httpvh://www.youtube.com/watch?v=ftQ5yAdWS9Y

The MPC came to a decision to leave interest rates on hold last week which was precisely what was expected.  This predicted turn of events highlights the growing concerns that the committee is allowing an inflation problem to develop in the UK. These worries are clearly reflected in the bond market, what with the rise in ten year gilt yields in the last four months, which reflected a sharp increase in break-up inflation rates. This can be attributed to a lack of faith in the MPC, which would have been cultivated by the last two botched attempts at hitting their inflation target. However in the past month we have seen real yields fall, even with the possibility of interest rates being hiked, which doesn’t help the inflation forecast. The general idea is that these inflation stresses will ease in time, but this morning’s figures showing that UK CPI Inflation has risen to 3.7% from the forecast of 3.4% is not helping matters.

Manufacturers are also being affected by inflationary pressures, as oil costs last month rose which left them facing the soaring costs of materials. It was not just oil which caused the monthly increase, apparently the cost of food and imported metals added to the pressure. This cost to manufacturers has naturally led to passing cost increases down the line. This will add to the Bank of England’s worries, as price strains on companies could link directly to inflationary pressures.  It is not all bad news though as manufacturing data has continued its recovery in November with output growing at the fastest pace since the mid-1990’s, the rise of 0.6% was stronger than was expected and could herald the rapid rebound of the sector.

David Cameron held meetings last Thursday at Downing Street with Herman Van Rompuy and Francois Fillon at which he was very clear on Britain’s stance when it comes to helping the euro.  When speaking to the European leaders he insisted that Britain would not be a part of any new bail-out mechanism but that he would not block any efforts to strengthen the euro. This was a bold move if you consider the pressure from both the EU and his own party to do the right thing.

Cameron did not stop there, and followed up his controversial NHS comment on the weekend by pushing ahead with healthcare reforms. The plans to hand over about £80bn of NHS care to GPs has created widespread uncertainty as it will involve significant upheaval of the system.

Last Friday Labour came out on top in the Oldham East and Saddleworth by-elections. Ed Miliband was obviously thrilled at the prospects of some positive Labour PR but he perhaps took it a bit far when he said the voters had sent a ‘very clear message’ to the coalition.

Jeremy’s Trade of the Week

This week’s trade of the week is a ‘Ratio Forward’.  The client decided to hedge his next 3 months of exposure via this trade selling GBP, buying Euros.

The clients protection rate is 1.1650 and will benefit in 75% of any upward movement to 1.2650 i.e. should GBPEUR be 1.15 on expiry, the client receives their protection rate of 1.1650. Should the rate on expiry be 1.2450, 8 cents better than the protection rate, the client achieves 1.2250, 6 cents better than the protection rate. If the barrier level is breached, 1.2650, then the client benefits 25% of upward movement. i.e, if spot on expiry is 1.2850, 12 cents benefit, the client achieves 1.1950, 3 cents benefit.

This strategy is premium free and allows a hedge with a nominal WCR of only 2.5 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