“It is not always possible to have everything go as one likes. In working with allies, it sometimes happens that they develop opinions of their own” Sir Winston Churchill
It would be foolish to begin the weekly update without mention of what is going on today, it is clearly noticeable that sterling seems to be on a massive rampage, trampling over the euro like a bull in a china shop. The theory is that this strength in sterling is down to the AIG/Prudential deal which seems to have been flogged to death. Prudential has tried to chop more than $5billion from the agreed price for AIA, and unless there is a change of mind it looks likely that Pru will not be able to afford the original offer. There are also many reasons why the euro is being destroyed. Over the weekend Spain was downgraded to AA+ from AAA and news from Germany of President Kohler quitting has caused more quakes within the German government, so it is looking distinctly murky in European waters.
It seems that quitting positions of power in the government has been something of a fashion over the weekend with David Laws resigning over expenses revelations. His resignation is a severe blow to the fragile and new-born government and Cameron is now desperately trying to calm worries that the coalition government is doomed before it has really taken off. Justice secretary Ken Clarke was clear the news would not distract from the government’s task of dealing with the £156bn deficit, stating: ‘We are all getting on with it.’ With many people missing Laws and his impressive start on the deficit already, his replacement Danny Alexander has his work cut out. Osborne is planning on taking out ‘the sting’ from the capital tax increase planned in the Budget next month by buckling to conservative pressure and looking around for other options that would cause less harm to retirees and entrepreneurs. Cable and Osborne are opposed on the idea to introduce a taper, reducing the rate on assets held longer term, although Laws called this ‘ingenious’ Cable says it will take important assets out of the tax net.
UK’s PMI data came out a tiny bit better than expected at 58 which was the same as April, this showed that the UK manufacturing sector has continued to rebound throughout May, with export orders rising. The release of this good news will increase hopes over the levels of GDP growth during the rest of this year. The markets for the start of this week will be focused on this apparent manufacturing health.
This week’s trade of the week is a 50% Par Plus. For a seller of sterling and a buyer of euros, this client took advantage of today’s rise in the GBPEUR rate, hedging themselves over a six month period.
The client was able to achieve a worst case rate of 1.16 which is protected as long as GBPEUR is not trading below 1.08 on expiry and is able to benefit in 50% of any movements in their favour. If on expiry GBPEUR is below 1.08 then for every percentage point lower the same reduces your worst case rate of 1.16.
This strategy requires no premium, and is also relevant for sellers of sterling and buyers of other currencies. As there is a potential strengthening for sterling in the future, it provides a balanced upside for this potential, while guaranteeing a tight WCR and the ability to take advantage of this uptick.
For further details and for live pricing speak to one of the options trading team on 0207 801 9050.
Have a lovely week!