petering out? Global markets are certainly signalling so. Stock markets are regaining

levels not seen since early January with government debt prices falling for the second

consecutive week. Commodities are also coming back from record highs with gold and

oil in particular seeing significant declines from price peaks. In essence, we are seeing

a reversal. How this has been typified in currency markets is the resurgence of the

dollar; EUR/USD slid to a 6 week low with cable testing technical and long term lows.

The British economy is still slowing however and a continued lack of credit supply is

still deadweight around the neck of consumer demand; inflation figures remain high

given current interest rate levels and are in touching of distance of ‘letter-writing’

territory. Inflation expectations are on the rise with some analysts predicting that CPI

will hold above 3% for as long as 5 months and a recent survey showing that less than

25% of people polled by the Bank of England believed that the MPC was satisfied with

the MPC’s performance in dealing with the credit crunch.

CPI was actually down in March, falling to 2.5% against a consensus of 2.6%, but

looking behind the figures the trend upwards is readily available to see. Wholesale gas

prices have jumped from a low in 2007 of $5.23 per mmBtu to a high last week of

$11.36 per mmBtu. The increase in gas prices are inextricably linked to the increases

we have seen in crude oil and utility bills here in the UK will be set for a rise to

accommodate the 117% price jump seen since August 07.

The MPC is due to meet this week, with a hold priced in on futures markets to more

than an 85% possibility as belief uniformly would judge a cut as unnecessarily risky

given the current inflation climate. The SLS, or Special Liquidity Scheme to give it its

full name, has had a positive effect on credit markets with spreads narrowing however

products available to so-called ‘prime’ borrowers fell by more than 1,000 in April.

To return to the original question, we believe the answer to be no. The housing market

is still proving to be a media chew toy and with a 1% fall in house prices in the year up

to April the memories of the early 1990’s problems are beginning to resurface. 64,000

houses were purchased in April which is a low since records began in 1999 and

consumer confidence once again dipped, this time to levels not seen since 1992.

We are at the end of the beginning of the crisis and no longer forecasting the beginning

of the end. A lot will need to happen for the ship to be righted but measures such as

the SLS have plugged some holes.

This week is fairly quiet on the dollar data front with Wednesday’s pending home sales

release the only real ‘tier 1’ release. Dollar watchers will be hoping to see the reversal

in fortunes continue and a strong figure come to the fore.

It is a much busier week for the single currency. The ECB will announce the latest rate

decision on Thursday; a hold being the obvious choice with a less than 10% probability

of another decision expected. Wednesday’s retail sales figures will also prove

interesting given Germany’s decline announced last week

Euro extended its losses against sterling and dollar away from record lows reached

over previous weeks as confidence drops and investors move away. Confidence

figures were mainly off due to what seems to be increased problems in the French

economy and a slowdown in Germany; so long the only economy performing in the EU.

HICP figures, the European CPI, fell last week and hopes are that should the trend

continue we may see a more relaxed stance and sentiment emanate from Frankfurt

with in the next few months; markets are pricing in cuts in August / September.

Dollar was the main beneficiary of positive economic data last week prompting

strengthening against the major crosses. The most documented and startling move

was against the single currency; dollar pushed to a 5 week high and its trade-weighted

index pushed to levels not reached since early March.

The volatile non-farms payrolls figure once again surprised the market posting a 20k

decline against expectations as far ranging as -100k. A bullish figure saw traders buy

dollars and move into riskier assets; The Dow Jones and S&P 500 enjoyed 0.5% and

0.7% jumps immediately after the release but fell back amid poor earnings figures. US

Government debt yields also rose, itself a sign that sentiment is improving.

Other data also underpinned the greenback with GDP figures hitting target at 0.6% and

the PMI report for the manufacturing sector although posting a contractionary figure of

48.6, halted the slide, symptomatic of dollar data in 2008.

We mustn’t forget that the FOMC did meet this week and cut rates by 25bps to 2%.

Language published immediately afterwards was unclear but the market interpreted it

as a mandate for further cuts but not for a while; futures markets point to a less than

25% chance of a cut in June. Inflation now seems to be the main focus of the Fed as its

chosen preference to measure the increases in prices, the PCE deflator, registered a

0.2% rise.

AUD was broadly unchanged over the course of the week against sterling due to a

mixed data environment in Australia. Although retail sales rose once again these were

offset by falls in building approvals which summoned fears over further problems in the

housing market.

Upward moves were down to increased commodity prices although such moves higher

can and would be reciprocated lower should the commodity bubble burst. Global risk

acceptance has also increased in light of news from the US; carry trade inflows from

Japan have risen sharply over the past week.

Kiwi dollar may be in for tough time over the next month or so. Most analysts are

tipping it to fall against its trans-Tasman counterpart and with a move below A83c for

the first time in 6 months; the kiwi boom is starting to lose some of its lustre.

The week ahead provides a good indicator of the state of the economy with the release

of the Household Labour Force Survey, the main NZ unemployment measure. This

may give us a clearer picture of labour supply but without a drastic move in the

unemployment rate currently sat at 3.4%

CAD continues to battle towards parity against its US counterpart but found little joy

slipping over the course of the week as poor data took its toll. GDP weakened by 0.2%

as the manufacturing sector continued its decline. Further interest rate cuts are

probable given these growth figures however the Bank of Canada will be wary

especially after a sharp wholesale price rise. Its saving grace however remains to be oil

prices and recent records will continue to underpin the loonie.

The Rand had a relatively quiet week in comparison to its normal volatility. GBPZAR

traded in a range of about 1.5% around a mid rate of 15.00 and saw a high of 15.10.

The main excitement came as a result of comments from the Reserve Bank governor,

Tito Mboweni. In an SABC interview he claimed, “The situation is deteriorating and we

can’t say we must wait for that (the MPC meeting) date because it is in the calendar.

Economic policy can’t wait for that date.” This was interpreted to mean the MPC would

soon be calling an emergency meeting to hike rates in an attempt to curb rising

inflation. However, later that day, the emergency meeting was denied and a statement

released that Mboweni’s comments were misconstrued. Nevertheless, the Rand rallied

and then fell back on the news. The market now widely expects the MPC to hike rates

by 50bp at the next meeting.

Please feel free to contact me at 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.

Please call us on 0800 001 5055 if you have any questions or would like to discuss the markets.

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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.