I am sure you have read by now that UK inflation leapt up to 3.7% on the government’s preferred CPI measure; that’s the largest jump since the rate of inflation has been measured in this way and a full 1.7% above the Bank of England’s central target rate. In normal times that kind of news would cause an equally impressive rally in the value of the Pound but, so constrained are the BOE by poor growth that the reaction was rather muted. We did see a small scale rise in the value of the Pound against the US Dollar and a similarly limp rise against the Euro but the Pound as petty languid other than this. I guess the problem is that no one can see the BOE hiking interest rates to temper inflation in the short term so sterling does have the sort of lure it might otherwise have. We get the UK employment data this morning and a poor reading here is likely to undo any positive movement the Pound experienced yesterday. However, jobs growth could well result in the Pound making further gains. All eyes on the newswires at 9.30 UK time.

The other news was a marked jump in German business confidence which, as I have mentioned many times, was just another example of how at odds the various members of the Eurozone are with each other. Greece, Ireland, Belgium, Portugal, Spain and Italy are all suspected of being on the brink of a financial abyss and would certainly be in deep water without the funds and support that the EU and International Monetary Fund have put at their disposal. So the question is whether there will ever be a chance for the funding to be reduced without an unavoidable collapse of some of these vulnerable states. I don’t have an answer but I am still amazed by how resilient the Euro has been. Germany may be by far the largest economy in the Eurozone but it surely cannot carry the rest of the economic bloc without some respite and German tax payers will punish the government severely if this situation isn’t improving by the next election. I have a feeling the sword of Damocles is swinging ever lower for the Euro and if you look at the countries mentioned above, the first cut will be felt in one of those.

The US Dollar had a less exciting day. Traders were back from their Bank holiday and perhaps still a bit bleary eyed but the improvement in the empire state manufacturing index and sanguine housing data were not enough to cause any major move in the US Dollar which actually weakened against the Euro and Sterling.

Elsewhere, the Bank of Canada’s decision to leave the base rate on hold at 1% was greeted with a selloff in the currency. The BOC made it quite clear that there was little chance of an early hike in interest rates and spoke in very measured tones about the uncertainty of the global recovery and the damage that the very strong Canadian Dollar was doing to export income. Sterling failed to push above recent ranges against the Canadian Dollar but is near the top of the range this morning.

The Australasian Dollars are very mixed as traders try to weigh the advantage they hold in terms of interest rate yield against the risks posed by the flood related drop in Australian output and the slowdown that the Chinese authorities are trying to induce. At the moment, the Aussie and Kiwi dollars are managing to avoid a collapse but that is not to say it won’t happen. I tend to think we will see another period of strength in these currencies before any major decline. NZ inflation data is due for release this evening and any reading above 2.3% will be positive for the NZ Dollar because the reserve Bank of New Zealand has the capacity to raise interest rates to temper inflation; a luxury the Bank of England seems not to have.


And finally, if you have plans to tell your loved one how you feel on St Valentine’s Day, just don’t take him/her to Iran for a romantic weekend to do it. Iran has banned production of Valentine’s Day cards and gifts because it sees the day as symptomatic of the spread of western culture. Now of all the decadent things that western culture has inflicted on the world, you would have thought something as innocent as a day devoted to the celebration of love would be exempt from Iranian bile but perhaps not. Or perhaps they just missed the point.


Currency - GBP / Australian Dollar
It isn’t hard to see the main influence on the Australian Dollar right now. There are billions of gallons of it all over Queensland in places that just should not be wet. Estimates of A$13 billion cost to the economy, of a drop in economic growth of as much as 1% and of months and perhaps years of clearing up are not good for anyone. Sadly, such bad news was bound to have a negative impact on the Australian Dollar and that is precisely what we have seen. Short term, I think we have seen the high in the Sterling - Australian Dollar rate but in the longer term, I do believe we will see another test of A$ 1.60 and perhaps a break above that level. If you need to buy Australian Dollars, I guess it just depends on your time frames and your attitude to risk as to whether you wait for the hoped for rally or you cut the risk and trade here.

