mortgage debts for the safest debt type of all; a gilt. This government backed debt will,

in an ideal world, lubricate the lending machine so that high street banks provide a

flood of liquidity into the housing markets, increasing demand and underpinning

everybody’s two up, two down. Fairly ambitious plans I think you’ll agree as befits a

monumental policy u-turn not seen in the bank’s 300 year history.

This was first announced on Friday, the same day that the Royal Bank of Scotland, the

UK’s second largest banking group by assets, came forward with details of a rights

issue. This funding measure is not uncommon however for a firm of such a size it

naturally had market commentators inhale sharply and cover their ears. However RBS

is trading up, at the time of writing, from Thursday’s close as are Barclay’s and HBOS;

both, rumours would have us believe, waiting and gauging the market’s reaction to

RBS’s decision before announcing fund raising measures themselves. Could this count

as an endorsement? We’ll have to wait and see.

All in all this can only be seen as an industry looking to heal itself as the spectre of

recession still looms large on the horizon. The above action allows the Bank of England

to move away from a US style drastic rate cutting strategy although 25bps cuts are still

priced in for June and August. This view was compounded by last week’s inflation data,

which showed an unexpected stagnation in price rises in March to 2.5% down from an

expectation of 2.6%.

How will this benefit sterling? Strengthening is very much possible, especially against

the drastically overbought euro and the terminally weak dollar but this will only be

possible if the global risk appetite increases and financial markets start to move easier

with less suspicion between market constituents.

This week’s data includes the minutes from the MPC’s April meeting which saw the

rate cut to 5% with retail sales and Q1 GDP also expected to move higher.

Dollar watchers are in for a busy week as reports are due from the housing,

employment and manufacturing sectors. Tomorrow’s home sales data is the highlight

with deterioration still forecast as sub-prime worries continue to weigh on sentiment.

This week there will be few Fed voting speakers as the FOMC meeting looms.

European data is expected to show a slowing in the pace of growth and a definite

cooling of sentiment with key releases being Wednesday’s PMI announcements and

Thursday’s German IFO business climate survey.

Single currency strength continued last week until Thursday/Friday saw strong profit

taking especially against sterling and the two biggest consecutive GBP/EUR day

HICP, the Eurozone’s key inflation measure, rose again to 3.6% from a previous

reading of 3.5% re-illustrating the inflation problems the EU has as a whole.

Subsequently ECB officials were typically tough talking in public comments increasing

euro purchase sentiment.

One measure which fell short of expectations and has been a firm foundation of recent

euro strength was the German ZEW index. 3 monthly rises gave way to an April fall to

-40.7 as weaker demand and high inflation pressures had business leaders feel less

confident of the upcoming 6 months.

Protests over euro strength will continue as especially Italian and Spanish exporters

are feeling the pressure of selling their wares to uncompetitive currency holders.

Intervention will most certainly be on the lips of some of the most vocal as restraint is

sought.

We saw record dollar lows once again against the euro last week and continual

softness against sterling saw the dollar weighted index fall to levels not seen since late

March.

Unlike recent weeks, the past 7 days have seen some positive US date come to the

fore although with a negligible impact. The New York Manufacturing Index rose

substantially along with the six month business confidence indicator and capital inflows

also rose although there was a fall in Chinese buying of US government debt.

Dollar watchers have also seen conflicting views being expressed over how the FOMC

should decide at the late April meeting. Regional Fed President Fisher is one notary

who indicated further weakening may be detrimental yet others would be happy with a

month.

Minutes published by the RBA showed a tight monetary policy strategy is being

followed but inflation pressures seem to be easing, allowing consumer confidence to

rise. As with Canadian, AUD rose as commodity prices continued to soar, having a

direct, positive effect on Aussie export prices. Further gains may be seen if risk

weariness dissipates but so far domestic inflation risks continue to weigh.

Recent data such as consumer and food prices rose in line with what most if not all

developed economies’ indices have been experiencing. Kiwi CPI rose 0.7% in March

taking the annual rate to 3.4%, confirming Reserve Bank forecasts and reiterating the

growth that the NZ is still experiencing. There is concern on the horizon however as

market participants continue to talk of recession by the end of the year with the

subsequent weakening of NZD as the RBNZ cuts rates to stimulate growth. A hold is

the forecast for this week’s meeting keeping the cash rate at 8.5%

The black gold supported CAD last week as crude oil headed close to $117.00 US a

barrel. Strong consumer prices also helped underpin the loonie as core rate falls hinted

at interest rate dovishness in coming weeks. Given the global risk profile Canadian

dollar finds itself in an interesting position; supported by high commodity prices as a

flight to quality continues but continuously vulnerable given its similarities to its

southern neighbour.

South Africa is the latest country to report falling house prices as data released on

Thursday last week showed completed building prices fell by 15.4% in February. The

rand traded in a fairly tight range over the closure of last week as market participants

wait for Wednesday’s potentially volatile CPIX reading. Figures suggest a 9.7% y/y

reading for March with an expected rise to 10% in April. These will be supported by last

week’s strong retail sales figures which in turn works in the SARB’s favour as the

economy continues to expand even with high interest rates and given the expected

CPI, more hikes are likely.

anytime regarding these briefings, if you have any questions or thoughts on them, or if you are

interested in a particular event in the calendar.

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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.

Any rates given are interbank and therefore for amounts of £5million and so are not indicative of

rates offered by World First for smaller amounts.

GBPUSD, move as any combination of two of these rates must produce the third in order to satisfy a

condition known as No Arbitrage. If there are movements in two markets, then the third must move

deterministically. Also knows as triangulation.

higher yield economy (Australia). This yields a certain profit unless the interest rate differential narrows or

the exchange rate moves such that it costs more to buy the currency back.

Macroeconomic models (such as eCIP).

elements like energy and luxury consumption leaving the ‘boring’ elements like utility bills and food.

[Quotes from BoE governor Mervyn King]

Interest Rate Traction: Although there is a group of people who announce an interest rate, it has to feed

through the economy through some very complex and poorly understood channels. Once rate hikes are

having an effect on inflation and long term yields it is said that they are finding traction with the economy.

who are not employed.

Participation rate: The percentage of the population of working age in the labour force.