Bold moves from Governments around the globe kept currency markets busy, and equity markets buoyant throughout the week. The US Government announced a bailout plan for ailing banking giant Citigroup and also unleashed an $800bn plan to further combat the credit crisis, while the action at home was focused on the pre Budget report on Monday.

Sterling advanced throughout the week against its major trading partners, boosted in part by reports that the UK government would force UK banks to pass on the recent interest rate savings to their customers. This ignited speculation that demand for the pound would increase as banks would need to repatriate overseas funds to strengthen their balance sheets.

And balance sheets were further stretching in the US, as the Fed announced plans to purchase $600bn of agency debt and also adding another $200bn facility to support consumer and small business loans. Last week also saw the Fed turn a new corner in its monetary policy approach, implementing a quantitative easing approach of targeting the quantity rather than the price of the dollar. Simply put, instead of manipulating interest rates levels they have also flooded the market with dollars in an attempt to provide liquidity in order to lower interest rates and stimulate spending. As Fed Vice chairman Donald L Kohn explains “The reason we put those reserves out there is in effect a response to the fact that banks aren’t lending to each other and they are not lending to the private sector”.

Many analysts are sceptical of its effectiveness, and as Sir Winston Churchill once commented “However beautiful the strategy, you should occasionally look at the results”. Quantitative easing was a policy employed by the Bank of Japan unsuccessfully in the early 2000’s, and this alteration in monetary policy approach weighed on the dollar throughout the week which slipped against all its major crosses except the Yen.

Equity markets had a strong week, as some much needed risk aversion returned to bourses, buoyed in part by the aforementioned rescue package of Citigroup. The FTSE managed its largest ever weekly advance and was not alone in its rising fortunes. This was good news for the South African and Australian currencies, which gained over the week on the back of this.

This week’s data is dominated by interest rate decisions including announcements from the BoE, ECB, RBA and RBNZ, where all banks are expected to cut rates aggressively. The US has some important data releases including the ISMs and non-farm payrolls figures for November and the market will also look forward to the continued development within the US auto industry as sales figures are out during the week that may further compound the industry’s woes. GM is said to have gone to the government again over the weekend with cap in hand, proposing a debt for equity swap.

Trade of the week

Last week’s trade of the week was for a seller of sterling and a buyer of US dollars through a ‘window convertible forward’. The client has a worst case rate (WCR) of 1.46 and can benefit 100% of any and all upside up to a rate of 1.68 during the relevant window period. Should GBP/USD hit 1.68 during the window period the structure reverts to a forward contract at 1.46. For full details of this structure please contact one of our options traders on 0207 801 9050.

Have a great 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.

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.

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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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