Foreign Exchange - UK Weekly Update - Written by rick on Monday, August 24, 2009 14:52 - 0 Comments
World First Foreign Exchange Sterling Update - 24 August 2009 - Inflation - The devil you know
Milton Friedman once wrote that “too late and too much has been the general practice”, describing the actions of central banks in the past. Last week’s Bank of England minutes revealed how keen the committee is to learn from previous lessons, with the results showing that not only had the Monetary Policy Committee (MPC) decided to proactively expand the asset purchase scheme by £50bn, but that they were split 6-3 on whether to deliver further stimulus.
Mervyn King, the Bank of England’s governor, renowned for his hawkish stance on inflation was part of a surprise minority that voted for a further £75bn injection. King and co are well aware of the relationship between money supply and inflation, and hope that further stimulus will help the UK economy avoid any further lapse into contraction. To once again borrow from the late Freidman, “inflation is always and everywhere a monetary phenomenon”. Normally one to sit on the tighter monetary policy side of the fence, it appears that now Mr King is happy to risk rising inflationary pressures, in order to avoid any chance of the unknown enemy of deflation taking a grip within the economy. Better the devil you know, than the devil you don’t I guess.
Sterling was quickly sold off on the back of this result; however the market seemed to eventually digest the news well as the pound recovered most of its initial losses over following sessions. Tuesday’s CPI reading continued keeping inflation at the front of investors’ minds, with a higher than expected reading of 1.8% underlining how sticky inflation had become. This gave sterling a slight boost, as anything that steers prices away from the deflation cliff is seen as a positive for the pound.
Late week data lifted the euro, which advanced by 0.7% against is sparring partners the pound and dollar over the week, as manufacturing and services readings for the euro zone showed a surprise expansion for the month of August. The results were particularly strong for Germany and France, underlining the growing dichotomy within Euro zone member’s performance. While this has helped prospects in the near term for the euro, it remains a threat for the long term stability of the euro zone. Unless domestic demand and employment picks up within the poorer performing European nations, there is a risk that they will weigh on the overall recovery within the region.
The dollar remained at the mercy of worldwide sentiment once again, and with sentiment generally positive and with investors seeking somewhere to find yield in the current barren landscape, it was no surprise to see the Norwegian Krone, Australian dollar and New Zealand dollar all perform strongly over the week. Ben Bernanke’s comments late in the week provided some brief respite, however the trend towards a weaker dollar in the face of risk appetite held once again.
Looking ahead for this week it is the US that will be the focus of most of the data, with new home sales, durable goods orders and consumer confidence readings. Data from Germany on Tuesday will reveal an IFO business climate figure on Wednesday, and the euro zone has an Industrial Confidence due on Thursday. Given the bullish growth data from the EU recently, Q2 data from the UK and US this week may provide some more momentum for risky assets.
Trade idea of the week.
This week’s trade idea of the week is a ‘Windowed Convertible Forward’ for a seller of EUR and buyer of GBP.
This zero premium structure enables the client to hedge their exposure for a one year period, protecting against a weakening euro but enabling the client to benefit in favourable movement.
The client has a worst case rate (WCR) of 1.17 and can benefit 100% in any and all favourable movement down to a rate of 1.07 during the relevant window period. Should GBP/EUR hit 1.07 at any point in the window period, the structure reverts to a forward contract at 1.17.For full details of this structure please contact one of our options traders on 0207 801 9050.
Have an enjoyable week.
| 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. |
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