Unemployment doesn’t do the Job

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UK data started the week by falling at the first hurdle and failed to make a convincing recovery after that. No change in the state of the housing market, continuing to cough and splutter with the RICS Housing Price Balance out at -28 versus a previous reading of -21.

The consumer price index matched expectations in posting a 4.5% rise year on year. It seems that Mervyn Kings prediction of hitting 5% in 2011 looks increasingly likely. Typically a high reading for inflation is bullish for Sterling as a central banks typical response is to take a hawkish stance to prevent overheating. However, the CPI reading is becoming less important to policy makers at the MPC in light of the UK’s sluggish recovery. What’s more, core CPI, which excludes seasonally volatile products such as food and energy, was down on expectations.

In the jobs market it appears the private sector is creating jobs a lot quicker than the public sector can shed them. The UK Unemployment rate was 7.7% which is down from 7.9% in the previous quarter.Employment data was not all positive as the number of people claiming jobseekers allowance rose by 19,600 to 1.49 million. However, analysts caution that some of the rise in the claimant count may be attributable to changes in benefits rules, which have seen many people move off other kinds of benefits onto the Jobseeker’s Allowance.

Market participants didn’t get too carried away with the improving data as we haven’t yet had the full impact of the government spending cuts and the public sector job cuts to come are going to be quite substantial.

To finish off the week of data, UK Retail sales fell by 1.4% in May. In April retail sales had risen 1.1% on the previous month due to feel good factors such as good weather and the royal wedding. However, May’s figures showed consumers were now cutting back because of the tough economic climate, worries about rising fuel prices and job uncertainty.

Key releases for Sterling this week

Bank of England Minutes out on Wednesday at 9.30am – Sentance’s departure at the end of May see’s out a hawk and we are expecting a vote for a rate hold from the new committee member Ben Broadbent. This will be bearish for Sterling.

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 9 month budget over the coming spring period. He buys dollars and sells sterling.

The client was able to achieve a worst case rate of 1.58 (2 cents below his current forward rate) on his option which allows the client to benefit all the way down to a rate of 1.72. 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 1.58 in 2 times the amount needed. i.e. if you originally hedged a monthly exposure of $200k then you would need to buy $400k. If the barrier is not touched then he can of course trade in the spot market. The barrier on this trade is also “incremental” i.e. it increases by 50 pips per month so in month 2 the barrier is 1.7250 and so on to 1.7650 in month 9.

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, it provides protection for this eventuality, while allowing a large amount of potential benefit as well

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Unemployment doesn’t do the Job

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