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I have learnt a valuable lesson in the past 24hrs and that is not to say that a military situation in a certain part of the world “seems to have calmed down” as it’s more than likely that it will all kick off again. I made this mistake yesterday with Libya as Brent put on over $2 a barrel in a couple of hours as fighting intensified around the port and refinery town of Zawiyah. This made sure that the oil up, dollar down, relationship extended again after the USD had fought back on Tuesday.

The main beneficiary was sterling as trade balance data showed that British exporters are finally coming to the party. Exports hit a record in January reducing the total balance to -£7.1bn, down from -£9.7bn, as the weak pound made UK goods more attractive to foreign buyers. The government was keen to crow about it, calling it “just the kind of rebalancing we need” and we are glad that the strong PMI figures that we have seen in the past few months, particularly in manufacturing, is now translating into other economic releases.

The euro has been knocked off course in the past 24hrs by a reemergence of fears over European sovereign debt. A debt auction from Portugal did not go very well yesterday with the yield that investors needed to invest for only 2 years was close to 6%; 50% more than the 4% that was required in November. Demand for the bonds was also weak and this hit other peripheral nations’ debt with the price of insuring against default also increasing.

In the past hour or so, we have also seen Moody’s deliver a hammer blow to Spain by downgrading its debt to  AA2 from AA1 with a negative outlook. The company doesn’t believe that Spain will need EFSF help but the downgrade is based on an increased liquidity need to deal with the funding problems of its banks and regional governments. This further emboldens our view The euro is back towards 1.17 in GBPEUR terms and into the early 1.38s versus the dollar.

Today is also Bank of England day and we believe that it will be a bit of a letdown for those looking for a rate increase sooner rather than later. While everyone seems to be focused on the inflation figure we do have to keep an eye on growth and the fact is that the last growth figure for the UK was -0.6%. While we have seen better trade figures, better news from the housing market and some great manufacturing numbers the recovery is by no means secure and the Bank knows this. We will be looking for no change and it may see GBP just soften somewhat post meeting.

Overnight we have seen one central bank get some action with the RBNZ cutting rates in New Zealand by 50bps in reaction to the Christchurch earthquake. While we thought fiscal stimulus may have been a better call than a rate cut, Governor Bollard said that he doubts rates will fall anymore. GBPNZD spiked to 2.2081 in the immediate aftermath before slipping to current prices.

Latest exchange rates at time of writing