Osborne takes the (AAA) Credit

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Much to Ed Balls’ dismay, Chancellor George Osborne got a collective pat on the back this week from the IMF and the credit ratings agency, Moody’s. Both independent assessments stated that the government had taken the correct measures for getting the UK economy back on track. Unfortunately this was not reflected in this week’s data but did help the UK hold onto its AAA credit rating.

Retail sales for May have come crashing back down to earth with a bang. The feel good factor surrounding the royal wedding, the extra bank holiday and sunny weather in April gave the previous two month’s readings a significant boost. However, high inflation and low wage growth have clearly put the squeeze on disposable incomes and May’s reading is probably a fairer reflection of the reluctance of the British public to spend.
On Thursday, UK interest rates were kept at the record low of 0.5% again by the Bank of England’s Monetary Policy Committee. Economists had expected the decision, as recent data has underlined worries about the strength of the UK’s recovery.

Contractionary fiscal policy will undoubtedly hit home soon which will pin back any modest growth we see in 2011 and inflation is yet to hit its peak according to MPC forecasts. This is why some analysts, including the team at World First believe rates will stay at 0.5% until the new year.

Also out on Thursday, the trade balance figures showed that the deficit is narrowing. A weak pound makes imports less attractive to consumers and our exports more attractive overseas which is why the figure beat expectations.
UK manufacturing and industrial production saw its biggest monthly drop for almost two and a half years in April. The full effects of the Tsunami and the royal wedding have filtered through which is why some analysts have not read too much into the figure and are not pinning any assumptions on one number.

The producer price index finished off the week of data releases and came out as expected at 5.3% year on year which had little bearing on Sterling.

Key releases for Sterling this week

RICS House Price Balance out today at Midnight – we expect the reading to improve but remain negative – bearish for Sterling.

Consumer confidence out on Tuesday at Midnight -- should improve from last month’s reading – slightly bullish for Sterling.

Consumer price index out on Tuesday at 9.30am -- we expect CPI to stay at 4.5% -- slightly bearish for Sterling.

Unemployment rate out on Wednesday at 9.30am – we believe unemployment will remain steady but jobless claims will drop off showing an improvement in the market – bullish for Sterling.

Retail sales out On Thursday at 9.30am – expecting a fall from Aprils reading – bearish for Sterling.

Jeremy’s trade of the week

This week’s trade of the week is a Leveraged Windowed Convertible Bonus with the client wanting to hedge their euro exposure through the whole of 2012. He buys euros and sells sterling and wanted to protect a budget level of 1.15.

The structure gave the client a protection rate of 1.15 to buy euros however should spot on expiry be below 1.15 your worst case rate is ‘boosted’ by the cent difference between the spot rate and 1.15 i.e. if spot on expiry is 1.11 then the client receives 1.19. This applies as long as the rate is not below 1.0750. If it is then you are simply protected at 1.15. Obviously this structure gives you a benefit to the upside as well and the client is able to benefit up to a level of 1.24. If the rate touches the 1.24 during the month before expiry however he must buy twice the amount of euros at 1.15.
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 up to. As there is a potential further strengthening for sterling in the future the structure allows for a large amount of beneficial movement whilst always protecting against adverse moves.

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Osborne takes the (AAA) Credit

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