The pressure remained firmly on the shoulders of the pound last week but the UK

currency staged a valiant fight back. The housing market is of particular concern and

there can be no doubt activity is slowing. The Nationwide house price index fell 0.8%

in November with the majority looking for +0.1%. Mortgage approvals also

disappointed at 88k versus 100k previously. This represented the lowest level since

February 2005. These figures will be particularly worrying for the Bank of England

going into this week’s monetary policy meeting. The credit crunch has had a

dampening effect on business, and the slowing in the housing market will mean the

pinch will be felt by households soon. In recent years, the strength of house prices

has acted like a shield. Under which, consumers had a sense of confidence that

despite rising inflation or climbing interest rates, they were always protected by the

equity in their homes. However, if this erodes, spending along with economic activity

might slow significantly and October’s consumer confidence fell to -10 vs. -9

expected, down from -8 the month before.

The conundrum for the Bank of England to solve is: When do you lower interest rates

and loosen the economy in order to stimulate growth, especially given the state of

rising inflation and higher food, oil and energy prices. Sterling’s recent fall has been a

result of the market pricing in a cut in the near future. Two weeks ago, Mervyn King

all but announced that the loosening would come in February. Since then however,

the inflation report forecasted slowing growth in 2008 and King expressed major

doubts over underlying trends. David Blanchflower, another member of the MPC,

went as far as to call for a cut at this week’s meeting. So, on the whole, the outlook

for sterling looks pretty grim and longer-term we see GBP remaining in a downtrend.

But we think this might be a little too bearish in the short-term. The MPC are likely to

leave rates on hold this week and since the market is pricing in a cut at about 50%

we may see some near-term strength for the pound.

Sterling has edged up though today’s trading, temporarily breaking 1.41 against the

euro and clawing back some of Friday’s losses to the dollar.

The week ahead

The Bank of England MPC announcement on Thursday. The majority are

expecting a no change decision but speculation has mounted that they may cut

early. Expected to remain at 5.75%

Still with the UK, housing data should remain in focus. It is unlikely that the

Halifax house price index will show a rise.

The Eurozone will also announce its rate decision this week. No change is

expected.

Friday’s Non-Farm Payroll figures are likely to reflect the continuing slump in

the US. This will be the major release for the dollar.

Economic Research

0207 801 9084

j.e.henson@worldfirst.com

Currency Rates Low High Current

GBPEUR 1.3891 1.4102 1.4075

The single currency finally weakened against GBP and USD last week as the outlook

for economic growth faltered over liquidity concerns. This however stood against

German consumer inflation figures of 3.0% in November from 2.6% previously,

concerns abound at the ECB. With the interest rates decision on Thursday, the ECB

must make a trade off between falling growth and rising inflation; a hold at 4% being

the consensus view. Trichet’s ‘post-match’ press conference will hold even more

value this month and any mentions of ‘vigilance’ may see Euro strengthen further.

GBPUSD “Cable” 2.0532 2.0832 2.0640

Once again the USD fell to record lows against the Euro on further speculation that

the Fed would cut rates at its next meeting, scheduled for the 11th Dec. Housing data

fell to lows not seen since the beginning of the current bull market as existing home

sales fell 1.2% and new home sales down 5.5% on previous month’s readings. The

Fed’s Beige Book also showed activity stagnating as the housing sector continued to

suffer. Uncertainties over global growth and credit conditions are likely to be very

important short-term market influences. There is still the potential for an unwinding of

carry trades which should provide underlying support for low-yield currencies. Overall

volatility levels are liable to remain higher, especially with tightening year-end

liquidity.

Commodity currencies

Credit Crunch fallout was tempered this week by Citigroup’s announcement of a cash

injection from the strategic fund run by the UAE authorities. This bolstered the carry

trade

Low High Current

GBPAUD 2.3173 2.3886 2.3408

There was no particular key data down under last week however a decisive win for

the Labour Party in the previous weekends elections made sure subsequent volatility

was to a minimum. AUD speculators will be keeping an eye on global equity markets

as a recovery will strengthen the dollar in line with a lessening of carry trade risk.

