Foreign Exchange - UK Weekly Update - Monday, March 16, 2009 17:39 - 0 Comments

Currency War Looms – World First’s Sterling Update – 16th March

Fears of a return to protectionist policies were raised again last week after the Swiss National Bank (SNB) announced that it would be directly intervening in the currency markets to sell Swiss Francs in order to depreciate its currency. While the SNB were successful in pushing the Franc lower over the week, the motives behind the move were put into question.

 

Prominent Austrian economist Ludwig von Mises once stated that “The philosophy of protectionism is a philosophy of war”. Protectionist policies are widely regarded as counterproductive in solving the worldwide crisis, and have reignited fears that countries would return to 1930’s policies, largely blamed for exasperating the Great Depression. Gordon Brown enforced this position a fortnight ago when addressing US Congress stating that, “Countries in this crisis can’t start turning inwards and erecting protectionist barriers”

 

Countries look to depreciate their currency in order to halt the threat of deflation (by increasing import prices). More worrying however, is that this manipulation of its terms of trade also helps to bolster the export sector.  This is the main protectionist threat and the reason why the deliberate devaluation of the Swiss Franc has raised a few eyebrows. China also sparked debate in late 2008 after it engaged in the ‘beggar thy neighbour’ policy of devaluing the Renminbi in order to try and support its flagging export sector.

Investors were fearful that the Japanese Central Bank may employ similar tactics as the SNB in order to aid its fading export sector which caused the yen to slide over the week. Its weakness can also be attributed to repatriation of funds for the Japanese financial year end.

Sterling had a mixed week, falling heavily early in the week after the UK government announced it would increase its holdings in the Lloyds banking group. However, a strong equity rally late in the week albeit erased these losses, and returned some risk appetite back into the market. News from the all important financial stocks was largely upbeat throughout the week, led by a bullish earnings announcement midweek from former banking mammoth Citigroup.

 

The US dollar released its chokehold on the euro as some confidence returned to the markets. The position of the US dollar as the safe haven currency was once again put into question, this time by Chinese authorities who voiced concerns about the level of dollar reserves in the US. The Euro’s strength was despite a grim industrial output and orders reading from its largest member state, Germany.

 

NZ dollar also had a strong week, after a lower than consensus rate cut of 50bp and some broad risk appetite returning. Alan Bollard’s accompanying statement revealed that the rate cutting cycle may be halted as he believes that in unison with the fiscal measures announced, interest rates at this level will be stimulatory enough for the economy.

 

The main focus on the data front this week will be from abroad, with Wednesdays FOMC meeting looking important as it may provide clues as to whether the Fed will engage in debt monetisation. US Secretary of Treasury’s Tim Geithner also stated on the weekend that he will be taking a further look into the toxic asset plan, so any announcement from him is sure to cause a splash, particularly after the disastrous speech from him on Feb 10 which caused equities to immediately dive over 5% in the day.

 

From the UK, we have minutes from the last rate BoE rate decision that are also due on Wednesday. Meanwhile, the Euro Zone provides industrial production figures which could provide a downside surprise. Banking stocks will continue to be a focus, particularly after Barclay’s announcement over the weekend that it is looking to sell part of the business to strengthen its capital base.

 

Trade of the Week

This week’s trade of the week is a Reduced Premium Risk Reversal on GBP/USD. This Premium Paid option gave a seller of GBP client a hedge rate of 1.38 and a best case rate of 1.55 for an upfront premium of 2.5% of the total contract amount. If, on expiry, GBP/USD is below 1.25, for every percent that the rate is below 1.25 the hedge rate (1.38) also falls by a percent. If, on expiry, GBP/USD is below 1.38, and higher than 1.25, the client will receive 1.38. If the rate is above 1.38 and below 1.55 the client will buy at spot. If the spot rate is at or above 1.55, 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.

 

Enjoy the week

 

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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:

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