UK economy is showing signs of fragility

Could the unthinkable double dip happen? The UK economy is showing signs of fragility yet again. The services sector, which accounts for 75% of economic output, showed its biggest decline in a decade in August. Industrial and Manufacturing production are also on the slide, having propped up the economy for the past 2 years they now appear to be running out of steam.

So, the question is where can we turn for help in an effort to kick start the UK again? It certainly won’t be coming from our major trade partners. At a speech on Friday George Osborne defended the spending cuts saying the deficit reduction plan was “the rock of stability on which the recovery was built” – no help there then either.

On Thursday, the Bank of England kept interest rates on hold and they announced that no further quantitative easing would take place at this time. The Bank of England minutes, released next week will give more insight into how the 9-strong MPC voted but I would be surprised if no more than 1 member favoured a cash injection. However, we may have to wait until GDP posts a negative value before we see any decisive action from the BoE.

But all is not lost! We may be on the verge of global collapse and an economic dark age but at least we’ll be able to work until we’re 70. It would appear that reforms to the pension age will be brought forward by 10 years. In response to an ageing population it is likely the pension age will shift to 67 as early as 2026, instead of 2036 originally planned. If you are searching the reasons to play the Lottery this weekend then look no further.

At least steps are being taken to prevent another financial crisis. Bank shares fell sharply on proposed ring fencing measures that will keep retail and investment banking separate in the future. It looks likely that the measures will be fully implemented by 2019, 11 years after the crisis first struck.

Key releases for Sterling this week

CPI (inflation data) out on Tuesday at 9.30am – we anticipate a figure slightly above expectation, bullish for sterling.

Unemployment rate out on Wednesday at 9.30am – we think unemployment will disappoint and increase again, bearish for Sterling.

Retail sales out on Thursday at 9.30am – we anticipate a reading below expectations which will be bearish for Sterling.

Jeremy’s trade of the week

This week’s trade of the week has proved very popular in the past few weeks as it gives you a strike rate well above current market while allowing a large amount of potential benefit and is called a Euro Barrier KIKO. This particular trade was for a client who imports goods from Holland and Spain and was looking to get a rate that would be unobtainable elsewhere to protect all of his imports through 2012. The below example is therefore in GBPEUR but the trade is available in other currency pairs and for sterling buyers (exporters)

The client received a strike rate of 1.1900 against a forward rate of 1.1600 and is protected at this level as long as the GBPEUR is not below 1.05 at 3pm on the day of expiry. If it is then he loses his protection at 1.1900 for that month. He also has the ability to take spot all the way up to a GBPEUR of 1.30. If GBPEUR is above 1.30 at 3pm on the expiry day then he will buy double the amount of euros at 1.19.

These barriers are different to normal barriers in that as long as the rate does not breach at 3pm on the business day of expiry then you are not penalised.

This structure has proved popular for 2 reasons. Firstly it allows the client to obtain a strike 3.00 cents above current market and secondly, with markets volatile at the moment provides a balanced risk/reward as part of a hedging portfolio. As such we would recommend that this trade is taken alongside a structure that provides a concrete worst case rate.

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UK economy is showing signs of fragility

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