Tuesday, February 15, 2011

Roses are red, violets are blue, with inflation rising, what can we do?

This week is being held hostage by the Bank of England's inflation
report on Wednesday morning, partly because the choice to keep
interest rates unchanged could have been a close call and we will find
out just how close when the report comes out. Of course there is a
limit to the shock factor of these figures as the MPC would have has a
glimpse at them and still chose not to bring to somebody's attention
rates. What is generally assumed is that the combinations we mentioned
in last week's sterling update, namely; VAT, oil and food price
rises, will push CPI inflation up to near the 4.2% mark from where it
currently rests at 3.7%. It seems likely that the MPC will use the
inflation figure to keep the door open to the possibility of raised
rates within the next few months, even if they do not choose to do so.
It would make sense that the MPC would want to be certain of the Q4
slowdown being a blot on an otherwise positive copy book. The threat
of a rate rise is not vacant to go away promptly, the committee will
do what they can to avoid putting them up but if the difficulty
intensifies too much come the middle of this year they might not have
a choice.

It doesn't stop there when it comes to vital data releases, after
the interest rate announcement comes the ILO unemployment rate and on
Friday morning we will see the retail sales figure. We expect to see
employment fall again in December what with snow deterring
job-seekers, while January's retail sales could have boosted when
consumers were finally able to access the shops, especially with the
VAT hike on the 4th.

David Cameron has stepped up his 'Huge Society' with the hope of
lift-off occurring this year, a 'vision' document has been
released by Francis Maude, cabinet office minister, and it details the
coalition's strategy. The main disclosure in this document is that
it will need approval from the European commission to access millions
of pounds sealed in dormant bank accounts. Cameron is aware that the
thought of his 'Huge Society' is not capturing the hearts and
minds of the UK, even his own party members seem unimpressed. 

!! Jeremy's Trade of the Week !!

This week's trade of the week is a 'Risk Reversal'. A risk
reversal allows you to hedge yourself close to the market but in turn
for a reduced upfront cost, it gives you 100% benefit up to a
pre-determined level.

The client will benefit in all upward movement up to a capped level.
Should the GBPEUR rate be below 1.1650 they are able to buy euros at
1.1650, if it is above 1.22 on the first expiry but then they have to
hold euros at 1.22. The capped level increases by 1 cent every month
i.e. month two's is 1.23, month three's is 1.24 etc. If the rate
is in-between the two levels then the clients buys the euros at spot.

This strategy has an upfront cost of 1.2% and allows a hedge with a
nominal WCR of only 2.2 cents from current market price . It is also
significant for buyers of sterling and sellers of other currencies.

Source: Fxstreet.com

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