GBPNZD 2.6638 2.7641 2.6937

NZD tested intraweek highs against the USD on Wednesday while the subsequent

bounce in global equity bourses helped underpin other commodity currencies. Data

wise, the National Bank monthly business outlook showed a decline in confidence

across the sectors apart from services, and a key decline in businesses’ confidence

about their own outlook. Dwelling consents, released Thursday, also fell however this

was countered by another positive day on Wall St come Friday.

GBPCAD 1.9867 2.0424 2.0642

News of a fire on the Enbridge pipeline between the US and Canada sent the price of

oil soaring and had a positive effect on the loonie. This however did not last and

news that the Current Account Surplus fell to CAD1.0bn from CAD6.3bn in Q3 and

falls in Industrial Product Prices weighed CAD down as it drifted towards parity with

the USD.

Low High Current

GBPZAR 13.6726 14.1034 14.02

CPIX rose by 7.3% from 6.3% as higher petrol prices and transport costs weighed

heavily on consumers’ pockets. A rate increase in December is almost a foregone

conclusion. Governor Mboweni was forced to defend his inflation targeting policy,

similar to that of Ben Bernanke, by saying that low inflation was good for the

economically weak, anyone thinking otherwise should look at Zimbabwe. Whether

consumers can withstand any more belt tightening will play out in coming months as

a further rate increase is forecast for February 08.

GBPCYP

Please see GBPEUR comments above. EURCYP is pegged in preparation for Euro

entry and so GBPCYP moves proportionally with GBPEUR. [Update: The Cypriot

government has allowed the currency to strengthen very slightly to 0.573 against

EUR, in light of market pressure. The pair is now stable here.]

Produced by Jabu Henson and Jeremy Cook (j.e.henson@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.

Please reply with REMOVE in the subject of your e-mail if you would like to be removed from

this list.

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.

This week’s data Previous Expected

Tues 4th

UK: 00.01 BRC Retail Sales (November) (+1.0%)

EU-13: 10.00 PPI (October) +0.4% (+2.7%) +0.4% (+3.1%)

CAN: 14.00 BoC Rate Announcement 4.5% 4.25%-4.5%

AUS: 22.30 RBA Rate Announcement 6.75% 6.75%

Wed 5th

OPEC: OPEC Meeting

EU-13: 09.00 Services PMI (November) 55.8 / 53.7 (p) 53.7

UK: 09.30 CIPS Services PMI (October) 53.1 52.9

UK: 09.30 Industrial Production (October) -0.4% (-0.2%) +0.1% (+0.6%)

– Manufacturing Production -0.6% (+-0.1%) +0.2% (+0.4%)

EU-13: 10.00 Retail Sales (October) +0.3% (+1.6%) -0.3% (+1.3%)

US: 13.15 ADP Employment (November) +106,000 +53,000

US: 13.30 Labour Costs (Q3 Revised) -0.2% -1.0%

– Productivity +4.9% +5.7%

US: 15.00 Factory Orders (October) +0.2% 0.0%

US: 15.00 ISM Non-Manufacturing (November) 55.8 54.7

NZ: 20.00 RBNZ Rate Announcement 8.25% 8.25%

Thurs 6th

JPN: 05.00 Leading Indicators (October) 0.0

GER: 10.00 Industrial Orders (October) -2.5% +0.9%

UK: 12.00 BoE Rate Announcement 5.75% 5.75%

EU-13: 12.45 ECB Rate Announcement 4.0% 4.0%

EU-13: 13.30 ECB Press Conference & Quarterly Economic Forecasts

US: 13.30 Initial Jobless Claims (w/e 1st December) 352,000 340,000

JPN: 23.50 GDP (Q3 Revised) +0.6% / +2.6% s.a.a.r.

– Deflator -0.3%

Fri 7th

ITL: 09.00 GDP (Q3) +0.3% (+1.7%) +0.4% (+1.9%)

GER: 11.00 Industrial Production (October) +0.3% -0.4%

US: 13.30 Non-Farm Payrolls (November) +166,000 +73,000

– Average Earnings +0.2% +0.3%

– Unemployment 4.7% 4.8%

US: 15.00 Michigan Sentiment (December Prelim) 76.1 75.0

US: 20.00 Consumer Credit (October) $3.75bn $5.0bn2%

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 (ie in the labour

force) who are not employed.

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