Tuesday, March 1, 2011

If you can dream – and not make dreams your master

Last week we saw a bombshell drop on the UK economy, with the fourth
quarter growth figure shrinking to -0.6%. This was of poorer quality
than the Office for National Statistics had expected, at -0.5%. The
finger of blame is being pointed to the huge freeze in December but
apparently the economy would have shrunk by 0.1% even without the icy
atmosphere. Naturally this would encourage worries that the economy
was floundering even before the VAT hike kicked in and the spending
cuts deepen in April. It is vital to note that the terrible weather
makes data hard to read and so we have a crossroad ahead, one way
points towards the snow deluge which could have baffled data. While
the other path is possibly besieged with survey's flaw to see an
vital turning point in the economy. Either way, this news hurt
sterling as it fell to a three month low against euro.

These fears over the economic recovery have caused retailers and other
businesses to heap difficulty on George Osborne as they clamour for an
efficient growth strategy in next month's budget. The have
questioned the chancellor to lessen future burdens as they are still
bruised from rises in national insurance, business rates and smallest

As more evacuees return from Libya over the past few days it has
emerged that Osborne has frozen Colonel Gaddafi's British based
assets, as well as five members of his family. This comes at the same
time as treasury and custom officials ramp up their efforts to make
sure no uncirculated Libyan currency leaves the UK. Apparently 800
Britons have left Libya over the past few days and although some
remain, there are no longer 'large numbers' in the country.

There is not a huge amount to watch out for in terms of UK data this
week, it is being overshadowed by eurozone and US releases. Keep an
eye on PMI Manufacturing, Air force and Construction, as well as
mortgage approvals tomorrow.

Have a lovely week!

!! Jeremy's Trade of the Week !!

This week's trade of the week is a Leveraged Convertible forward
with the client wanting to protect a 6 month budget over the coming
spring period. He buys euros and sells sterling.

The client was able to achieve a worst case rate of 1.1600 on his
selection which allows the client to benefit all the way up to a rate
of 1.21. This rate increases by 1 cent every month i.e. month 1 has a
barrier of 1.21, the 2nd 1.22, the 3rd 1.23 etc. Should the rate touch
the barrier level during the window period (1 month before the expiry
date) then that month's structure reverts to a forward at 1.1600 in
1.5 times the amount needed. i.e. if you originally hedged a monthly
exposure of EUR200k then you would need to buy EUR300k.

This strategy requires no premium, and the use of leverage allowed the
client to increase both his level of protection and the barriers that
he can benefit it up to. As there is a potential further strengthening
for sterling in the future, it provides a balanced upside for this
potential, while guaranteeing a tight WCR.

Source: Fxstreet.com

No comments: