward rate as possible

 The client’s worst case rate was set at 1.6450 on his option which allows the client to benefit all the way down to a rate of 1.5350. Should the rate touch the barrier level during the window period (1 month before the expiry date) then that month’s structure reverts to a forward at 1.6450. He is of course able to trade at spot between 1.5350 and 1.6450 if the barrier is not touched.

 This strategy is premium free and allows a hedge with a tight worst case rate to the forward As there is a potential further strengthening for sterling in the future the structure will always protect against adverse moves while allowing for a large amount of beneficial movement.

The UK economy grew by 0.2% in the second quarter of 2011. Predictably, Osborne described the figure as “good news” whilst the opposition accused him of choking the recovery with austerity measures and VAT hikes. The net growth figure for the previous 9 months is also 0.2% demonstrating the economy has been at a near stand-still since October 2010.

However, the office for national statistics did offer up several one-off factors during spring that are believed to have dented growth by as much as 0.5%. These special events included the Japanese tsunami, time off for the royal wedding and tickets for the Olympics going on sale. Positive PMI data for the manufacturing, services and construction sectors this week would add weight to this argument and we have not had the best of starts.

Earlier today, PMI manufacturing data showed contraction in the sector for the first time in 2 years. A figure above 50 shows expansion and the reading for July came in at 49.1. A weak pound has undoubtedly helped manufacturing exports but unfortunately overseas demand is slowing. Analysts are concerned that the UK’s recovery may be running out of steam and domestic demand is certainly not capable of plugging the gap.

To add to our woes, the CBI has also lowered its growth forecasts for the UK economy in 2011. Should Q3 GDP disappoint, we may see more members of the MPC leaning towards further quantitative easing in the future which would keep the pound weak for the foreseeable future.

On Friday, the Nationwide building society announced in their latest monthly report that house prices are stabilising. Prices across the UK rose by 0.2% in July, leaving them just 0.4% lower than a year ago. The society said that demand for homes was still sluggish and a gradual rise in the supply of available houses was keeping prices stable.

Key releases for Sterling this week

PMI Construction out on Tuesday at 9.30 am and PMI Services out on Wednesday at 9.30am – we expect both sets of data to disappoint which will be bearish for Sterling.

BoE Interest Rate Decision on Thursday at Midday – no change in interest rates and no change in QE – we are forecasting a non-event which will have little impact on Sterling.

Jeremy’s trade of the week

This week’s trade of the week is a ‘Ratio Forward’.  The client decided to hedge his next 6 months of exposure via this trade selling GBP, buying dollars.

The clients protection rate is 1.6000 and will benefit in 75% of any upward movement to 1.67  i.e. should GBPUSD be below 1.60 on expiry, the client receives their protection rate of 1.6000. Should the rate on expiry be 1.66, 6 cents better than the protection rate, the client purchases 75% @ 1.66 and 25% at 1.60, averaging 1.6450. If the barrier level is breached, 1.67, then the client benefits 25% of upward movement. i.e, if spot on expiry is 1.72, 12 cents benefit, the client achieves 25% @ 1.72 and 75% @ 1.60 , averaging 1.63 thus 3 cents benefit. The barrier in this example rises by 1 cent a month so in month two it is 1.68, month three 1.69 and so on.

This strategy is premium free and allows a hedge with a nominal WCR of only 3 cents from current market price and guarantees upside should there be any. It is also relevant for buyers of sterling and sellers of other currencies.

Have a great week

The Bank of England MPC will have felt the pressure come off when UK CPI, a key measure of inflation, fell back from 4.5% to 4.2%. The BoE had forecast inflation would hit 5% this year, in line with rising commodity prices. The conundrum is, do you hike interest rates in favour of price stability or do you keep interest rates low to help stimulate growth? The MPC have, until now, favoured the latter and if inflation falls further this month the argument for QE would gain weight. Interestingly, core CPI, which discounts volatile items such as energy and food, fell back from 3.3% to 2.8% which further justifies the MPC’s dovish tone to date.

