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Weekly Market Update

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BoE Minutes the Big News of the Week

Wed, Nov 18 2009, 07:59 GMT
by Alex Sullivan

World First UK Ltd

We had several pieces of big news last week, the headline grabbers were US unemployment jumping to 10.2%, the BoE Quarterly Inflation Report and the news our friends spending the single currency had exited the recession.

The week began with concerns over the recovery in the US with unemployment posting higher than expected. This added fuel to the argument regarding the greenback status as the global reserve currency and is a debate that refuses to go away. We have had further mutterings from Singaporean APEC conference that the Chinese Yuan may have to be revalued to increase its competitiveness. It seems that the Yuan is certainly the main contender to dethrone the dollar but until the Chinese entertain floating their currency it seems the argument may be redundant.

In the wake of the poor US data we had the news that Europe had emerged from recession. It must be said that the emergence was met with little fanfare due to a slightly disappointing GDP figure out at 0.4% against an expected 0.5%. This happened on Friday and had little effect on GBPEUR and left EURUSD flirting just below 1.50.

The news from Brussels was punctuated the day before by the BoE Quarterly Inflation Report.
Market was looking to comments made by Merve the Swerve to place a firm hand on the tiller of the UK fiscal policy and outline a clear path forward. In typical fashion, King’s mantra was that the Bank had decided to inject a further £25bn (bringing the total to £200bn) at the last BoE meeting, and the committee would continue to asses the situation and do what was required. He did state that he felt that measures implemented by the Bank had worked well so far. King was very cautious but when drawn to comment on the warnings made by Fitch that the AAA UK credit rating was ‘the most at risk’, he did state that although he would leave the decisions to the credit rating agencies he saw no reason for the UK’s rating to come under threat. He did comment that a period of austerity was clearly required and simply said that the pre-budget report alluded to a state of saving once the economy returned to growth.

He finally allayed many fears regarding the surprise UK GDP figure Q3. Governor King said that all projections are just that and stressed that the important thing was that the figure was progressing along the predicted trend.

The big news of the week will again come from the Bank with the release of the BoE minutes at 9.30 on Wednesday. As ever, we will be looking to see if the minutes set a definitive tone for the direction of QE and the voting split may provide an insight, with the Bank notoriously tight lipped this will be particularly interesting.

Trade of the week

This week’s trade of the week is a Convertible Forward until May. For a GBP seller and a buyer of USD, this client took advantage of the uncertainty in GBPUSD in order to protect themselves against falls whilst being able to benefit should the market turn higher.

The client was able to achieve a worst case rate of 1.6550 on their option which allows them to benefit all the way up to a rate of 1.80. Should the rate touch 1.80 during the barrier period (one month before the expiry date) the the structure reverts to a forward at 1.6550.

This strategy requires no premium, and is also relevant for buyers of sterling and sellers of other currencies. As there is a potential further weakening for sterling in the future, it provides a balanced upside for this potential, while guaranteeing a tight WCR.

Published on  Wed, Nov 18 2009, 07:59 GMT