complete howler as Sterling made its 2008 highs against the USD but fell to new alltime

lows against the EUR. With Mervyn King and the MPC deciding that a rate hold

was the most suitable course of action for the UK economy and thus aiming at a

controlled slowdown or ‘soft landing’, further volatility will be an issue.

The UK economy painted a mixed picture last week as a combination of positive and

negative data was released. Both PMI indices, manufacturing and services, showed

increases inline with growing optimism in both sectors and both price indices also

showed expansion. On the downside the Halifax Bank, the largest mortgage lender in

the UK, reported that house prices fell by 0.3% in February along with further falls in

UK consumer confidence and retail spending figures.

Although we have few UK focused announcements this week, none has been more

anticipated from a political or economic standpoint than Alistair Darling’s first Budget as

Chancellor which will be released at 12.30 on Wednesday. With most commentators

focusing on the fight between the government and the CBI over the tax status of the so

called ‘non-doms’ and Darling’s own desire to emerge from behind the shadow of

Gordon Brown little is being made of the FX ramifications. We see that should the

Budget be beneficial for homeowners that the Bank of England may not need to cut

rates as drastically as previously thought so as to keep the inflation problem in check.

This will in turn support sterling against most crosses. Although we will be focusing on

these economy boosting measures and fully expect growth to be downwardly revised,

Darling does not have much room for manoeuvre.

Today’s UK PPI data is expected to show pressures not seen since the early 1980s as

the price of producers’ baskets of capital and consumer goods continues on an

inflationary path and we could see further pain for mortgage holders as both the Royal

Institute of Chartered Surveyors and the Department of Communities and Local

Government both report house price data.

All in all we expect GBP to stay in and around current levels against the main crosses

with possible further upside against the USD as, at the time of writing, rumours abound

over a possible second intermeeting cut in the Fed rate by a possible 50bps.

The US data announcement of note will be Friday’s CPI figure and I think it may not

show the jump anticipated as although US WTI Crude Oil once again broke through

record levels the price of gasoline at American forecourts has stayed relatively stable.

Any news will of course be monitored by the Fed however inflation at the moment is

taking a back seat to concerns over a lack of growth.

Euro interest will be confined to the German ZEW economic sentiment release which is

expected to hold at around -40.0 showing that at least 40% of analysts polled anticipate

the European economy to deteriorate in the next 6 months.

With the USD sliding Euro was the currency to capitalise as it moved higher to records

against sterling and the greenback. Jean-Claude Trichet and the ECB decided

unanimously to hold rates at 4.0% and in a notable split from Fed Chairman Ben

Bernanke will focus their efforts on controlling inflation in the Eurozone as supposed to

stimulating growth. This forced many to rethink their euro strategy as most were hoping

for at least some minor nod towards a weakening in the near future. Trichet also

continued his policy of not commenting on the currency markets at his Thursday press

conference angering some industry bigwigs who had voiced concerns over euro

strength and its subsequent detrimental effect on their export markets.

Trichet’s job is regarded as the hardest of the central banker’s due to the multiple

individual economies that must be factored into the decision making process. Certain

countries are feeling the pain more than the Eurozone as a general; Spain and Italy’s

PMI indices both showing recession like conditions however neither of these readings

could stop the single currency’s strong march.

As predicted USD was not afforded a moment’s respite against the Euro and GBP last

week as further records were shattered. Euro moved higher than 1.54 briefly and

Sterling consolidated above the 2.01 level after a slew of dollar negative data.

Wednesday’s ADP employment release signalled that we would see a drop in the US

jobs market but very few forecast the downward shift that was realised; Consensus

views were in and around the +25k mark for Non-Farms with an actual figure of -63k

published by the Bureau of Labor Statistics.

This was by no means the only negative announcement as every release be they

regarding costs, prices, employment or growth all seem to point to a recession in the

US. The US PMI survey moved below a reading of 50.0 signifying a contraction in the

manufacturing and services sector and further denting confidence. With further

confirmation that the Fed is more worried about the US slowdown than any ensuing

inflation, rumours abound over a more drastic cut by the FOMC on the 18th March as

some polls show 30% of analysts expect a full 1% cut taking the rate from 2.0% from

5.25% in the space of 7 months.

The RBA proved to be nothing if not predictable by rising rates by 0.25% to 7.25%, the

highest in the developed world. The market from Tuesday morning gorged on the high

yielding Aussie further pushing it towards parity with the USD reaching an all-time high

of 0.95 before relaxing to consolidate in and around 0.93 due to profit taking. This

strong yield will see it the main target for carry trade participants however in these days

of global unease should participation in risky trades dwindle so could the AUD’s value.

Kiwi dollar had a fairly torrid time last week as global equity market falls hurt carry trade

participation. NZD which was the currency of choice for said bets weakened

consistently with the only fillip coming from the post RBNZ decision statement.

Although they decided to hold rates, they gave an indication that the inflationary climate

has not dissipated and that cuts will have to wait until H2.

With further increases in the price of a barrel of oil it is little surprise that CAD had a

strong week against its American counterpart. Although the BOC did cut by the

estimated 50bps and signal that further cuts may be needed in the near future a sharp

deterioration of the loonie did not follow. Although some domestic data, GDP down

0.7%, did disappoint the influx of funds for the purchase of booming commodities will

hold CAD in good stead for the short term

Most emerging market currencies have had a terrible time over the past couple of

weeks none more so than ZAR. Data told the now familiar story of rising inflation and

falling growth as PPI accelerated to 10.4% with notable increases in the agricultural

April we will focus on Tuesday’s retail sales and manufacturing output data with

estimates that both values that will fall.

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.