As traders try to establish what will happen in interest rates around the world, they face all manner of conflicting influences. The National Institute for Economic and Social Research (NIESR) sees UK interest rates being hiked in three separate quarter point steps through 2011. Yesterday’s UK money supply and lending data would suggest this is a very optimistic view. Lending remains subdued as either banks make borrowing conditions too tough or consumers and small businesses are too nervous to get involved in any long term planning. It is probably a combination of both factors but either way, a rise in interest costs would further restrict that sector and I can’t imagine the Bank of England; having suffered rampant inflation and all the criticism that entails, would want to stifle the smattering of fragile growth in this way. Nevertheless, the manufacturing activity report was at a record high and that was enough to boost the Pound. It would appear that Britain may see manufacturing and industrial production being the driving force for the economic recovery, rather than the service sector.

Yesterday’s other data included Eurozone unemployment which seems to have levelled off and many believe it peaked in the last quarter of 2010. We also had the Eurozone purchasing managers’ index which was rather more upbeat than many had expected. The Euro was buoyed by this further strengthened; flattered even, by the weakness of the US Dollar as investors move away from safe havens and seek financial return elsewhere. The Euro strengthened against most currencies but lost a little bit of ground against the Pound as the lure of higher UK interest rates caused a bit of Sterling buying.

The US Dollar weakened yesterday as investors, seeing improving production and output numbers around the world, chose to strike from the safety of the US treasury certificate and sally forth to seek the holy grail of income from slightly riskier assets. We saw that same fall in value in the other traditional safe havens like the Japanese Yen.

Elsewhere, as if Queensland in Australia hadn’t suffered enough, now a hurricane is approaching the coast and threatening to damage whatever wasn’t washed away by the floods. I don’t know what the people of Queensland have done to upset the gods but they ain’t happy. The financial impact on Australia will be calculated as the hatches are battened down and the fact that the mining and agricultural industries will be ht again means there will be an impact on Australian output and growth. However, the Australian Dollar is likely to see some strength as an investment tool because a 4.75% base rate is a very attractive lure when rates elsewhere are so low.

The New Zealand Dollar is also getting a bit of a fillip from investor interest but also from rising commodity prices which have pushed the price of milk products up; a major part of NZ exports. Sterling is struggling once again below NZ$2.07.

Tiff Macklem, the Senior Deputy Governor of the Bank of Canada says he thinks it would be wrong to bet against the Canadian Dollar because he is quite bullish about the future. He was urging Canadian Businesses not to count on a weaker CAD in order to regain a competitive edge. However, with commodity demand and prices rising, the demand for Canadian exports ought to be enough to keep the Canadian Dollar strong.

Today’s data diary is a lot lighter than yesterday’s. The UK construction sector purchasing managers’ report, Eurozone producer prices and US ADP private payroll data are the three headline acts. With a speech by a voting member of the US Federal reserve this evening being the support act. Traders may well be a tad quieter over the next few days though as we await the official US employment data for January and as tension in Egypt appears to be abating. President Mubarak has agreed to step down in September but the pressure is on for him to go sooner than that. Hopefully, the situation will be resolved in the next few days and traders and investors can emerge from their hidey-holes and remove their tin hats with impunity.

As for other news, well I was astonished to hear that Scarborough council is teaching people how to hold a street party for the royal wedding on 29th April. Astonished that is, until I realised that the first lessons were how to do a risk assessment and how to arrange third party liability insurance. I guess we should be surprised; nothing happens these days without a risk assessment does it. Even parties arranged between friends and neighbours clearly carry risks that we have to insure against. Have fun at your parties everyone but for goodness sake, don’t take any risks eh!


Quotes on risk

Nothing will ever be attempted, if all possible objections must be first overcome.
Samuel Johnson

There are those who are so scrupulously afraid of doing wrong that they seldom venture to do anything.
Vauvenargues

It is when we all play safe that we create a world of utmost insecurity.
Dag Hammarskjold