The UK unemployment rate fell from 7.8% to 7.7% which, on the face of it was a positive sign for the economy. However, some of the decrease was put down to young people going into full time education and two thirds of the increase in employment was due to part time jobs. A big question mark remains over how sustainable the improvement in jobs market data is. Digging deeper into the figures we can see that the ratio of unemployed people to job vacancies has risen from 5-1 to 5.4-1. We can also see that the number of people claiming jobseekers allowance rose by 24,500. Following public sector job cuts most forecasters believe unemployment will increase by 150,000 within 12 months so the worst may be yet to come. It is unlikely that the private sector will be able to accommodate the losses of the public sector in such a short time frame.

Key releases for Sterling this week

Bank of England interest rate meeting minutes out on Wednesday at 9.30am – we expect a vote of 7 – 2 in favour of keeping interest rates on hold and a vote of 8-1 against any further quantitative easing. We anticipate the minutes will take a slightly more dovish tone than usual and expect Sterling to weaken slightly.

UK Retail sales out on Thursday at 9.30am – this will show some bounce back from May’s drop off but unlikely to have a big impact on Sterling’s fortunes.

Jeremy’s trade of the week

This week’s trade of the week is a ‘Convertible Forward Plus’. This differs from the usual Convertible Forward in that, for an increased risk, the client’s strike improved by 3 cents.. The client decided to hedge his next 12 months of exposure via this trade. He imports goods from China and his supplier require payment in US dollars

The client’s worst case rate was set at 1.5900 on his option which allows the client to benefit all the way up to a rate of 1.72. Should the rate touch the barrier level during the window period (1 month before the expiry date) then that month’s structure reverts to a forward at 1.59. He is of course able to trade at spot between 1.61 and 1.72 if the barrier is not touched. The added risk is should GBPUSD fall below 1.4950 then for every percentage point below 1.4950 then he loses the same off the strike of 1.59. if the rate is not below 1.4950 then he is completely protected at 1.59.

This strategy is premium free and allows a hedge with a tight worst case rate to the forward while a normal convertible forward would see a WCR at least another 3 cents worse.  The trade also works without the additional risk but your worst case rate increases to 1.59 from 1.56. As there is a potential further strengthening for sterling in the future the structure allows for a large amount of beneficial movement whilst always protecting against adverse moves.

Have a great week

It’s been another week of mixed messages regarding the fortunes of the UK economy. Last week, the headlines read like obituaries for some of the UK’s most recognisable retailers and yet UK retail sales figures showed recovery.

This week started with PMI construction data, coming in as expected at 53.6, with a figure above 50 showing expansion in the sector. With construction picking up over the past few months you would expect more jobs to have been created. Worryingly the sector witnessed the sharpest job cuts seen in construction over the last 5 months.

We had more of the same in the manufacturing sector. Manufacturing production showed that last month’s 1.6% drop was a likely anomaly and recovered to show a 1.8% rise month on month. Before analysts could get too excited, industrial production came in beneath expectations which quickly deflated any optimism. Some analysts believe that manufacturing should now continue to tick higher with the worst of the Japanese tsunami behind us.

The Bank of England interest rate decision on Thursday went according to the playbook. No change in interest rates, being kept on hold at 0.5% and no further plans for quantitative easing. The Bank of England is unlikely to make a move on either until the end of 2011 at the earliest. The BoE meeting minutes in 2 weeks’ time will add more direction to Sterling when we hear how each of the 9 MPC members voted. If any of the members have changed their stance, either moving from a hike in rates to a hold in rates or from a hold in rates to more QE, expect Sterling to weaken. However, if any members have taken a more hawkish stance we may see some Sterling strength.

PMI services data showed a slight climb on last month, posting 53.9 versus 53.8 the previous month. However, none of services, manufacturing or construction has done enough to show that the private sector can absorb future public sector job cuts. Expect unemployment in the UK to remain stubbornly high for some time yet.

 Key releases for Sterling this week

RICS Housing Price Balance out today at midnight – expect housing data to disappoint across the board. Bearish for Sterling.

UK Trade balance out on Tuesday at 9.30am – the weak pound should have improved the trade balance in our favour. Bullish for Sterling.

