Barclays' trigger PLUS tied to currencies vs. euro can be used to short eurozone, sources say

By Emma Trincal

New York, Sept. 6 - Barclays Bank plc's 0% trigger Performance Leveraged Upside Securities due Oct. 3, 2013 linked to the performance of a basket of currencies relative to the euro give investors a rare opportunity to take a short position on the currency of the eurozone, a sellsider said.

The basket, composed of five equally weighted currencies, will see its level increase when the currencies strengthen relative to the euro, according to an FWP filing with the Securities and Exchange Commission.

Rarely used

"In the U.S. retail distribution, building a currency note on the euro as opposed to the dollar is kind of unique," the sellsider said.

The basket includes equal weights of the Australian dollar, the Korean won, the Malaysian ringgit, the New Zealand dollar and the Philippine peso.

The payout at maturity will be par plus 135% to 150% of any gain in the basket. The exact leverage factor will be determined at pricing. Investors will receive par if the basket falls by 15% or less and will be fully exposed to the decline from the initial level if the basket falls by more than 15%.

"Some people will like it. There will be demand for it because you just don't see that many deals on the euro," he said.

"It should have a place in someone's portfolio. But you'll have to be a sophisticated investor in order to understand how those currencies move against the euro."

Euro zone weakness

There is a context for this note hitting the market just now, the sellsider noted.

"It's happening at a time of increased pressures in the eurozone," he noted.

Sebastien Galy, senior currency strategist at Societe Generale, said that bearish bets against the euro have not succeeded so far and that sophisticated investors and traders have used other asset classes instead to express their negative outlook on Europe, such as equity and bonds.

But things have changed rapidly since August, Galy wrote in a research piece.

"We now face an entire month of fears about Europe; testing negotiations between Troika and Greece; Italian bond supply; sovereign ratings action; legal challenges to bailouts; resistance to bailouts already agreed; resistance to the plans for the EFSF; worries about European bank funding: The list is long," the research note said.

In an e-mail to Prospect News, however, Galy said that the notes are not for everyone.

"The lack of protection against a deep move is quite unacceptable for anything else than a professional audience," he wrote.

Bullish on China

Mark McCormick, currency strategist at Brown Brothers Harriman, said that the notes offer "a good way" to be bullish on Asia while bearish on Europe.

"Investors in this note are bearish on the euro more so than they're bearish on the dollar," he said.

"They're also bullish on China's outlook, and this a way to play that."

McCormick said that the countries represented in the underlying basket are all countries trading with China and deriving a large part of their growth from their exports to China.

"It's a bullish play on China through the proxies it trades with," he said.

In addition, investors in the notes are taking a short-term bet, expecting the euro to fall lower than its support level given the current European weakness, he said.

"The debate over the bailout package in Europe could break the recent range of the euro on the downside," he said.

"A key date will be the German vote on Sept. 29 over extending or not the power of the [European Financial Stability Facility]. A no vote could trigger a weakening of the euro," he said.

The notes (Cusip: 06738KSX0) are expected to price Sept. 26 and settle Sept. 29.

Barclays Capital Inc. is the agent with Morgan Stanley Smith Barney LLC as dealer.

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