dollar last week to highs of 1.9972 however lost ground against the Euro to the lowest

levels seen since the euro was launched in 1999. Further gains were kept in check by

a lack of confidence in the financial sector given poor earnings figures from high street

banks including a $16 billion write-down on the part of HSBC and news that a

prominent London based Hedge Fund managed by a former Goldman Sachs magician

has decided to shut up shop after losing substantial amounts of money thanks to credit

crunch falls.

Sterling data failed to provide any upward swell as most releases came out at

consensus values. BBA mortgage approvals rose however mainly down to an increase

in remortgages as supposed to new inflows into the housing market. This followed the

news that house prices fell by 0.5% in January in a survey published by the Nationwide

Building Society which launched a panic in the Daily Mail readership.

Looking ahead, economic sentiment and hard data points towards a gradual easing of

UK monetary policy throughout 2008 however we and the market believe that this

month will see Mervyn King and the MPC hold rates at 5.25%. Speeches given by

MPC members gave an impression that they were concerned more about inflation than

the lack of growth in the UK economy with Rachel Lomax, the deputy governor, going

as far as to say that there is the distinct possibility that ‘lenders are caught in the

largest ever peacetime liquidity crisis’. She followed this with “But while sophisticated

economic models are unable to identify the extent of the current credit crisis,

consumers can stick to the tried-and-tested model of living below their means. And

doing so sooner rather than later will help cushion the blow.”

The rates decision is the only piece of tier 1 data this week with BRC shop prices and

PMI services the only other releases; both scheduled for Wednesday.

As it always seems to be, the bulk of data this week will be coming from across the

pond. The US Non-Farms Payroll change is the obvious key announcement and in my

personal opinion could, if it differs far enough from the market consensus of 25k, be the

catalyst for a GBPUSD push above 2.00. We will get a fair indication through

Wednesday’s ADP employment figure and Thursday’s initial jobless claims as well.

Along with the BOE we will have the ECB’s rate decision on Thursday. A hold at 4% is

forecast but any adverse readings from Tuesday’s EMU PPI or Wednesday’s retails

sales figures could see Jean-Claude Trichet dial back the hawkish rhetoric.

Euro was the talk of the town last week as it made all time highs against the USD and

GBP. Although these gains were mainly down to their opponents’ weaknesses some

strong Euro data did help out. The German IFO index made an unexpected jump to

104.0 and German retail sales also made a 1.6% recovery. As with all economies

recently inflation forecasts rose while their growth counterparts fell. We forecast a hold

on € rates this week although as always Trichet’s comments afterwards will give us a

clue as to his policy weakening mindset.

The main story in FX circles last week was the surge in EURUSD. EURUSD is the

most traded FX contract in the world and significantly weaker US economy prospects

saw it move into record territory. Consumer confidence fell to a level not seen since

2003 with expectations the lowest since 1991 while house prices in December fell by

9.1%, putting our 0.5% fall in perspective. Ben Bernanke gave his semi-annual

testimony to the US congress on Wednesday and Thursday and further weakened

dollar by clarifying that the Fed is more preoccupied with the lack of growth in the US

economy than an inflation problem. With Bernanke confirming that the US economy is

in a worse condition than it was before the 2001 recession we are pricing in a 50bps

cut on the 18th March.

Strong surges in the price of gold and oil lifted commodity currencies none more so

than AUD. AUD rocketed to the highest level in 24 years against USD as the familiar

story of American weakness continued to weigh. No major data announcements

shaped the movement apart from continued belief that the RBA will hike once again to

7.25% in the early hours of Tuesday morning.

Kiwi dollar continued its bullish run last week as it charged through record highs

against the USD and moved within touching distance of a 2 year high against GBP

before profit taking kicked in on Friday. In partnership with the Aussie dollar, high

yielding currencies have benefited from increased participation in carry trades with

news that US based bond insurers, which have been crucified after defaults in the

subprime housing sector, may be subject to rescue plans which in turn saw sentiment

increase in riskier assets.

Crude oil was the medicine the loonie needed last week as it moved to 3 month highs

against USD. Given the US buys more oil from Canada than it does from Saudi Arabia,

any significant movement in the price of crude will see CAD move ferociously. We coulf

have seen it move higher were it not for the belief that further rate cuts may be sought

at the BOC’s March meeting.

South African rand is one of the most volatile currencies we trade here at World First

and last week was no exception. Continuing problems in SA’s electricity industry has

caused one of the country’s leading gold miners to warn that up to 25% of production

could have been lost in Q1 alone. Friday was the day where ZAR was battered as fears

of a global slowdown in the US hurt currencies with large current account deficits. This

is down to the fact that South Africa is borrowing large amounts of money to finance its

expenditures and will not be exempt from the global recession forecasters are

predicting.

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.