At the moment the UK economy is low on confidence and as such sterling is feeling the

pinch as records continue to be broken against the euro and momentum against the

dollar is hard to come by. After a fairly stable week Friday saw us erase gains and dip

to 1.26 against the single currency and a move below 2.00 versus the greenback. Data

supporting the lack of good feeling towards the UK economy was released showing

that UK consumer confidence has fallen to the lowest levels since 1993. So what’s

holding us back?

The obvious drag would be that of the housing market. The latest news from the UK’s

second largest mortgage provider, the Nationwide Building Society, is that prices

dropped once again in March and that the yearly growth rate has fallen to 1.1%, a level

not seen since 1996. There was also a small increase in mortgage approvals however

these were no different from seasonal norms given people’s propensity to buy around

the Easter period. It’s not unobvious to say that if the value of your house is falling, you

may start feeling gloomy.

Let’s say however that most of your investments are not in property but in the stock

market; unfortunately there’s no ray of sunshine to be found here. The FTSE 100 index

of shares at the time of writing is around 16% off of the highs seen in July and October

with theory dictating that a market trading 20% below is in a bear market. Earnings are

down across all sectors with billions wiped off the value of companies such as

Vodafone, HSBC and Marks and Spencer. So your pension plan is being hammered as

well.

This rather toxic recipe combined with higher prices at the petrol pump and at the

supermarket checkout has left Joe Public feeling pretty sorry for himself and the cycle

continues. The question is now what can or will break us out of this?

Simply put sterling is in a very precarious position and we may have to wait for the

Bank of England’s next cycle of raising rates, not forecast until Q3 2009, for these

and very little of that”; he very well could have been talking about sterling.

The US data schedule is very busy this week but will be focused on Friday’s Non-Farm

Payrolls which is forecast to dip for the third consecutive month, an indication being

found in Wednesday’s ADP release. Other key statements include Tuesday’s ISM

figure and Thursday’s Initial Jobless Claims announcement.

Euro watchers will focus on details from the Eurozone’s manufacturing sectors as PMI

is released Tuesday and Producer Prices on Wednesday. Three members of the ECB

Central Committee are due to speak publicly this week and all ears will be listening fro

hawkish tones and belligerent hints.

Euro is becoming unstoppable. Although some speculators took the opportunity to lock

in some profits over the past week the single currency maintained its bullish stance

against its competing crosses. In contrast to the US and UK both data and sentiment is

on the euro’s side.

Germany is Europe’s largest economy and as such its data and readings have more of

an impact than that of say Spain. The main boost last week was the German IFO

Business Climate report, nudging higher against a global backdrop of falling belief.

Analysts and commentators see this as an indication that the economy is stable, a rare

commodity in today’s financial climate. This was backed up by reports that the chances

of a Eurozone rate cut this year has fallen to 50% from an almost certainty in

January/February.

The only real opponent of the continued euro strength to voice his concerns was

Nicolas Sarkozy, the new President of France, but markets viewed this as nothing

more than a political kowtow given his desire to bring France and its economy closer to

the US than was tried under Chirac.

The disparity between dollar and most of its crosses continues and the greenback

persists in flailing around like a punch drunk boxer. Although dollar moved higher on

Monday with European markets enjoying a long weekend it soon found itself sliding

back into record territory.

Data was not a friend of dollar last week as most sectors and their relevant indices

moved lower. The announcement that garnered the most headlines was the increase in

US Existing Home sales however this was offset by the catastrophic fall in the Case-

Shiller Index. This measures the value of residential real estate in 20 metropolitan

areas in the US. With a fall of 10.7% it is certain that not only the low-end housing

market is taking a beating this however could in turn lead to buying opportunities.

GBP/AUD was one of the most volatile crosses last week as the lack of domestic data

left it at the mercy of commodity prices and global stock indices. We however have the

RBA rate decision tomorrow with expectations of a hold at 7.25%. A survey was

recently conducted by AAP and it found that not one of the 19 economists polled are

expecting a hike.

Strong GDP data allowed Kiwi strengthen last week. With a figure of 1% published

against a forecast of 0.8% NZD combined with Reserve Bank Governor Alan Bollard’s

comments that he is entirely happy of the interest rate in New Zealand at the moment

and a cut was not being forecast due to domestic inflationary pressures being seen as

more of a problem than global market turmoil. Kiwi will however remain under pressure

due to its current account deficit. New Zealand’s currently runs at 7.9% of GDP;

anything over 5% is viewed as risky.

The loonie’s saving grace at the moment is the price of oil. Falls below the $100 a

barrel level will hurt however retracements back to $110 like we saw last week will

continue to underpin. Without this we could have seen further losses given the

problems the US, Canada’s main trade partner, is having. We foresee CAD will

continue to slide as the Bank of Canada looks to cut rates in the near term.

Inflation is still a concern in South Africa typified by last weeks PPI figures. As with

most economies the largest rises were down to increases in the petroleum and coal

products which were up 15.5% to 49.1% in March and food which were up 2.2% over

the same period. All this points towards a CPI reading of 10% in the near term and the

SARB will be torn between raising rates and hurting growth or leaving them on hold

and watching inflation fly.

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.