Risky trades continued to dominate last week, with the pound closing the week at lofty highs of 1.67 and 1.17 against the dollar and euro respectively after a week of encouraging data and earnings releases.The US dollar was firmly on the back foot, as the move towards risky assets and currencies means it is continuing to fight an uphill battle. GDP data revealed that the second quarter of the year was better for the States than economists predicted, falling 1% compared to a consensus view of 1.5%.It was all action from down under over the week, the Reserve Bank of New Zealand (RBNZ) leaving interest rates at 2.5% with the accompanying dovish statement attempting to talk down the kiwi. The Reserve Bank of Australia (RBA) was also active in the market, commenting that they would be in a position to raise interest rates once growth returned. This caused the Antipodean currencies to both surge to 2009 highs against the US dollar, as investors continued to search for yield outside of the traditional safe havens.
Supporting the pound was UK housing data raising hopes that the housing market has stabilised, and better than expected earnings from large UK corporations. Further UK bank earnings releases this week will help to dictate the direction of sterling, as this morning’s rally can attest.
The only glitch of the week was rumours from China that Central authorities would be reining in lending in the coming months. Chinese banks have lent a record 7.4 trillion Yuan (£650Bn) in the first half of the year, but a lot of this lending has poured in to real estate, commodity and stock markets, whilst small and medium businesses have been sitting on the sidelines starved of credit.
hinese authorities were quick to deny the rumours, but the Shanghai Composite equity index fell 5% on Wednesday, providing a temporary boost to the dollar.
Central banks remain firmly in focus this week, with the Bank of England and ECB both providing an interest rate decision on Thursday. No change is expected for rates in both cases; however it is the comments around Quantitative Easing schedules and inflation projections that will move the market. Given the good news radiating from the Monetary Policy Committee (MPC) in recent meetings we would not be surprised to see sterling given a boost following this. The RBA also has a rate decision to make, if the market gets a sniff of any chance of rate hikes in the future, we would expect AUD to continue flexing its muscles.
The UK also has manufacturing and construction PMI’s to contend with early in the week, and the US closes with Nonfarm payrolls on Friday, the major indicator of unemployment for the States.
Trade Idea Of The Week
This week’s Trade idea is a Target Accumulator Redemption Note (TARN), which is an attractive option for a seller of GBP and a buyer of EUR or USD over a 12 month period.Using a buyer of Euros as an example, the client is given a strike rate of 1.20 with 9 big figures or euro cents (on GBP/EUR) to use over the 12 months. The strike rate a TARN provides is significantly better than the current spot and forward rate. The client is obligated to buy Euros at expiry per month for 12 months at the strike rate of 1.20 until either the benefit of the 9 big figures has been used, or until the end of the 12 months. E.g. if spot at expiry is 1.18 for the first month they will sell at 1.20, and have used 2 cents of the total benefit of the 9 cents (leaving 7 cents of benefit to be used over the remaining 11 months). However, if spot at expiry is above the strike rate, the client is obligated to buy at the strike rate. Once the 9 cents are exhausted, the TARN ceases to exist.Please note that this cannot be considered a hedge as it doesn’t carry a worst case rate. This product is suitable for clients currently un-hedged. Like all of our option structures, this is also available in other major currency pairings (for USD it gives a strike rate of 1.75). For full details of this structure please contact one of our options traders on 0207 801 9050.
