Last week we saw a bombshell drop on the UK economy, with the fourth quarter growth figure shrinking to -0.6%. This was worse than the Office for National Statistics had expected, at -0.5%. The finger of blame is being pointed to the big freeze in December but apparently the economy would have shrunk by 0.1% even without the icy atmosphere. Naturally this would encourage worries that the economy was floundering even before the VAT hike kicked in and the spending cuts deepen in April. It is important to note that the bad weather makes data difficult to read and so we have a crossroad ahead, one way points towards the snow deluge which could have confused data. While the other path is possibly littered with survey’s failing to see an important turning point in the economy. Either way, this news damaged sterling as it fell to a three month low against euro.
These fears over the economic recovery have caused retailers and other businesses to heap pressure on George Osborne as they clamour for an efficient growth strategy in next month’s budget. The have asked the chancellor to lessen future burdens as they are still bruised from rises in national insurance, business rates and minimum wage.
As more evacuees return from Libya over the past few days it has emerged that Osborne has frozen Colonel Gaddafi’s British based assets, as well as five members of his family. This comes at the same time as treasury and custom officials ramp up their efforts to ensure no uncirculated Libyan currency leaves the UK. Apparently 800 Britons have left Libya over the past few days and although some remain, there are no longer ‘large numbers’ in the country.
There is not a huge amount to watch out for in terms of UK data this week, it is being overshadowed by eurozone and US releases. Keep an eye on PMI Manufacturing, Services and Construction, as well as mortgage approvals tomorrow.
Have a lovely week!
Jeremy’s Trade of the Week
This week’s trade of the week is a Leveraged Convertible forward with the client wanting to protect a 6 month budget over the coming spring period. He buys euros and sells sterling.
The client was able to achieve a worst case rate of 1.1600 on his option which allows the client to benefit all the way up to a rate of 1.21. This rate increases by 1 cent every month i.e. month 1 has a barrier of 1.21, the 2nd 1.22, the 3rd 1.23 etc. Should the rate touch the barrier level during the window period (1 month before the expiry date) then that month’s structure reverts to a forward at 1.1600 in 1.5 times the amount needed. i.e. if you originally hedged a monthly exposure of EUR200k then you would need to buy EUR300k.
This strategy requires no premium, and the use of leverage allowed the client to increase both his level of protection and the barriers that he can benefit it up to. As there is a potential further strengthening for sterling in the future, it provides a balanced upside for this potential, while guaranteeing a tight WCR.