On Friday, the Office for National Statistics confirmed with its second estimate that the UK economy grew by 0.2% in the second quarter of 2011. George Osborne has come under fire from the opposition who claim that VAT hikes and overzealous austerity measures were hampering the recovery. However, the chancellor will feel relatively happy considering UK growth was ahead of France’s and Germany’s between April and June. The ONS also repeated its argument that one off factors such as the Tsunami in Japan and the royal wedding could have dented growth by as much as 0.5%.
The focus will now shift to the UK’s third quarter performance. Recent data from the manufacturing and retail sectors suggest that the economic climate is no more habitable than earlier on this year. Meanwhile, unemployment is on the rise and could continue to climb as the private sector struggles to accommodate public sector job cuts.
Consumer confidence unsurprisingly contracted in July and is largely to blame for the UK’s limited economic expansion. Spending will undoubtedly stay low in an environment of high inflation, job cuts and limited wage hikes.
The one glimmer of light came from mortgage approvals which are up slightly from last month. This was the third monthly increase in a row and means approvals were 3% higher than in July last year. Hopefully this will result in greater home sales in the not too distant future.
Key releases for Sterling this week
PMI Manufacturing out on Thursday at 9.30am – we anticipate a slight fall in manufacturing performance this week – bearish for Sterling.
PMI Construction out on Friday at 9.30am – a close call on construction, leaning slightly to the downside – moderately bearish for Sterling.
Jeremy’s trade of the week
This week’s trade of the week is a ‘Convertible Forward’. The client decided to hedge his Jan-Mar 2012 exposure for when he repatriates dollars from abroad and changes them back into sterling. He also wanted to obtain a strike level as close to the forward rate as possible
The client’s worst case rate was set at 1.6450 on his option which allows the client to benefit all the way down to a rate of 1.5350. 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 1.6450. He is of course able to trade at spot between 1.5350 and 1.6450 if the barrier is not touched.
This strategy is premium free and allows a hedge with a tight worst case rate to the forward As there is a potential further strengthening for sterling in the future the structure will always protect against adverse moves while allowing for a large amount of beneficial movement.
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