Wednesday, January 19, 2011

Inflation Mess Causes Stress

The MPC came to a decision to leave interest rates on hold last week
which was precisely what was expected. This predicted turn of events
highlights the growing concerns that the committee is allowing an
inflation problem to develop in the UK. These worries are clearly
reflected in the bond market, what with the rise in ten year gilt
yields in the last four months, which reflected a sharp increase in
break-up inflation rates. This can be attributed to a lack of faith in
the MPC, which would have been cultivated by the last two botched
attempts at hitting their inflation target. However in the past month
we have seen real yields fall, even with the possibility of interest
rates being hiked, which doesn't help the inflation forecast. The
general idea is that these inflation stresses will ease in time, but
this morning's figures showing that UK CPI Inflation has risen to
3.7% from the forecast of 3.4% is not helping matters.

Manufacturers are also being affected by inflationary pressures, as
oil costs last month rose which left them facing the soaring costs of
materials. It was not just oil which caused the monthly increase,
apparently the cost of food and imported metals added to the pressure.
This cost to manufacturers has naturally led to passing cost increases
down the line. This will add to the Bank of England's worries, as
price strains on companies could link directly to inflationary
pressures. It is not all bad news though as manufacturing data has
continued its recovery in November with output growing at the fastest
pace since the mid-1990's, the rise of 0.6% was stronger than was
expected and could herald the rapid rebound of the sector.

David Cameron held meetings last Thursday at Downing Street with
Herman Van Rompuy and Francois Fillon at which he was very clear on
Britain's stance when it comes to helping the euro.

When speaking to the European leaders he insisted that Britain would
not be a part of any new bail-out mechanism but that he would not
block any efforts to strengthen the euro. This was a bold move if you
consider the pressure from both the EU and his own party to do the
right thing.

Cameron did not stop there, and followed up his controversial NHS
comment on the weekend by pushing ahead with healthcare reforms. The
plans to hand over about £80bn of NHS care to GPs has created
widespread uncertainty as it will involve significant upheaval of the

Last Friday Labour came out on top in the Oldham East and Saddleworth
by-elections. Ed Miliband was obviously thrilled at the prospects of
some positive Labour PR but he perhaps took it a bit far when he said
the voters had sent a 'very clear message' to the coalition.

!! Jeremy's Trade Of The Week !!
This week's trade of the week is a 'Ratio Forward'. The client
decided to hedge his next 3 months of exposure via this trade selling
GBP, buying Euros.

The clients protection rate is 1.1650 and will benefit in 75% of any
upward movement to 1.2650 i.e. should GBPEUR be 1.15 on expiry, the
client receives their protection rate of 1.1650. Should the rate on
expiry be 1.2450, 8 cents better than the protection rate, the client
achieves 1.2250, 6 cents better than the protection rate. If the
barrier level is breached, 1.2650, then the client benefits 25% of
upward movement. i.e, if spot on expiry is 1.2850, 12 cents benefit,
the client achieves 1.1950, 3 cents benefit.

This strategy is premium free and allows a hedge with a nominal WCR of
only 2.5 cents from current market price and guarantees upside should
there be any . It is also relevant for buyers of sterling and sellers
of other currencies

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