“I have enough money to last me the rest of my life, unless I buy something.” Jackie Mason

httpvh://www.youtube.com/watch?v=hoTWvlYlkE8

It seems that things are calming down after the excitement of last week’s highs for sterling, we have dropped back to familiar ground, and although that can seem frustrating we have to remember that the rates are still a lot better than they have been, so don’t get too blue if you have missed the moment on those levels. Euro sellers rejoice, the valiant euro is struggling back as best it can and with the data being released this week it could get interesting. EU GDP and the ECB and UK Trade Balance will likely see a drop in the rate even further. We have also seen a big move in EURUSD in favour of the euro over the past week and this will naturally feed through to help EUR against GBP.

Concerns about fiscal tightening in this ‘age of austerity’ have begin to show themselves, mainly with the impact of spending cuts on economic activity. In June the services sector expanded at the slowest rate for 10 months, which was the weakest reading since August 2009. Although new business continued to grow, it too was noticeably slower in pace than it has been previously. This is entirely due to a huge knock of confidence after the emergency budget, which could perhaps be most damaging to services providers and to the private services sector. Likewise there has been a large drop in short selling of sterling since the budget, as hedge funds and speculators closed their positions that anticipated sterling to fall even further. Roger Bootle, managing director of Capital Economics, told the Telegraph; “A weak pound is critical to the strategy of rebalancing the economy away from consumption and government spending towards exports and investment,” he writes. “We are asking manufacturers to invest in developing products for export and sales forces on the back of the weak pound and yet we have no strategy for ensuring that the pound remains competitive – and they know it.”

Osborne has been encouraged by a poll claiming he is the most popular Conservative chancellor since the 1970’s, he decided to waste no time keeping this new title by planning cuts to 700 school building projects. In a review of capital spending Osborne wants to scrutinise every project, even those already started to make sure that only those that create a good return will be approved.

Not surprisingly with all of this unease in the markets finance directors of the UK’s largest companies are less than optimistic and fear a double-dip recession. Apparently market turbulence has made them more cautious about financing using equity. However, if you need some good news then the buy-to-let market is showing signs of recovery, with the number of loans rising to 50% since September last year. This is a sign that lending conditions are improving at last.

And to finish on a lighter note, I have heard that the summer exhibition at the Royal Academy is worth seeing, so you should go if you get a chance. Have a lovely week!

Jeremy’s Trade of the Week

This week’s trade of the week is a 50% participating but differs in that, for an increased risk , you benefit from a higher worst case rate (WCR). The client sells GBP and buys EUR to pay suppliers in Holland.

The client was able to achieve a worst case rate of 1.18 on their option and they benefit in 50% of any upward movement i.e. should GBP/EUR rise by 6 cents, the client would benefit by 3 cents.. Should the GBPEUR rate be below 1.18 and above 1.10 on expiry they are able to buy euros at 1.18, if it is below 1.10 however then for every percentage point below 1.10 they lose the same off their WCR of 1.18

This strategy is premium free and allows a hedge with a nominal WCR of only 2.5 cents from current market price while a normal participating forward would see a WCR at least 2 further cents lower. It is also relevant for buyers of sterling and sellers of other currencies. As there is a potential further weakening for sterling in the future, it provides a balanced upside for this potential, while guaranteeing a tight worst case rate.

Have a great week