UK CPI out on Tuesday at 9.30am – with dropping commodity prices we may see inflation come off slightly. Bearish for Sterling.

UK Unemployment rate out on Wednesday at 9.30am – expect unemployment to remain stubbornly high for some time yet. Bearish for Sterling.

Jeremy’s trade of the week

This week’s trade of the week is a ‘Participating Forward Plus’. This differs from the usual participating forward in that, for an increased risk, your strike improves from 1.08 to 1.09 against a forward rate of 1.10. The client decided to hedge his next 6 months of exposure via this trade.

 The client will benefit in 50% of any upward movement i.e. should GBPEUR be 1.23 on expiry, 14 cents better than the strike rate, the client receives 1.16, 7.00 cents better than the strike rate. Should the GBPEUR rate be below 1.0900 and above 1.0400 on expiry they are able to buy euros at 1.0900, if it is below 1.0400 however, then for every percentage point below 1.0400 they lose the same off their strike of 1.09

 This strategy is premium free and allows a hedge with a nominal WCR of only 2.5 cents from current market price while a normal participating forward would see a WCR at least 1.00 further cent lower.  The trade also works without the additional risk but your worst case rate decreases to 1.08 from 1.09.

 Have a great week 

 Sentiment in the retail sector took a dive following the news that Thornton’s will close 180 shops nationwide and Habitat announced it was going into administration. Retail sales figures of late had suggested it was getting tougher on the high street as consumers are feeling the squeeze of low wage growth and high inflation.

On Monday, the third estimate for Q1 GDP threw up few surprises when it was confirmed once more that the UK economy grew by 0.5%. There was a slight upward revision in construction output which was cancelled out by a downward revision to manufacturing.

It is the manufacturing sector that will be drawing most attention from analysts following the purchasing manager’s index data released on Friday. In June, the figure fell to 51.3 down from 52 in May. This shows that the sector is still expanding and that jobs are being created. However, the pace of growth is more subdued and given that manufacturing has been our shining light, guiding the UK out of the recession, this could be a sign of tougher times to come. With the austerity measures being put into action it is likely that domestic demand will suffer. This means our exposure to the global economic shocks, such as the tsunami in Japan or the crisis in Europe, is even greater.

There was little else for analysts to get their teeth into. Mortgage approvals were down on expectations as the housing market continues to drag its heels through every data release.

The BoE’s credit conditions survey for Q2 reported that “In the three months to early June, lenders reported that the availability of credit to households and corporates was broadly unchanged.”

Key releases for Sterling this week

PMI Construction – out this morning at 53.6 as expected.

PMI Services is out on Tuesday at 9.30am – we anticipate a poor reading following poor consumer confidence figures which will be bearish for Sterling.

Industrial production and Manufacturing production are both out on Thursday at 9.30am – both down slightly on expectation as global demand slows. This will be bearish for Sterling.

Bank of England Interest rate decision is out on Thursday at Midday – we anticipate no change on rates or quantitative easing and little impact on Sterling.

Producer price index is out on Friday at 9.30am – we anticipate a slight fall in PPI in line with a drop in commodity prices which will be bearish for Sterling.

Jeremy’s trade of the week

This week’s trade of the week is a ‘Participating Forward Plus’. This differs from the usual participating forward in that, for an increased risk, your strike improves from 1.08 to 1.09 against a forward rate of 1.10. The client decided to hedge his next 6 months of exposure via this trade.

The client will benefit in 50% of any upward movement i.e. should GBPEUR be 1.23 on expiry, 14 cents better than the strike rate, the client receives 1.16, 7.00 cents better than the strike rate. Should the GBPEUR rate be below 1.0900 and above 1.0400 on expiry they are able to buy euros at 1.0900, if it is below 1.0400 however, then for every percentage point below 1.0400 they lose the same off their strike of 1.09

This strategy is premium free and allows a hedge with a nominal WCR of only 2.5 cents from current market price while a normal participating forward would see a WCR at least 1.00 further cent lower.  The trade also works without the additional risk but your worst case rate decreases to 1.08 from 1.09.

Have a great week