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It won’t be a surprise if this week is devoted to the oncoming interest rate decision on Thursday, as the UK attempts to guess what the Bank of England will vote towards. If they do decide to raise the rate this would be good news for Sterling, which has remained in a weakened state over the past few days. Likewise, if the interest rate is decreased then the BoE will flood the market with Pounds and therefore sterling would continue to depreciate. At March’s meeting the rate was held at 0.5% which marks it at a record two years left unchanged, and even though the vote came in at 6 to 3 for a rate hold, the increasing level of inflation may change that. In February the figure rose from 4% to above the expected 4.2%, coming in at 4.4% -definitely above the 2% target.

Recently we have had a mixture of data out in the UK which confused the direction of the recovery, on Friday we were disheartened by the Manufacturing growth figures which slowed more than expected in March. The Manufacturing PMI figure fell to 57.1 from 60.9 in February, a move which will create more anxiety when it comes to the BoE decision on Thursday. At least there were signs of rising job creation and a slight growth in companies’ raw material cost, which are encouraging. This morning it was revealed that the construction sector in the UK grew faster than expected last month, almost to the level we saw in February. This would have reassured investors after the manufacturing news on Friday but inflationary pressures are still too high to feel we are in the clear.

Apart from the sad news about Oddbins going into administration, even though I did my best to keep it afloat, the springtime air has affected more than people’s wardrobes. Royal wedding fever is spreading, April fool’s day jokes went from the sublime to the ridiculous and even the coalition are getting along. The most recent bone of contention has been the NHS reforms, with Labour firing fierce criticism into the enemy camp.   

Have a lovely week!

 Jeremy’s Trade of the Week

This week’s trade of the week is a Leveraged Convertible forward with the client wanting to protect a 6 month budget over the coming spring period. He buys sterling and sells dollars

The client was able to achieve a worst case rate of 1.6350 on his option which allows the client to benefit all the way down to a rate of 1.4850. Should the rate touch the barrier level during the window period (1 month before the expiry date) then that month’s structure reverts to a forward at 1.6350 in 2  times the amount needed. i.e.  if you originally hedged a monthly exposure of $200k then you would need to sell $400k. If the barrier is not touched then he can of course trade in the spot market.

This strategy requires no premium, and the use of leverage allowed the client to increase both his level of protection and the barriers that he can benefit down to.  As there is a potential further strengthening for sterling in the future, it provides protection for this eventuality, while allowing a large amount of potential benefit as well