across the board, with the FTSE falling almost 6% in today’s trading alone. The losses

have come about after renewed fears of a US recession, and the concerns have

spread to higher yield, higher risk, assets. The Aussie, Kiwi and Rand have all lost

ground versus the majors with the latter two trading at 2.60 and 14.00 respectively.

The dollar has managed to hold some position and in fact strengthened against the

euro and pound. But this week could bring the greenback under strain again as we

draw closer to next week’s Federal Reserve Bank interest rate announcement.

As far as equities are concerned the Fed’s cuts may be too little too late. Consumer

spending has dwindled as households feel the pinch of higher mortgage lending and

the credit crunch. US consumers make up a large proportion of global demand and

represent a significant market for European and Asian companies, therefore shares

this side of the pond have been quite badly hit.

Despite the recent USD rally, the dollar should not like this environment either. The

implication is that the Fed will have to continue to loosen the economy to attempt to

arrest the slowdown, and the subsequent rate cutting will offer little support.

Sterling remained under pressure after December’s retail sales figures confirmed our

fears. Consumer’s tightened their belts over the festive period and numbers slumped

by 0.4%. The headline sales figure was expected to have growth by 0.2%, lower than

the month before at 0.4%, but the negative growth was worse than expected. The

pound fell on the release, but concerns over growth in the Eurozone helped support

GBP against the euro. Housing data offered little assistance as prices continued to

cool. This morning’s Rightmove survey showed house prices fell 0.8%, the third drop in

as many months.

Trichet, the European Central Bank President, did his best to remain hawkish and

reassert his inflation fighting stance, but this was largely ignored by the market who

aggressively sold the euro from mid week last week.

The major event for sterling will be the Bank of England MPC minutes. The policy

committee voted to keep rates on hold at the last meeting and this was seen as slightly

more positive then the news had been of late. However, despite the “no-change”

announcement, sterling sold off taking GBPEUR to 1.3130. We have since seen a

bounce back, and the number of votes for and against could be crucial. The consensus

is for 7-2 in favour of a hold. If the voting is closer than this, sterling should lose some

of its gains.

The euro weakened slightly last week off the back of global equity bourse falls and

concerns over euro-zone growth targets for the upcoming year. The Italian and

Spanish economies are in focus with the expectation of property price falls acting as a

harbinger. Yves Mersch, the President of the Central Bank of Luxembourg and

Member of the Governing Council of the ECB stated during an interview that the eurozone

must be wary of ‘downside risks’ to growth. He also weighed in on inflation

detailing that the ECB were ‘not unaware of mitigation to price developments’ citing a

supremely strong euro, rising oil prices and higher credit risk. The German ZEW index

once again fell to a 15 year low of -41.6, showing once again that confidence in the

German economy’s 6 month prospects is falling. Technical analysts are foreseeing

further weakening of Euro this week with a possible move towards 1.36.

The dollar endured a fairly volatile week against the euro; weakening to 1.49 before

rallying back down to 1.46 by Friday. It was a busy week as far US centric data with all

major economic readings pointing towards an expected recession. US retail sales fell

0.4% in December with underlying sales also falling by 0.4%, although this followed a

strong report for November. The Philadelphia Fed survey fell sharply to -20.9 for

January while the New York survey was little changed. Headline consumer prices were

slightly above expectations at 0.3% while core prices rose 0.2% to give a 2.4% annual

increase. Core producer prices also rose 0.2% over the month with the headline 2007

PPI increase at a 25-year high. This was exacerbated by further write downs on Wall

Street by the major investment banks in particular Merrill Lynch which reported loss in

Q4 of $8.2bln against an estimate of $717.5mln due to write downs caused by subprime

mortgage investments. All eyes will be on the Fed come the end of the month

and the FOMC meeting with most market participants forecasting cuts of 50bps or

75bps; clarification will become evident further towards the 30th.

Risk reversal fears and declines on equity bourses weakened the carry trade and

commodity currencies slightly last week.

Many things weighed against AUD last week including falling commodity prices, carry

trade weakness and rumours of the BHP Billiton / Rio Tinto merger falling apart.

Further losses were saved due to the high yield differential however the market is

throttling down on expectations the RBA may tighten rates further this week.

NZD has endured a fairly negative week. Big falls on global equity markets have hurt

the carry trade and as such investors and speculators have moved away from riskier

assets and moved to so-called ‘safe heaven’ investments, gold in particular. Even

positive inflation data typified by Thursday’s CPI announcement, which showed a

surprisingly strong 1.2% figure, failed to quell the sell off. Next week the RBNZ is

expected to hold rates at 8.25% due to the recent global slowdown however will stay

alert to the threat of inflation. The central bank is concerned that, in addition to higher

food and oil prices, rising income for the country’s big dairy sector and expected

personal income tax cuts in an election year would add to inflationary pressures.

Canadian Dollar was also weighed down last week of the back of fears of a global

slowdown and how that would affect Canada given the nature of its exports, commodity

prices and bearish economic data. This week it is widely expected the BOC will cut

rates by 25bps to 4.00% on Tuesday in order to give the economy a shot in the arm

which is needed given relatively weak jobs and building permits data.

Rand started 2008 well, stronger against sterling by 10% up until Monday night due to

record precious metal prices, decent yields and obviously the volatile greenback.

the DJIA; this was followed by falls of 62 points, 283 points and 115 points. The reason

I mention this is down to the strong correlation between the two; by close of business

on Friday GBP/ZAR was 13.94 indicating losses of 8.3% in 4 days. The upcoming

week is fairly quiet data wise and as such ZAR watchers should take their cues from

movements across the pond.

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.

Services PMI 53.1 52.8

Current 108.1 107.2

Expectations 98.2 97.6

Tokyo (+0.3%) (+0.3%)

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.