Last week is almost a distant memory after a weekend which saw a British company

nationalised for the first time since the days of British Leyland and British Aerospace in

the 1970s. The fact that the company concerned is a financial institution and that

London is known as the ‘financial capital of the world’ is further embarrassment for a

government already beset by accusations of fiddling while Rome burns.

Even so, Sterling enjoyed a fairly strong week as the fallout from the Bank of England’s

February Inflation report allowed it some room to breath after recent losses. An

expected jump in the CPI turned out to be more of a hop after it came in below

estimates however higher than December’s reading off the back of higher food, energy

and fuel prices. A higher figure would have muddied the waters further in the run up to

next month’s MPC meeting. As it stands at the moment, cuts taking the UK interest rate

down to 4.75% by the end of ’08 seem to be about right.

As predicted, UK house price data continued to show that growth is slowing as the

RICS survey fell to the lowest level since 1992 causing further concern over whether

UK-based subprime borrowers may be subject to negative equity in the coming

months.

Wednesday could be one of the most important days of UK/US data in recent times

both FOMC and BOE minutes are published and we can see the thinking behind the

Fed’s 0.5% and BOE’s 0.25% cuts respectively. Market forecasts predict a 9-0 voting

record in favour of the MPC rate action; any movement towards a split vote would

increase the chance of further Sterling volatility. A case can be made that we could see

dissenting voices showing favourability towards a hold in rates given CPI projections

made in February’s Inflation Report moving towards the government’s 3% worst case

scenario.

Also published on Wednesday will be US CPI which is believed to come out above 4%

again given the offsetting effects of higher energy and food prices against typical

holiday season discounts in the run to Christmas.

The week ahead

UK data, as stated above, is dominated by the Bank of England minutes due to be

published on Wednesday. Other key pieces include CBI Distributive Trends which is

forecast to show a fall in volume on UK based retail firms’ order books from the month

before and the value of Retail Sales being seen to fall as well.

The EU will take a backseat this week as the only major announcements are the PMI

figures for services and industrials due on Friday expected to show figures just above

50.0 indicating a slight expansion.

Economic Research

0207 801 3023

j.cook@worldfirst.com

Currency Rates Low High Current

GBPEUR 1.3315 1.3504 1.3326

Euro strengthened against most competitors last week although it did see a fair amount

of weakness against Sterling midweek before making gains on Friday afternoon. The

main announcement last week was the German ZEW index which showed an uptick in

financial professional sentiment on the future performance of the German economy. In

other news German GDP fell from 0.7% to 0.3% in Q4 and the ECB downgraded its

growth forecasts for 2008 which would give credence to stagflation fears given the

increase in inflation readings.

GBPUSD “Cable” 1.9403 1.9737 1.9512

Dollar moved lower over the week although an influx into US government debt due to

equity market tribulations helped stifle larger losses. Ben Bernanke testified on Capitol

Hill that the Fed will do everything in its power to help the economy and would look at

medium term forecasts when determining policy although rumours abound over 50-75

bps cuts at the next meeting scheduled for 18th March. Retail sales rebounded from an

expected 0.3% loss to an actual 0.3% gain however this is mainly due to calculation

differences between British and US readings.

Commodity currencies

AUD and NZD managed to stay fairly stable last week as monetary policy tightening in

Australia enabled antipodean currencies to bypass any weakness associated with the

impending global slow down.

Low High Current

GBPAUD 2.1367 2.1985 2.1365

A record unemployment figure helped AUD strengthen last week as it becomes

increasingly more likely that the RBA’s tact of continually tightening monetary policy will

continue in March. Unemployment fell to a 33yr low and with continual inflation

pressures being sounded out a hike next month seems almost guaranteed although no

officials would comment. This is in direct conflict however with the weakening

consumer confidence and housing finance figures also published last week.

GBPNZD 2.4436 2.5123 2.4528

NZD has weakened this week against sterling although further indications of

inflationary action from the Reserve Bank of Australia dragged the pair downwards

towards the end of the week. Weaker real estate data was released on Wednesday

and although this was largely expected caused NZD to ease. Domestic data did not

come to the rescue this week as all announcements were drowned out by goings on

across the Tasman Sea (See Above). Friday saw the carry trade weaken after talk of

further Wall St. write downs off subprime woes taking Kiwi with it. Retail sales data

flattened in December prompting a further sell off and increased chatter that a rate cut

by the New Zealand authorities may be due come summertime. This week’s data is

rather insignificant and all NZD participants would be wise to further volatility in the

coming days.

Low High Current

GBPCAD 1.9330 1.9801 1.9635

CAD has spent another week in and around parity against the USD. Higher oil and

other commodity prices helped support to a certain extent although trade surplus

figures weighed. The trade surplus fell from $3.8bln to $2.4bln which was the lowest

reading since 1996 due to orders from the USA continuing to fall. With this in mind a

rate cut by the Bank of Canada would not be out of the question in the coming months.

GBPZAR 14.878 15.274 14.869

Retail sales figures for South Africa showed that the economy is slowing under the

weight of interest rate pressures. With tighter credit condition hurting consumer credit

options and with the spectre that the rolling electricity blackouts will not end for the

considerable future retail sales are forecast to continually weaken in 2008.

Produced by Jeremy Cook (j.cook@worldfirst.com) Please feel free 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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Notes:

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.

Definitions

Bull/Bullish: one who thinks a market, currency or asset will appreciate

Bear/Bearish: one who thinks a market, currency or asset will depreciate

Pip: the fifth significant figure of a currency price: 1.2345

Big figure: the third significant figure of a currency price: 1.2345

Basis point: a 0.01% unit

Tightening (Interest Rates): raising interest rates (loosening is opposite)

Hawkish: comments that suggest interest rate tightening i.e. moving higher

Dovish: comments that suggest interest rate loosening i.e. moving lower

MPC: Monetary Policy Committee, the body that sets UK interest rates

ECB: European Central Bank, the body that sets the Eurozone interest rate

RBA: Reserve Bank of Australia: the central bank of Australia.

Cross-Currency Pair Flow: Where a set of three interlinked rates, e.g. GBPEUR, EURUSD and

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.

Carry Trade: Simply put, is the borrowing of money in a low interest economy (Japan) and investing it in a

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.

Fair Value- Also called financial fair value: A measure of the theoretical exchange rate using certain

Macroeconomic models (such as eCIP).

Underlying Inflation: A somewhat academic measure of long-term inflation- removing all the’ interesting’

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.

Unemployment rate: The percentage of people who are able and ‘willing’ to work (i.e. in the labour force)

who are not employed.

Participation rate: The percentage of the population of working age in the labour force.