Man the tractors: EU to cultivate GBP strength

By:
Peter Garnham
Published on:

Sterling looks set to rally this week as the UK hedges payments to British farmers as part of the European Union’s Common Agricultural Policy.

Traders say there should be a large EURGBP sell order on Friday, as the UK authorities cover the pay-out. Barclays is said to have the mandate.

The last day of September is when the EU locks the exchange rates for direct payments to farmers – money paid to farmers in the region for maintaining agricultural land.

In the UK each year, farmers have to file for direct payments by May 15, and expect to receive cash between December and March. That means the UK authorities are running FX risk should EURGBP fall between the end of September and the start of December.

ING believes Britain will hedge the full amount and estimates that direct payments worth €3.3 billion will be made in the UK this year.

That would suggest the European Central Bank 12.15 GMT fix on Friday will see heavy EURGBP selling.

Chris Turner, head of FX strategy at ING, says while it is tempting to set up short EURGBP positions, broad EURUSD trends will sway those of EURGBP.

"If EURUSD rallies, it is unlikely that EURGBP declines," he says.

 Cable threatening to break higher

 
 Source: Reuters

Turner says, in the post-Federal Reserve meeting, soft USD environment, that long GBPUSD positions might be a better way to profit from sterling strength, especially since the EUR might get a boost this week should Spain formally request aid.

"Technically, GBPUSD looks as if it is breaking higher," he says.

ING recommends buying GBPUSD with a stop at $1.6150 and a target of $1.6600. Alternatively, Turner notes a one-month $1.67 one-touch option costs 17%, a 5.9-times return on premium paid if GBPUSD hits $1.6700 within a month.