Everyday it seems that we are making new highs on the world’s oil markets. The year

started with thoughts over $100 barrel oil; analysts said it would happen and dive back

quickly as the traders’ desire to see a three figure price was sated. Hindsight however

is a wonderful thing and given that predictions are now being bandied around of $140,

$150 even $200 a barrel we are moving into territory not seen since the mid 70s; hardly

a golden period for global economies.

The 1970’s saw a wage-price spiral unimagined until it was upon us. Inflation

expectations bid up pay rises; prices increased and the problem rolled back on itself.

The price of oil was high then and given that global monetary policy has been rudely

awakened from a decade of economic nirvana by the credit crunch has people worried.

Commodities have become the new bonds. Oil, copper, wheat and natural gas have all

outperformed typical investments and speculators have dived into the market to gain a

quick buck from riding the bull trend higher. So what now for sterling? Should we batten

down the hatches and stock up on canned goods?

No. GBP is in a good, but not ideal, position to deal with an oil ‘super-spike’ although

the Bank of England’s mandate does not allow it the flexibility of say The Fed in dealing

with persistently high inflation. Our relatively fuel efficient economy, in comparison to

the USA’s gas guzzling ways, allows the UK to be a net importer of energy but still sit

with a small, stable external balance and the harsh tax levied on oil based fuels permits

government a fall back plan to help the consumer’s pockets should public pressure

become loud enough.

Should oil prices continue higher GBP will, ceteris paribus, be a currency that can hold

its own in the international markets; more so than the dollar certainly. Oil is certainly an

animal but whether it turns out to be a sterling bull or bear is up for discussion.

Data for the UK this week is thin on the ground this week but that does not mean that

what we have isn’t worth watching; Friday morning’s GFK consumer confidence has

been one of the main releases that has drilled sterling in recent months and the trend is

forecast to continue with further declines in confidence predicted.

US data is plentiful this week with most attention being paid to Thursday’s GDP and

core PCE figures. GDP is expected to grow as the trickle down from the Fed’s drastic

cutting cycle starts to increase.

The Eurozone is the main data focus this week with liberal smatterings of important

releases from member states. German CPI tomorrow could underpin the euro should

the release come out as strong as expected with business climate figures on Friday

likely to follow last week’s IFO survey and post a gain.

Euro traded within a fairly tight band against sterling over the week although volatility

was high over the intraday. Sentiment indices from Germany were the main movers as

the ZEW index weakened in May but the more influential IFO saw an unexpected jump

higher; proving to be not a little confusing! Comments tied alongside both releases

revealed a split in probable interest rate policy as the ZEW chief thought an increase in

rates whereas his IFO counterpart foresaw a cut in the medium term.

The German economy continues to be the only consistently strong performer in the

Eurozone as data from Spain, France and other constituent economies were poor. This

contributed to a 2.5% fall in the number of industrial orders over the entire region.

Inflationary factors are still an obvious concern to Jean-Claude Trichet and the rest of

the ECB voters as public comments were still decidedly hawkish in nature. This is still

proving to elicit consternation from some member states as their growth is pinned down

underneath the ECB’s hard-line anti price increase pressures.

Dollar reversed the gains it had made against the EUR and GBP last week as data

continued to be less than flattering and oil prices pressurised the greenback. With a

lack of top tier data commodity prices held the strings over the dollars movement.

Oil has become a ‘hot button’ topic naturally and increasing prices spell nothing but

doom and gloom for the once mighty dollar. Research points to an inverse correlation

between the two in so much that a $10 increase in the price of oil sees a 1%

weakening of the dollar in its cross against the euro.

The inflation problems are still current stateside and minutes from the FOMC were

clear in their assessment of the situation that rates will kept on hold in the short term at

least. Fed members are also very downcast over the state of growth in the economy

and have dropped their estimates of growth for the second half of the year.

This has been a record breaking week for the AUD as it made 25 year highs against

the dollar before shrinking back as the commodity catalyst that had been fanning the

flames retreated. Bullish feeling towards the AUD still remains as typified in a mid-week

special in the FT. Massive inflows into AUD have been seen over the past decade as

China, India and other gluttonous economies devoured its massive stocks of iron,

copper and gold. Currency players also love it for its yield of 7.25%; the second highest

for a developed nation.

Analysts believe we may be seeing a new dawn for Aussie as government plans to

expand its debt operations will only serve to increase the attraction of investment in the

AUD. In the near term we will wait on how commodity markets fare and for further

news on the suffocated housing market.

The government delivered a stimulatory budget for the NZ economy on Thursday

underpinning Kiwi and giving the belief that interest rate cuts are far off and when they

do come they will not be as harsh as previously expected. New Zealand Finance

Minister Michael Cullen announced tax cuts of $10.6 billion despite running a cash

deficit of close to $3bn. With the anticipation of hawkish news Kiwi moved to fortnight

highs against most of the major currencies and was able to hold them Friday in the

face of strong profit taking pressures.

Earlier in the week NZD had to rely on its antipodean counterpart to provide the bump

higher. AUD jumped on the back of minutes from the RBA indicating a split in the

voting record and significant pressure for a hike.

The well publicised surge in oil prices helped CAD higher last week with economic data

also providing a fillip. April’s consumer price figures jumped upwards by only 0.3% but

the markets were looking for a reason to price in doubt as to the Bank of Canada’s next

policy move; this figure provided the uncertainty over the forecast cutting cycle. Oil

prices will continue to provide support as will data should it be of an inflationary

flavour: Focus is expected on

.GBPZAR 14.5573 15.3217 15.3088

Fears over civil unrest and xenophobic violence hurt ZAR sentiment last week although

Finance Minister Manuel tried to put a brave face on it; it is however the only emerging

market currency to not have benefited from the recent increase in commodity prices.

Things have become so bad that President Mbeki has asked for the armed forces to

step in; resolution being the only status that will underpin the rand.

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The above comments are only our views and should not be construed as advice. You should

act using your own information and judgement. Although information has been obtained from

and is based upon multiple sources the author believes to be reliable, we do not guarantee its

accuracy and it may be incomplete or condensed. All opinions and estimates constitute the

authors own judgement as of the date of the briefing and are subject to change without notice.

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