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
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
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.
0207 801 3023
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.
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
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.
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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.
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.