httpvh://www.youtube.com/watch?v=gzcASgl86Gw

There has been an air of expectation after the GDP figures last week, which will likely culminate at the MPC meeting this week. There seems to be little sign that the pick-up in money and lending growth will be up to the standards that the MPC are wishing for. It looks as though they will try and avoid the topic of Quantitative easing, but that does not mean it is a far off possibility, what with weak broad money growth contesting Mervyn King’s inflation problem obsession.

Broad money growth is not the only thing struggling in the UK economy at present, last week showed that house prices dipped in October by 0.1% compared to the year before. Hometrack said that prices were down 0.9% on the month which is the biggest monthly drop since January 2009. Apparently further falls are expected as seasonal trends will affect falling prices in the lead up to Christmas and the early part of 2011.  All the hard work of the GDP figure has not been eradicated as this morning showed. Manufacturing activity picked up pace for the first time since March, which also helped the MPC to ward off the QE issue for a few more days! Expectations were at 53.1 so the leap to 54.9 from the 10-month low in September of 53.5 is definitely good news. Sterling rose to above 1.15 on the back of this news, as combined with the GDP figure and retail sale figures it may mean the economy is not slowing as fast as many feared. The PMI figure also indicated the strongest boost to employment on record, and puts hopes firmly in this sector in order to continue the growth.

On Friday David Cameron didn’t manage to halt the growth of the EU budget, his visit prompted the accusation that he was using the summit for ‘political grandstanding’ and Labour leaped like hungry wolves at the sign of failure. His focus on the EU budget might have seemed a little strange given the other important issues being discussed at the summit meeting but he came away with a letter signed by 12 member states giving their word that they will propose a 2.9% budget increase and no more.

As Jeremy mentioned this morning this is a busy and important week for sterling, and it will pave the way for the end of 2010 and even the dawn of 2011. Not least that Briton Lee Westwood has managed to take the title from Tiger Woods as the world number one – if we can’t get the economy right we can always stick to golf. 

Jeremy’s Trade of the Week

This week’s trade of the week is a ‘Risk Reversal Plus’. This differs from the usual risk reversal in that, for an increased risk, your strike improves from 1.1150 to 1.1350. The client decided to hedge his next 6 months of exposure via this trade.

The client will benefit in all upward movement up to a capped level. Should the GBPEUR rate be below 1.1350 and above 1.08 on expiry they are able to buy euros at 1.1350, if it is below 1.08 however then for every percentage point below 1.08 they lose the same off their strike of 1.1350. The capped level is at 1.2050 for the first month and then increases by 50 pips every month i.e. month two’s is 1.21, month three’s is 1.2150.

This strategy has an upfront cost of 1.5% and allows a hedge with a nominal WCR of only 2.2 cents from current market price while a normal risk reversal would see a WCR at least 2 further cents lower for, we believe, a manageable risk.