Foreign Exchange - UK Weekly Update - Monday, June 1, 2009 15:36 - 0 Comments

Sterling Redemption Underway – World First – Sterling Update – 1st June 2009

“Our greatest glory is not in never falling, but rising every time we fall”. Perhaps sterling took some inspiration from Confucius, China’s famous ancient philosopher, as last week the pound surged to multi month highs against the dollar and euro, a far cry from the lows of 1.36 and 1.02 reached just months ago. Sterling concluded the month of May recording its best monthly performance against the dollar since the mid 80’s.

Last week saw worldwide sentiment continuing to provide a positive outlook for risky assets worldwide, with equity and commodity markets advancing, albeit slowly.

Good news from the UK came in the form of housing data, figures from Nationwide revealing a positive bounce of 1.2% for house prices in the month of May, indicating that while this may not be the bottom of the property market, the freefall is at least moderating. However, we do suggest that there is further weakness still to be realised, with worrying signs including the low levels of housing stock being shifted (owners aren’t selling unless they have to), and unemployment levels yet to peak. However, if further stability in housing prices is witnessed in coming months, lenders may be more willing to loosen lending criteria, further aiding in the recovery process.

The pound wasn’t the only currency bathing in glory over the week, commodity currencies in general continued onwards as investors search for a higher yield. The Aussie dollar reached eight month highs against the US dollar, on the back of increasing bullish PMI readings from its major trading partner, China. Commodities have continued on strongly, with oil reaching $66 per barrel, over double the lows of $32 reached in December.

The euro zone was delivered some sobering news, with inflation figures arriving at a flat 0.0% (consensus 0.6%). This raised fears of deflation within the euro zone, and provides further headaches for the ECB as they attempt to combat the recession. German business confidence figures also showed that full economic recovery is still a while away. Despite this, the euro was able to push the hapless dollar into the 1.42’s, largely due to dollar weakness than euro strength.

The week ahead sees rate decisions from the European Central Bank (ECB) and Bank of England (BoE), with the latter likely to be a non event. From the US, we have nonfarm payrolls late in the week which have a consensus reading of 521,000 jobs to be lost in the month of May. The euro zone also provides retail sales figures on Thursday

Trade of the Week
The trade of the week is relevant to a seller of sterling and a buyer of dollars. This zero premium structure enabled the client to hedge their exposure for a six month period through a ‘window convertible forward’.

The client has a worst case rate (WCR) of 1.60 and can benefit 100% of any and all upside up to a rate of 1.75 during the relevant window period. Should GBP/USD hit 1.75 at any point in the window period, the structure reverts to a forward contract at 1.60. For full details of this structure please contact one of our options traders on 0207 801 9050.

Enjoy the week ahead

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Please feel free to contact me (rick.roache@worldfirst.com) if you have any questions or thoughts regarding these updates or if you are interested in a particular event in the calendar. If you would like to discuss your foreign exchange requirements, please contact our:
Corporate Foreign Exchange Team on 020 7801 9050 or our Private Client Currency Exchange Team on 020 7801 9080.

To view any past or present currency blogs please click on the following link www.worldfirst.com/blog

Disclaimer: The above comments are only our views and should not be construed as advice. You should act using your own information and judgement. Although information has been obtained from and is based upon multiple sources the author believes to be reliable, we do not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute the author’s own judgement as of the date of the briefing and are subject to change without notice.
Any rates given are “interbank” i.e. for amounts of £5million and thus are not indicative of rates offered by World First for smaller amounts. E&OE. Definitions of jargon/market terms can be found in our Glossary of Foreign Exchange Terms.

This financial promotion is issued in the United Kingdom by World First Markets Limited which is authorised and regulated by the Financial Services Authority (“FSA”) to provide advice on and execute trades in derivatives.  Please note that other activities that may be referred to in this material, such as the execution of spot foreign exchange trades, do not fall under the remit of the FSA.  World First Markets Limited’s FSA Firm Reference Number is 477561.

Investing in any of the hedging strategies contained in this material involves certain risks, for example that the exchange rate at expiry of the contract is less favourable than if you had entered into a forward contract.  Please ensure that you fully understand these risks before investing.  If you are in any doubt as to the nature of these risks, please speak with your financial adviser or an adviser at World First Markets Limited.

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