against the euro and dollar over the course of last week. Last week we reported on the

lack of confidence that the UK economy is suffering; this week the MPC gets an

opportunity to make an impression.

Thursday sees the MPC’s April decision and the market is pricing in a 70% chance of a

cut with a 100% probability of loosening by May. The consensus size is 25bps and is

the minimum that the MPC can be seen to do as homeowners brace themselves for

‘repayment shock’; the change in mortgage payments as a fixed-term rate ends.

We tend not to hear about the IMF much nowadays and if we do it’s a case of a sub-

Saharan African country having their debt reduced or written off however last week saw

comments on the UK housing market. The IMF estimates that the UK housing market

is overvalued by up to 30% and as a result a prime candidate for a ’sharp correction’. It

is almost certain that prices will fall this year following the well-publicised contraction in

mortgage availability. A figure that stands out is that the amount of money lent in the

UK for house purchases is down by 40% year on year in February. Not being able to

pay for a house normally precludes you from buying the house.

Sterling’s solidification can be put down to couple of things. We have mentioned in the

past that GBP is closely related to the fortunes of the worldwide financial sector. Last

week some banks which have had a real time of it over the past weeks started to

recover. HSBC was up 3.6% last week with Goldman Sachs up 6.8% and Barclays

8.8% over the same period. Weaknesses in the European economy, outlined below,

also contributed to a move higher in the GBP/EUR cross with further gains likely to

crystallize by the end of H1 as Eurozone cuts are priced in for June.

All in all, the picture has shifted in sterling’s favour over the past week but not

significantly; there is still a conspicuous absence of popping champagne corks. The

only real data this week is the MPC announcement; a cut will bring us lower, but those

interested in the outcome of sterling would be minded to watch and wait for BRC shop

prices and Wednesday’s Industrial and Manufacturing production announcements.

The US economy takes a relative backseat this week as focus turns to the UK and EU.

Tuesday evening’s FOMC minutes obviously have the power to move the dollar

however we will wait and see whether the important musings have already been

revealed by Bernanke’s recent trips to Capitol Hill. Friday’s consumer confidence figure

will also be worth watching for signs of a recovery.

Apart from Thursday’s rate decision it is a very quiet week for European data with only

Friday’s OECD leading indicators of note.

The euro showed the first signs of cracking last week as some poor retail sales and

consumer confidence data hinted at an economy starting to sweat over credit crunch

issues. As so often is the case the German economy was the focus. Some analysts

believe that the German economy alone has been underpinning the Eurozone on its

own as Portugal, Spain, Ireland and Italy are seeing a greater slowdown economically

speaking than the UK. Some of this could be down to the high proportion of German

exports bound for Russia, China and the Middle East gorging on petrodollars.

Jean-Claude Trichet and the ECB are expected to hold rates at 4% this Thursday as

has become the customary stance in Frankfurt. Euro watchers will look for cracks in

Trichet’s hawkish armour at the press conference for indications of when a loosening of

rates could be become reality.

GBPEUR is expected to head lower in the short term following a potential cut by the

Bank of England. Levels around all-time lows are still well within a solid move

downwards. However logic dictates that a GBPEUR rate higher than at the time of

writing is probable as I believe weakening of European economic fundamentals will

move the single currency lower.

The word recession is bandied around more often nowadays than articles about the

environment and Al Gore’s crusade to save some elks but when certain commentators

start to give it credence the world sits up and listens. Alan Greenspan, commentating in

El Pais, believes there is more than a 50% chance of the US economy heading into

recession but believes that the ‘sharp falls in orders, strong rises in unemployment and

intensive weakening of the economy’ does not place the world’s largest economy in a

slowdown yet.

An FT report also highlighted that the US economy is lacking the migrant workforce

that it once prided itself on. Intellectual immigrants such as doctors, teachers and IT

workers choosing Canada and Europe over the US as dollar salaries mandated home

are being eroded by adverse exchange rate movements.

Ben Bernanke painted a sunny picture however before the Senate Banking Committee

as he believes that the economy will pickup in H2 as the effects of the drastic rate cuts

and tax rebates would stimulate spending and growth without inflationary pressures.

It was again a quiet week on the AUD domestic data sheet as the dollar primarily

moved on external factors and comments from the Reserve Bank Governor Stevens.

Stevens stated last week that inflation was not out of control but left open the possibility

of further interest rate jumps and recently Australian media has focused on the amount

of middle class homeowners in dire straits due to the RBA’s aggressive rate hiking

stance. Future movements will also be predicated on how the global risk outlook

picture fairs with carry trade participants waiting in the wings.

A deteriorating economy hurt kiwi last week as it fell against its main crosses. With NZ

analysts looking forward to tomorrow’s Quarterly Survey of Business Opinion a bearish

pall has been cast as NZ consumer confidence continued to fall between December

and March. Main economic constituents are starting to feel the pinch especially the

agricultural sector which is dealing with a drought and a lack of competitiveness due to

the NZD strength. This may hurt the potential IPO of the world’s sixth largest dairy

consortium Fonterra which has been discussed for nearly 6 months with no end in

sight.

Canadian dollar has drifted back towards parity with its US counterpart over the past

week as the Canadian economy rebounded; GDP rose 0.4% against a previous

reading of -0.7%. We also saw gains as oil rebounded from levels close to $100 a

barrel back to around the $106 level.

Rand sellers were afforded some respite last week as it fought back from its recent

doldrums. This was not really down to any major pro-SA data but more based around

problems in the UK and US economies and the weakening of sterling and dollar. This

week however sees the SARB’s rate decision on Thursday; the market is split almost

50:50 on whether we will see a 50bp hike. CPIX is likely to spike through 10% in April

however consumer and industrial confidence is plummeting and retail sales have also

been negative over the past 3 months. The trade off between inflation and growth will

be the subject of discussion for the rest of this year I feel.

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.