Foreign Exchange - UK Weekly Update - Wednesday, December 10, 2008 9:58 - 0 Comments

World First’s Sterling Update – 8th December 2008

Out of the Frying Pan and into the Fire
According to author Chuck Palahniuk “Only after disaster can we be resurrected.” One can only hope that this is true for the fortunes of poor sterling, which continued another dismal week, reaching record lows against the Euro and shedding another 5% against the dollar.

This was against the backdrop of increasingly negative data worldwide, the nadir of which was Friday’s nonfarm payrolls result, realising the third worst monthly result since 1950. Over 1.5M Americans have been added to the jobless queue over the last three months and unemployment figures are forecast to worsen. This result didn’t dent the dollars progress and instead caused fresh concerns within the Euro Zone region. This was underpinned with disastrous German new industrial orders figures revealing a 6.1% month on month fall and causing the Bundesbank to revise growth rates for 2009 to a 0.8% contraction.

Risk tolerance is therefore continuing to provide direction in the currency markets and is the reason why the yen and dollar continue to strengthen regardless of the weak data emerging. Oil prices also continued to indicate how ominous world growth prospects have become, as they tumbled again throughout the week to fresh lows of circa $40 per barrel.

Rate cuts were delivered like they were going out of fashion by no less than five central banks over the week. Within Europe the UK slashed rates to their lowest level since 1951, and the ECB cut rates by 75 bps in the most aggressive move in their brief history. Sweden’s Riksbank delivered a shuddering 175bp cut which saw the krona tumble throughout the week and the Pacific pairing of Australia and New Zealand also eased rates by 1.5% and 1% respectively. This week sees Canada and Switzerland joining the rate cutting bonanza, with further reductions almost certain in both countries.

Emerging market giants Russia and China allowed their currencies to ease moderately throughout the week in order to boost exports and further strategic devaluation looks likely. The Chinese stock market rose on the back of Mondays 0.9% fall for the renminbi, as this was taken as a positive signal for the large Chinese export sector.

The week ahead sees a raft of data focusing on the household sector. The United States’ November’s Retail sales figures are expected to be weak after lasts months record fall. October’s home sales figures are also due for release, as is the Michigan Sentiment survey.

From the UK, the RICS house housing report and the BRC retail sales survey should provide further vindication for the recent BoE rate cuts, while the Euro Zone is fairly light on data.

Equities will once again provide direction, and look set for a short bounce after last week’s bearish results. Obama’s comments early this week alluding to further fiscal injections have in part spurred a stock market rally, and it looks increasingly likely that the Auto industry will receive its much needed leg up. Politicians seem to have decided that the fallout from an industry that employs over 800,000 people and is responsible for 4% of US GDP would be too catastrophic for the economy to absorb in the short term.

Trade of the week
This week’s trade of the week is a Premium Paid Risk Reversal on GBP/USD. This Premium Paid Risk Reversal gave the client a worst case rate of 1.40 and a best case rate of 1.60 for an upfront premium of 3.5% of the total contract amount. If, on expiry, GBP/USD is below 1.40 the client will receive 1.40, if it is between 1.40 and 1.60 the client will buy at spot, and if above 1.60 the client has an obligation to buy at this level. For full details of this structure please contact one of our options traders on 0207 801 9050.

Have a great week

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