Forex Investment and Currency Trading

Developed Markets

UK Comments by BoE chief economist Bean on Thursday appeared to suggest that the BoE is unlikely to embark upon aggressive rate easing, pointing away from a back-to-back rate cut in May, alongside measures to relieve pressures in money markets. Bean noted that the downside risks to growth from the credit crunch combined with upside risks to inflation from elevated energy and food costs had left the BoE “walking a tightrope”. Notably, he stated that the decline in the sterling effective exchange would likely exacerbate inflationary pressures, reiterating the BoE view that headline CPI inflation would probably breach 3.0% in coming months. Meanwhile, the 12% fall in the sterling EER equivalent to a 3% fall in the Bank Rate would help cushion the slowdown and the effects of the credit crunch on the real economy. We still expect a 25bp cut in June, to be followed by continued modest and steady rate cuts over the course of this year to reach 4.25% by end-2008 and a trough of 4.0% by 1Q 2009. In data release, M4 money supply grew by 0.8% mom in March from 0.2% (consensus: 0.5%), with the yoy rate easing to a still robust 12.0% from 12.4% in February. M4 sterling lending also advanced to £17.7bn, despite expectations for moderation to 15.0bn from 17.6bn in February. However, lending data look set to fall in the months ahead, a reflection of increasing credit tightening measures since the end of March.

Eurozone Data releases continue to support the ECB’s hawkish stance, with German PPI inflation continuing to rise and Italy’s new orders data pointing to a sharp rebound in January and February. Bundesbank President and ECB Council member Axel Weber warned that inflation in the Euro area would stay elevated for longer than previously thought and that the ECB would act as necessary to prevent second-round effects, stressing that any action must be “decisive” and “proactive.” Of Friday’s releases, only the Spanish house price data pointed to marked slowdown, but they clearly are not a key focus for the ECB at this stage. Specifically, the German PPI in March rose 0.7% mom and 4.2% yoy, up from 3.8% in February. Italy’s new industrial orders rose 2.8% mom in January and 2.0% mom in February, following a steep drop in Q4. Year-on-year growth was 6.9% in January and 14.3% in February. Spain’s house price index rose an unadjusted 0.8% in Q1, but its year-on-year growth rate slowed to 4.0%, from 4.8% in Q4. This is lower than the current CPI inflation rate of 4.5% yoy, so property prices are now declining in real terms.

Japan The seasonally adjusted Consumer Sentiment Index fell by 2.3 percentage points 1Q to 36.5, the fifth consecutive qoq decline, although the unadjusted monthly index posted a narrowing of the yoy decline to -10.2 points in March from -12.2 points in February. The Fukuda Administration’s decision on whether or not to revive the gasoline tax surcharge at the end of April will probably be critical to consumer sentiment. As usual, BoJ Governor Shirakawa’s opening remarks at the quarterly branch managers meeting essentially repeated the Bank’s main view expressed in the latest monthly report. Mr. Shirakawa reiterated the Bank’s expectation of near-term economic slowdown to be followed by resumption of moderate growth. As for the policy stance, he also repeated that the Bank would assess if the base case economic outlook can be achievable and will conduct monetary policy according to its judgment on the outlook. He also indicated that the BoJ does not expect “serious” impact on the domestic financial system stability of Japanese financial institutions’ growing credit product investment-related losses, which should still be absorbed by their periodic profits. Separately, the BoJ published a research paper on total factor productivity growth excluding cyclical factors, concluding that the technological progress rate has been picking up moderately since 2000. In its April 30 semiannual outlook report presentation, the BoJ Policy Board will probably maintain its view that Japan’s potential growth rate is estimated to be 1.5-2.0%. The Policy Board’s central forecast of FY2008 real GDP growth will probably be set near the low end of this range leaving some room for flexibility (if not ambiguity) for the Bank’s monetary policy stance.

Australia Australian export prices rose 3.5% qoq in 1Q 2008, a little higher than expected and consistent with strong 1Q commodity prices. The surprise was the 2.7% qoq rise in import prices. On a trade weighted basis the AUD was flat in 1Q 2008 vs 4Q 2008 so higher import prices represent rising world prices for Australian imports, including oil (Australia both exports and imports oil) and crude materials. The result is a smaller increase in terms of trade during the quarter but a less adverse real net export contribution to GDP than previously expected. Note that the RBA expects terms of trade to rise about 15% in the year ahead on the basis of coal and iron ore price rises but these do not start to hit the national accounts until 2Q 2008 onwards. The other implication of the strong import price number is that it adds upside risk to both Monday’s quarterly PPI figure and the tradables component of Wednesday’s CPI report. We are already looking for 4.2% headline and 3.8% trimmed mean inflation and this adds to the case for upside risk.