sterling would feel the effects so quickly. Much like the commodity currencies’

propensity to whipsaw violently due to sometimes small movements in the gold and oil

markets, sterling has become the currency world’s punch bag for financial sector

concerns due to the UK economy’s exposure to the financial services arena. Figures

published at the beginning of the year show that this sector contributes 9.4% of UK

GDP alone.

Bear Stearns’ capitulation was the obvious drag however we nearly had another UK

casualty or some would have us believe. Wednesday morning saw the city wires alight

with rumour, suggestion and intrigue that a UK bank was due to go to the Bank of

England and use it as a lender of last resort with further digging suggesting that it was

HBOS, the parent company of Halifax and the UK’s largest mortgage lender. This

however eventually turned out to a load of rubbish and the FSA Is currently

investigating suspicious activity in the trading of the bank’s shares. In the ensuing panic

most High St. banks’ shares tumbled. Even though this turned out to be the act of a few

unscrupulous individuals, it served as a warning for all sterling watchers.

Last week was an example of style over substance; a market influenced by rumour and

fear more than the underlying fundamentals. If this had been the opposite we could

have seen sterling higher. The data that garnered the most headlines was the rise in

retail sales which posted a 1.0% increase against a forecasted -0.2% fall. This,

combined with CPI rising to 2.5% on the back of increased food prices, falls in the

unemployment rate and the CBI announcing export order levels at the highest level

since 1996, paints a picture of an economy moving itself away from a recessionary

problem.

The Bank of England also released the minutes from its March meeting showing a

voting record of 7-2. Perennial dove David Blanchflower as expected voted for a 25bps

loosening but was joined by the Deputy Governor John Gieve which surprised the

markets and weakened GBP momentarily.

The pick of the data will be Friday’s current account release which given the recent

drop in the value of sterling should see a healthy strengthening from-£20bn.

Much of this week’s US data is focused on consumers and the labour market. Today

we have a consumer confidence figure due to fall as this is the first reading since Bear

Stearns’ catastrophic fall from grace and the ensuing scramble for liquidity. Friday’s

Michigan Consumer confidence figure is due to follow the same path.

Most European data this week is from its largest economy, Germany. Tomorrow

German IFO business climate data is due followed by consumer confidence figures on

Thursday. These are expected to the upside and may solidify the single currency’s

strength given the lack of intervention from Jean-Claude Trichet.

The euro continues to exert considerable pressure on sterling and dollar although

weakness has been seen against ‘safe haven’ currencies and JPY and CHF. The only

piece of definitive data last week were the ‘flash’ PMI figures which although were

published above the 50.0 expansionary figure were lower than market forecasts,

solidifying thoughts that the Eurozone economy is due a slowdown with exporters

bearing the brunt especially.

Central Bank committee members once again expressed concern over the sharp rise

and continued elevation of the euro in particular against the dollar however this may be

all talk and no trousers as intervention seems ways off.

The dollar continues to ricochet between relapse and recovery as it again moved lower

against the euro but strengthened against GBP last week.

As we expected the Fed thought a 75bps cut was the right option to reinvigorate the

ailing US economy. This takes the rate to 2.25%, some analysts believed that a cut of

100 or even 125bps was needed however Ben Bernanke and other policy makers

shied away from this due to inflationary concerns.

Ben Bernanke has been very active in loosening money markets stateside in order to

increase liquidity and counteract the recent reticence lenders have been experiencing.

One such measure saw the iconic Freddie Mac and Fannie Mae, both US government

sponsored enterprises, to take on close to $200bn worth of distressed mortgages and

pump funds back into the system.

Wall Street has contributed a fair share to the dollar’s woes but impressed last week as

both Goldman Sachs and Lehman Brothers posted profits that were both above

analysts estimates but still a lot lower than last year’s figures. With news that JP

Morgan has increased its offer fivefold for Bear Stearns the greenback has gained a

portion of respectability.

As with all the commodity currencies AUD suffered last week as the recent commodity

bubble did not burst but instead let out some air. The main data release last week was

the publication of the minutes from the Reserve Bank of Australia’s March meeting. As

reported last week consumer demand has begun to fall and a slowdown in growth is

forecast; as such further rate hikes seem unlikely.

Kiwi has continued to be at the behest of carry trade participants as higher equity

markets and lower commodity prices saw NZD move violently over the week. Lower

gold and oil prices and a pick up in the fortunes of the USD towards the end of the

week saw NZD’s recent rally stall. Next week both fourth quarter balance of payments

and gross domestic product data, on Thursday and Friday respectively.

Everything seemed to go against the Canadian Dollar last week as it weakened to the

lowest levels against sterling since mid December 07. Primarily the falls in the price of

gold and oil hurt the loonie given their large proportion of Canadian exports with the

financial turmoil radiating from across the border not helping either. CAD will also not

be helped by expectations that although inflation rose in February by 0.1% the Bank of

Canada is expected cut rates in the short term.

The SARB’s Quarterly Report was published on Wednesday and held few surprises.

The overall picture showed that the South African economy is continuing to grow at a

healthy pace and is moving from sales-led growth to a more sustainable investment-led

growth pattern. Looking forward tomorrow’s consumer and producer price index figures

are expected higher which will continue the inflationary pressures being felt by Africa’s

largest economy.

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