As inflation hit 4% last month, the Governor f the Bank of England has had, yet again, to write to the Chancellor of the Exchequer to explain why the BOE is failing to keep interest rates below their upper threshold of 3%. Up until now, Mervyn King has been fairly relaxed about the external nature of the inflation pressure and the bank’s confidence that the cost of living will fall back to within bounds within a couple of years but the tone changed in yesterday’s letter and we are now expecting three interest rate hikes of 25 basis points each before the year is over.

That stoked fears for mortgagees but acted like a honey pot for the Sterling buying bees which swarmed to the Pound throughout the day. Sterling hit the top of its trading ranges against most currencies and its highest level against the New Zealand Dollar in 6 months before slipping back a little on profit taking. This morning’s UK unemployment report and the Bank of England's quarterly inflation report are the next hurdle for the Pound so a positive employment figure and hawkish inflation adn interest rate setniment here could well see sterling start to make headway above recent ranges.

Sterling was less buoyant against the Euro, even though it did make it to within a whisker of €1.20. The day’s EU data just served to high light the disparity between EU economies. Spain reported rising inflation at 3.0%, most EU states reported economic growth in line with forecasts but Greece still stands out as the black sheep of the Eurozone flock with figures that show the Greek economy shrank by 6.6% last year. They are still in recession even as Germany and France are starting to grow out of the gloom. That has caused some nervousness but the Euro hasn’t yet collapsed.

The US Dollar was shunted from pillar to post as analysts tried to get through reams of data releases. Strong manufacturing sentiment was countered by poor retail sales but a rise in business inventories was the item that prompted most debate. Businesses tend only to increase stock holdings when they are confident in the future, so the rise of 0.8%, which was above forecasts, was a welcome boost for US business sentiment. In traditional perverse fashion, good US news generally results in a weaker US Dollar as investors shun the safety of US treasuries in favour of higher yielding but potentially more risky assets elsewhere. That effect was a tad muted though because this week’s data diary is so huge and because weaker US sales have a dampening effect on demand. Today’s US data diary is another barnstormer, with producer price data, housing market data, industrial production and capacity utilisation all ready to assail us before the day is over. However, the release of the minutes from the last Federal Reserve Open Market Committee (FOMC) meeting will be the major talking point and every word will be analysed in search of hints on any interest rate or quantitative easing changes.

So if investors were selling the US Dollar, what were they buying? I heard you ask the question from here. Well they were buying the Pound and to a lesser degree, the Canadian Dollar. Strong commodity prices are boosting the CAD but the fact that Canada’s trade balance returned to surplus last month is a bonus and the Canadian Dollar hit a fresh 2 year high against the US Dollar on the back of all this news. Today brings Canadian manufacturing sales data and the leading indicators index so we will watch those with great interest.

Both the New Zealand and Australian Dollars were big movers on the day. Sterling hit NZ$ 2.15 briefly, the highest level we have seen in 6 months as poor US retail data weakened sentiment around the globe. US share prices fell on the day and so did the high yielding currencies like the Aussie and Kiwi Dollars. The Sterling - NZ Dollar though is right at the top of a trading range which has contained this pair since September 2009, so NZ Dollar buyers really ought to be looking at their requirements at this level. This is a ‘gift horse’ if ever I saw one.

So buckle up everyone for another roller coaster of a day. Scream if you want to go faster.

I will leave you with the salutary tale of Josue Hernandez of Naples, Florida who was arrested for disorderly intoxication and carrying a concealed knife. All of that is bad but the thing that prompted the fight makes the story a trifle more understandable. Josue was in a bar, buying drinks for a group of girls and getting on really well with them until he discovered that they were actually men in women’s clothing. He was upset, perhaps over the drinks bill, perhaps over the wasted evening and perhaps because of what others may think of him but he will certainly be a tad more careful in future. Another drink for the ‘laydeees’ Josue?


Quote

Some people see the glass half full. Others see it half empty. I see a glass that's twice as big as it needs to be.
George Carlin