Currency - GBP / Canadian Dollar
The Bank of Canada decided to leave the Canadian Base rate alone at 1.0% when their monetary policy committee met today. In the statement they issued, they commented on the improving tone of the economy but warned that the strength of the Canadian Dollar was undoing all the positive effects of increasing exports and rising commodity revenues. You could perhaps say that their commentary was less negative than previous reports but it certainly wasn’t positive and still had the foreboding air of a central bank that is not yet convinced the economy is out of the woods. The Canadian Dollar weakened on the announcement and remains a tad weaker at the close of business in the UK. Wednesday brings the more detailed Monetary Policy report from the BOC so we will be expecting a little more volatility in the next 48 hours. Obviously, events in America will also have an effect and the floods in Australia are directly impacting on the value of commodities, so eye sin the back side and top of your head would be very useful. Alternatively, let us know what you need to achieve and we will do the watching for you.

Currency - GBP / Euro
The reports I have been writing on the Euro are a bit like stuck records because all the same influences are still in play. Debt ratings, fears over the peripheral Eurozone states, pressure on the European Central Bank to tighten monetary policy and the disparity between outstanding German economic performance and the more laggardly performance of the rest of the Eurozone are all factors in the minds of traders. Nevertheless, the fact that China and Japan have both supported recent bond auctions within the EZ does lend the Euro an air of solidity which it probably doesn’t deserve. The Euro is at the weaker end of its range against the Pound but doing rather better against the struggling US Dollar and that is a situation that could continue if we fail to see the claims of an improved EU cohesion over debt management followed through into solid action. The fact that UK inflation pushed to 3.7% on the CPI measure failed to boost Sterling because the Bank of England cannot afford to hike interest rates as they perhaps should and would do if inflation were this high in a normal market environment.

Currency - GBP / New Zealand Dollar
Queensland’s plight and China’s slowdown are the major themes for the New Zealand Dollar because NZ exports heavily to both countries. Any drop in demand is bad news for the Kiwi economy. So it is not perhaps so surprising that the NZ Dollar has, at long last, finally stepped back from a pattern of unabated strength. Weakness in the US Dollar is generally a sign of strength in the Australasian currencies and, you have to consider that, were it not for the fall in the value of the US Dollar, the Sterling - NZ Dollar rate would be higher. Sadly, I think we have to view this bounce in the Sterling - NZ dollar rate as a short term correction rather than a permanent change of direction. The poor demand issues are now factored in and yet the GBP-NZD exchange rate has still not managed more than a 7 cent rise from the December low. Quite what it is going to take to change the direction f this pair is very uncertain but for the short term, taking advantage at NZ4 2.05 and above is the obvious choice.

Currency - GBP / US Dollar
Positive reaction to the EU bond auctions and nervousness over the disparity between consumer and manufacturing recovery in the US are the major themes in the Sterling - USD exchange rate. From a UK perspective, we are seeing constrained support for the Pound without the follow through that an exuberant market would deliver. From a US Dollar perspective, we are seeing improving manufacturing and industrial numbers but nothing anywhere near as positive from the labour market or retail end. Unless US consumers start to feel confident again, the US economy is always going to struggle to recover. Nevertheless, the US Dollar is the most liquid currency in the world and it takes a lot to persuade traders to sell the US Dollar for any sustained period. Sterling struggles to make any gains above $1.60 and the Euro struggles above $1.34. While those resistance levels cap these exchange rates, we have to respect then as market toppers and trade accordingly.


A quote for the Iranian leadership – just to set the record straight

"Love is a temporary madness. It erupts like an earthquake and then subsides. And when it subsides you have to make a decision. You have to work out whether your roots have become so entwined together that it is inconceivable that you should ever part. Because this is what love is. Love is not breathlessness, it is not excitement, it is not the promulgation of promises of eternal passion. That is just being "in love" which any of us can convince ourselves we are. Love itself is what is left over when being in love has burned away, and this is both an art and a fortunate accident. Your mother and I had it, we had roots that grew towards each other underground, and when all the pretty blossoms had fallen from our branches we found that we were one tree and not two."
St. Augustine