A recipe transferwise disaster

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Take a pinch of negative retail sales, a dash of high unemployment and add to a £15.9 billion public sector net borrowing requirement. Be sure to squeeze household spending then rub in high inflation, low wage growth, public sector job cuts and crippling austerity measures. Combine the two mixtures, bring to the boil for a few months and serve on a platter of Eurozone debt contagion and a slowdown in global growth. If that isn’t a successful recipe for a recession I don’t know what is.

The IMF told us little that we don’t already know when they lowered their growth forecasts for the UK last week and there are certainly more tough times on the horizon. So, surely we can expect swift and decisive action from central banks and governments alike in an effort to baton down the hatches in the eye of the storm? Well, not necessarily.

The Bank of England minutes revealed that only one MPC member, Adam Posen, voted for further QE at the September meeting. All of the MPC elected to keep interest rates unchanged but when it came to the crucial question the minutes say “for some members, continuation of the condition seen over the past month would probably be sufficient to justify an expansion of the asset purchase program at a subsequent meeting”. Translation – we need to see a poor Q3 growth estimate, the final nail in the coffin, before we will agree to act. Most market participants believe more QE will come through in November although some believe we will get an extra £50 billion as soon as October.

It is difficult to gauge the potential effect of the program given the current state of the global economy. The good news is that it will definitely have a positive impact which is a boost the UK economy is long overdue.

Key releases for Sterling this week

Please note that movements on currency markets will be dominated this week by the unfolding sovereign debt crisis in Europe. If you would like to take advantage of our free rate watch service please contact your dedicated dealer.

Mortgage approvals are out on Thursday at 9.30am – we are expecting a fairly flat to mildly positive reading which will be bullish for Sterling.

Gfk consumer confidence out on Thursday at midnight – we are expecting a poor reading which will be bearish for Sterling.

Jeremy’s trade of the week

This week’s trade of the week is a ‘2x Leveraged Seagull’. This trade is a close cousin of the risk reversal in that it 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. We also include a liability below a certain level that allows your hedge rate to be that much closer to the market for no additional upfront cost.

The client will benefit in all upward movement up to a cap level of 1.64. If on expiry the rate is above your cap level then you must buy 2x the amount at that cap. Should the GBPUSD rate be below 1.5300 and above 1.3950 on expiry they are able to buy dollars at 1.53, if it is below 1.3950 however, then for every percentage point below 1.3950 they lose the same off their strike of 1.53. If the rate is between 1.53 and 1.64 then the client’s hedge can be bought at spot.

This strategy didn’t cost the client anything and allows a hedge with a nominal WCR of only 1.5 cents from current market price while a risk reversal without the additional liability would see the cost increase by an additional 0.5%. We believe this is a balanced trade as although it is not a true hedge you are avoiding any barrier levels should GBP rebound during the lifetime of the trade. It is also relevant for buyers of sterling and sellers of other currencies.

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A recipe transferwise disaster

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