Central Banks Up to Their Old Tricks
An update from the currency exchange firm World First.
Last week saw a rather subdued market as we witnessed further signs of sterling consolidation. Sterling range traded for most of the week against both the single currency and greenback despite the best efforts of Central Bankers worldwide.
GBP performed strongly early in the week but was pushed slightly lower midweek, after the World Bank’s revised growth forecasts worldwide. Equities fell off the back of this, and predictably with poor data, back came a measure of risk aversion causing a slight selloff for the pound. However, the week was not one to remember for the euro either, as sterling managed to push for a 2009 high against the euro in the Tuesday morning trading session, as IFO data failed to post a figure positive enough to give the markets confidence. A high IFO was expected due to the positive PMI data previously out of the Euro zone and Germany, the main economic powerhouse of the EU.
Spencer Dale, the Bank of England’s Chief Economist, stated his belief that a weaker pound is more advantageous to the recovering British economy. A return to a sentiment driven market we saw at the end of 2008 was evident midweek, where fundamental data no longer guides prices, and the general feel of the market dictated direction. Euro also benefitted from statements from some voting members of the ECB panel, including Trichet, that rates will not be cut further in 2009. This was coupled with a successful auction of ECB treasury debt which 1101 Banks signed up to, showing both support for Europe as a whole, and displaying confidence that rates will not drop below their current 1% rate.
Mervyn King further talked down the pound, as the eternal harbinger of doom pointed out that sterling wasn’t in the best position, and prepared markets for the downward leg of the ‘W’ shaped recovery that many predict.
The dollar was volatile against sterling as the market built up to Wednesdays FOMC meeting expecting fireworks. As it transpired, it was a bit of damp squib with Bernanke coming out with a ‘steady as she goes’ message after the two day meeting. The greenback did manage to make some gains against the majors after the FOMC meeting had concluded, but fared less well against the commodity currencies as risk appetite returned briefly.
In the week ahead a major talking point will be UK GDP finalized figure for Q1 out on Tuesday. Forecast at -2.1% this figure will become increasingly synonymous with GBP sentiment as we look to the discrepancy between GDP and Public Debt as the main gremlin in the works. We also have PMI figures out late in the week.
European data of note begins on Friday with PMI manufacturing data and German retail figures. Thursday sees the ECB rate announcement and unemployment rate, before we end the week with Euro zone retail figures out on Friday morning.
U.S. Data is more chaotic this week but watch out for Chicago PMI on Tuesday. ADP unemployment is out on Wednesday expected at -376K. Due to Independence Day Holiday on Saturday and Friday being a bank holiday stateside we have the volatile Non-Farm Payrolls announcement on Thursday.
Trade of the Week
This week’s trade of the week was for a client selling sterling and buying Euros, who entered into a ‘zero premium risk reversal’.
The client was guaranteed a worst case rate (WCR) of 1.14. If spot at expiry was between 1.14 and 1.21 the client is able to buy in the spot market and if the rate at expiry is above 1.21 they are obligated to sell at 1.21
The client hedged all of their exposure over a 3 month period, with no premium payable for this strategy. For full details of this structure please contact a World First options trader at 0207 801 9050
For more information see www.worldfirst.com.
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