The pound reclaimed some lost ground over the week against dollar and euro, helped in part by a mild rally on Friday amid suspicion that today’s pre Budget report would include tax changes making repatriation of overseas earnings a more enticing option for UK companies. Throughout the week, the Pound and Dollar were knocked around by US and UK CPI readings that exceeded market expectations substantially on the downside. Inflation data has surprised Central Banks on both sides of the Atlantic, the speed at which the tables have turned from persistent upside pressure just a few months ago, to the present situation with downside risks to inflation has been startling. Oil price declines have largely been inflation’s saviour (and possibly soon to be its enemy), with crude prices sinking below the psychological $50 per barrel mark for the first time in over three years. 

Dollar was reasonably resilient in the face of some dreadful data (which has hardly been in short supply worldwide), with weak initial jobless claims, housing starts and the uncertainty surrounding the future of the important US Automakers sector. However, further deleveraging has meant investors require Dollars and continued to aid in Dollar strength over the week. US equity markets reached their lowest points in 11 years on Thursday, but managed a brief resurgence on Friday as news of the likely appointment of Tim Geithner to the position of Obama’s Treasury Secretary, a post currently held by Hank Paulson.

Yen continued to flex its muscles also, as another round of risk aversion swept through equity markets worldwide.  It was dire enough for the Japanese Central Bank to again threaten intervention into the currency markets in order to halt the Yen’s strength. Japanese data revealed that recent Yen strength and falling demand has resulted in its first monthly trade deficit in 28 years, while Tuesday’s GDP outcome also saw Japan join the unenviable club of countries in recession, ending the longest post war period of expansion for the Land of the Rising Sun.

The Swiss National Bank (SNB) surprised the market with a 100bp rate cut, sending the Franc to its lowest level in 15 months, and issuing a warning of a protracted slowdown in Swiss economic activity. Emerging markets also came under a new wave of pressure, particularly after the Golden Child of emerging markets, China, released an employment report revealing the outlook was grim. A fresh wave of factory closures within the resilient China has highlighted the weakness in its export market sector and caused further headaches within emerging market economies. The Russians revealed a $20bn stimulus package to assist the flagging economy and most emerging markets currencies depreciated due to further asset selloffs.

Preliminary GDP figures are due later this week from the UK, and the US reciprocates on Tuesday. The Euro Zone will be bracing themselves for further weak data after last week’s PMI results showed a contraction at the fastest rate in a decade, and German Business Confidence is at its lowest levels since the early nineties.  The single currency area releases employment rate and CPI figures on Friday.

Trade of the Week

This week’s trade of the week was for a seller of US Dollars and buyer of Sterling (an exporter to the United States). The Client entered into a trade known as the protection option for an exposure of $500K over a 6 month period. The protection option enabled the client to participate in all beneficial movement and still have a worst case rate of 1.52 if the market moved against them. The client was required to pay a premium of 4% in order to secure this safety. 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.

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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