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

Deputy Governor of the Bank of England, Charlie Bean, has instructed British consumers that they should be spending rather than saving money in order to help the economy recover. In this wonderfully timed piece of financial advice he also suggested that households might have to ‘eat into their capital’ in order to fund their spending during the period of low interest rates.  This might seem bonkers at a time when many people are facing cuts, housing market slumps and the famous double-dip recession. Not to mention the fact that those who are saving have been hit by the financial crisis and the interest rate lows mixed with rising inflation are making even the most prudent savers tighten their belts. Bean has been given rather a stern response by the British public who feel that they are being urged to sacrifice their hard earned savings to give the country a temporary leg up. However that is not entirely the case and we should perhaps not judge Bean so badly for his call to the credit cards. He was essentially returning to the basis of monetary policy by encouraging people to save less, borrow and spend more which was the main aim of the MPC when they cut interest rates.  By encouraging money consumers to save more it could push the fragile economic recovery back into a recession which will eventually make people worse off and leave saving even lower. So although Bean’s comments provoked a lot of criticism, if the short term growth gets better then GDP growth would mean higher returns on saver’s investments and pensions as well as higher incomes.

The real question is whether households can continue to sustain their spending in the way the BoE would like. Incomes are unlikely to keep falling by 1.6% but at the same time they are also unlikely to pick up much pace due to the fragile state of the labour market. The only way to increase spending would be to decrease saving, or indeed using savings and borrowing. Households are unlikely to do this because they have very little confidence, which they may have good reason for as it is hard to see how falling saving can be the basis for a prolonged consumer recovery.

Boris Johnson called today for tougher strike legislation as another tube strike freezes central London, he said that it was wrong for workers to take industrial action when less than 50 percent of the workforce had voted for the decision. The CBI agree with Boris, they want a new rule to come into place which will require 40 percent of balloted members to be in favour of a strike.

The UK construction sector has experienced an unexpected pick-up in September even though unemployment fell which leaves doubts about how sustainable demand will be in the future months. Housing activity also fell sharply which was the lowest reading since July 2009.

Jeremy’s Trade of the Week

This week’s trade of the week is a risk reversal from now for 6 months. The client sells GBP and buys USD to pay suppliers in China

The client was able to achieve a worst case rate of 1.56 on their option and they benefit up to a rate of 1.65. Should the GBPUSD rate be below 1.56 on expiry they are able to buy dollars at 1.56, if it is above 1.56 and below 1.65 they buy in the spot market and if it is above 1.65 they are obligated to buy at 1.65

This strategy required a premium of 1.6% of the notional amount (the amount hedged), and is also relevant for sellers of sterling and buyers of other currencies. As there is a potential further weakening for sterling due to the spending review, it provides a balanced upside for this potential, while guaranteeing a tight worst case rate.

For full details of this structure please contact one of our options traders on 0207 801 9050.