Green Shoots Keep Sprouting
This update is from the trusted currency exchange firm World First.
Further greens shoots from the UK continued to strengthen the pound over the week, pushing it to its highest level of the year against the euro, and promising levels against the dollar.
Encouraging manufacturing data from the UK caused the National Institute of Economic and Social Research (NIESR) to state “either that the recession is over or that it is close to over.” The Confederation of British Industry (CBI) also confirmed they are more optimistic than previously, revising estimates up, with growth to begin returning in 2010. Other glimmers of optimism were recorded in the housing market, with prices again showing further signs of stabilization.
The euro continued to suffer throughout the week, as worries grew about the extent that a Baltic state crisis would have on its banking system. The euro is a victim of European government’s lack of transparency in dealing with their banks exposure to the looming Baltic state crisis. The uncertainty surrounding levels of exposure will continue to weigh on the euro until European Central Government’s stop sitting on their hands and take some action to instill confidence to their financial sector.
This is in contrast to the UK which has already undergone painful banking nationalizations; write downs and consolidations. Also contrasting is the behavior of the Central Bank, which reacted quickly with ultra loose monetary policy, and a program of Quantitative easing (QE) to combat the crisis. The results have seen the UK economy and pound begin a journey of recovery, while the euro drags its heels.
Fears over the ability of the US to finance its debt saw the dollar slip early in the week. Mumblings that Brazil and Russia would seek to reduce their dependence on the dollar by buying bonds from the International Monetary Fund (IMF), which are denominated in a synthetic mixture of currencies (SDR’s), undermined the dollar strength. However, later comments from the Japanese finance minister stating that their trust in US Treasuries is “absolutely unshakable,” and Russian finance minister Alexia Kudrin adding that it was “too early” to talk about an alternative to the dollar saw the greenback regain some late composure.
Commodity currencies (CAD, AUD and NZD) rounded off their best quarter against the dollar since 1971 in typical fashion, enjoying another strong week. The kiwi benefited midweek after the RBNZ held interest rates at 2.5%, despite warning that more cuts in the short term are possible. Governor Alan Bollard further attempted to talk down the currency as he noted that the current strength of the kiwi was damaging potential growth in export receipts.
Data this week from the UK starts with inflation figures on Tuesday, followed with employment figures and Bank of England minutes on Wednesday. Retail Sales figures due on Thursday will also be closely watched. Most of the US event risk arrives early in the week with Industrial Production and PPI figures due tomorrow.
Trade of the Week
This week’s trade of the week is a Participating Forward Extra for a seller of GBP and a buyer of Euros.
This zero premium option gave the client a worst case rate (WCR) of 1.15 and the ability to participate in 50% of favorable movement upwards of the WCR.
If, on expiry, GBP/EUR is below 1.15, and above 1.07, the client can buy at 1.15. If, on expiry, GBP/EUR is below 1.07, for every percent that the rate is below 1.07, the WCR (1.15) also falls by a percent. If, on expiry, GBP/EUR is above 1.15, the client is able to participate in 50% of the movement upwards. For full details of this structure please contact one of our options traders on 0207 801 9050.
If you would like to discuss your foreign exchange requirements, please contact the World First Corporate Foreign Exchange Team on 020 7801 9050 or our Private Client Currency Exchange Team on 020 7801 9080.
For more information see www.worldfirst.com.
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