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

The planning is over, the bargaining is likely done and all is left for George Osborne to deliver the cuts to the UK population on Wednesday. The basis of the spending review will be formed by spending cuts (77%) with tax rises making up the remainder. These are of course the first steps the coalition government must take to sort out our monstrous deficit, protect the AAA rating and ensure the future viability of the UK as a whole.

What the future will hold for sterling and UK assets is unknown at the moment, although the belief that future quantitative easing is on the way from the Bank of England may undermine the pair in the near future. This weekend’s Sunday Times has quotes from the head of the Centre for Economic and Business Research arguing for at least another £100bn of stimulus and saying that £200bn could be ‘very possible’. The centre is predicting that growth will slide to 0.1% in 2011 with a 50-50 chance of GDP turning negative. The chances of the BOE extending QE are probably 60-40 against at the moment and we think the MPC will be happy to wait for the Fed’s next meeting and the November quarterly inflation report to pass before they have to make a decision. Both King and Osborne are certainly walking a long, thin tightrope at the moment.

But growth is slowing here in the UK with PMIs, although still expanding, starting to look wobbly. Unemployment is still high although nothing compared to the US and Europe, while retail sales will surely be under pressure from the austerity measures as we move closer to Christmas.

The fact is that the government mustn’t shirk the task that they were so voluble about during the election campaign. They advocated swift and sharp cuts to delay pain further down the line; any postponement of these decisions will look like weakness to the markets and our AAA rating plus gilts and sterling will be targeted by traders looking to turn a problem into a disaster.

And so the stage is set and at Noon on Wednesday Osborne will deliver his speech. Too many on the left hand side of the political spectrum are deficit deniers, those who believe that we can continue to exist at these extreme levels of debt, while on the right there are too many commentators who are unwilling to accept the pain that the cuts are going to cause. Unfortunately, the UK’s champagne lifestyle on a brown ale income is set to end. Last orders please.

Jeremy’s Trade of the Week

This week’s trade of the week is a Convertible forward with the client wanting to protect a 3 month budget over the coming Christmas period. He buys euros and sells sterling.

The client was able to achieve a worst case rate of 1.1250 on his option which allows the client to benefit all the way up to a rate of 1.20. Should the rate touch 1.20 during the barrier period (1 month before the expiry date) then the structure reverts to a forward at 1.1250

This strategy requires no premium, and is also relevant for buyers of dollars and sellers of other currencies. As there is a potential further strengthening for sterling in the future, it provides a balanced upside for this potential, while guaranteeing a tight WCR.

Have a great week