Good Afternoon,

Something in the Air?

 

Since records began in 1929, the recent month was the warmest April ever recorded, while the March just gone was the third sunniest.  Stock markets also had one of their best series of months on record, rebounding steeply from the early March lows, dragging sterling along for the ride north. The UK’s FTSE has now risen over 25% from its lows, as have European and American stock indices.

 

Last week was more of the same trend, with data providing more ‘green shoots’ to pave the way for rising equity markets. This caused investors to retreat from the safety of the dollar and yen, and pile into riskier currencies such as sterling. This was all in spite of the threat of a global flu epidemic, and US carmaker Chrysler filing for Chapter 11 bankruptcy.

 

Other risky currencies performed well, with the Australian dollar rising to seven month peaks.  The New Zealand dollar also regained further strength, as the RBNZ cut rates by 50bp over the week. Asian currencies also took favourably to equity markets rising, and recent bullish data from China.

 

The week ahead, albeit a short one, has plenty of event risk late in the week. Equity markets will be looking to the results of Thursdays stress testing that the US government has undertaken. There is plenty of conflicting reports on the number of banks that will are likely to be asked to raise further capital, with Reuters reporting that 10 of the 19 banks will be instructed to, while Bloomberg reported that up to 15 may indeed need further capital support.

 

The Bank of England (BoE) and European Central Bank (ECB) both have rate decisions on Thursday, with the European result the most contentious. ECB president Jean Claude Trichet had in earlier meetings targeted this meeting as the one to announce any non conventional measures to deal with the crisis. Last month he commented that “when we make a decision on non-standard measures on May 7, we will explain it to the markets and investors”.  Interest rates look set for another cut, as Trichet also mentioned that he “cannot exclude a further measured decline in the ECB’s benchmark rate”. The euro has weakened in anticipation of this result, and any deviation or surprise measure from the ECB will no doubt provide volatility on euro crosses.

 

The BoE are unlikely to change interest rates, or any of the details of the Quantitative Easing (QE) program that is currently underway. The US also provides important data in the form of the nonfarm employment figures on Friday, with consensus for another sobering 610,000 jobs to have been shed in the month of April.

 

Trade of the Week

The trade of the week is relevant to a seller of sterling and a buyer of US dollars. This zero premium structure enabled the client to hedge their exposure for a six month period through a ‘window convertible forward extra’.

 

The client has a worst case rate (WCR) of 1.48 and can benefit 100% of any and all upside up to a rate of 1.60 during the relevant window period. Should GBP/USD hit 1.60 at any point in the window period, the structure reverts to a forward contract at 1.48. This structure also provides an extra ‘boosted rate’ whereby if the rate doesn’t fall below 1.37 for the window period, the client will receive a WCR of 1.52. For full details of this structure please contact one of our options traders on 0207 801 9050.

 

Enjoy the week ahead, and let’s hope the sun keeps shining.

 

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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.

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.

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