Sterling has fallen off the edge of a cliff on Tuesday and early mornings trading following comments by the Bank of England Governor, and a distressing report highlighting the downside risks to growth the UK economy faces. Mervyn King admitted that the economy is on course for its first recession since the early 90s and that the way out of it will be slow and painful. During his bearish speech he gave further support for ongoing rate cuts, as he argued that the inflation outlook had changed dramatically over the last month. Supporting his claims on the dim growth prospects was an overnight report from NIESR which has predicted the British economy will shrink by an alarming 0.9% in 2009. We look forward to Friday’s first estimate of GDP to confirm that a technical recession is upon us, and a dovish tone from today’s MPC meetings minutes.

As expected, dollar underwent further strengthening as the stampede for safety has investors clutching for dollars. It is now at levels not seen since 2003 against Sterling and 2006 against Euros.

Canada dropped interest rates yesterday 25bp to 2.25%. It has now halved rates since 10 months ago when they stood at 4.5%. Canadian dollar has undergone dramatic weakening in the last month and is continuing to struggle as the crisis bites on commodity prices and risk appetite

We look to the interest rate decision from RBNZ tonight where consensus is a 100bp rate cut, as initiated by their Aussie cousins recently. Budget balance from the E13 is also due, and following the UK’s lead we look for further downward result. We look forward to another volatile day