httpvh://www.youtube.com/watch?v=sA5KEaLkQ1M

It was clear that Jeremy was very glad when last week eventually slumped, exhausted, to a close. Although a lot of the action was dominated by the US we in the UK still saw enough to cause a light beading on economist’s foreheads, mainly because the markets were playing their most unpredictable cards. Last Tuesday saw the PMI Construction drop to lower than expected and lower than last month, not a good sign for the pound – this was important as there was concern among many that construction made up much of the increase in the GDP figure for Q2 and Q3, so if the levels slow then it could get sticky in future, especially with the possible VAT hike in January. Not to be put off by this figure entirely PMI Services and Producer Price Index were higher than previous months; there was also a slight gain in house prices according to Halifax. Midst this befuddling stream of data from all sides, sterling persevered and is now lurking around the 1.156 area.

After the BoE held interest rates again last Wednesday, and further QE was postponed for a later date, we are now looking towards the G20 summit meeting this weekend. The idea is that the recent ‘currency war’ speculations will be throwing a spanner in the works when it comes to discussions over how to rebalance the global economy. The recent US QE bombshell will also dominate procedures, as the preamble to the meeting is distinctly negative when it comes to the Fed’s decision.  There is still a lot more important data to come out this week in the UK, with Wednesday seeing the Inflation Report likely confirming that the MPC still expects inflation to fall in the medium term. Tomorrow the trade and industrial production figures should give us more of an idea on whether the external sector is starting to feel the positive effects of the previous falls in the pound, it isn’t looking too hopeful. Retail sales, also tomorrow, are possibly going to show that the spending growth was still weak in October.

In conclusion, the euro and dollar are still the ones to watch, with a possible collapse of both in the future. Sterling is up to its old tricks and not delivering enough good news to stand up against any strong positive data from the euro-zone, such as if the EU Q3 GDP figures come out positive this week.

Jeremy’s Trade of the Week

This week’s trade of the week is a ‘Participating Forward Plus’. This differs from the usual participating forward in that, for an increased risk, your strike improves from 1.55 to 1.57. The client decided to hedge his next 6 months of exposure via this trade.

The client will benefit in 50% of any upward movement i.e. should GBPUSD be 1.63 on expiry, 6 cents better than the strike rate, the client receives 1.60, 3 cents better than the strike rate. Should the GBPUSD rate be below 1.57 and above 1.50 on expiry they are able to buy dollars at 1.57, if it is below 1.50 however, COMMA then for every percentage point below 1.50 they lose the same off their strike of 1.57

This strategy is premium free and allows a hedge with a nominal WCR of only 3.5 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.

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