Sterling was whacked following early strength in the markets

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Tuesday 13/03/2007

• The pound is hammered despite strong data
• UK RICS housing data lower than expected
• US sub-prime market worries continue to weigh on US Treasuries
• ECB officials keep door open for rate hikes
• Australian business confidence pushes the dollar higher
• Oil stabilises just below $60

US Dollar:

After a poor start against the pound due to mortgage worries the dollar gathered pace and rallied strongly
back. News that a large sub-prime lender may be in trouble pushed cable up through 1.94 as mortgage lenders
started to pull 100% loan deals worrying investors about growth in the US.
What looks like massive unwinds in the yen against sterling caused cable to nosedive throughout the morning
eventually settling at sub-1.93. Against other crosses the dollar was largely quiet with Euro-dollar only moving
by 30 pips. The move took markets by surprise and stops were triggered which exaggerated the move.
The worrying thing is that cable this morning is showing few signs of a rally.

Pound:

Sterling was whacked following early strength in the markets. The rally at the start of the day was underpinned
by strong PPI data however very heavy sterling-yen selling entered the market in what looks like further
carry trade unwinding and sterling was smashed. Cable lost over a cent in an hour and the pound lost
about the same against the Euro in a similar time frame. The pick up in PPI would point to a further interest
rate hike but these figures were shrugged off in the FX market with the volume going through.
RICS house prices overnight came in lower than expected adding confusion to markets following the bullish
report from the FT yesterday. Trade balance is the data of note today with the deficit expected to narrow.

Euro:

Yesterday was a fairly quiet day in the Euro market considering the action going on elsewhere. The Euro rallied
sharply against the pound yesterday as discussed above but elsewhere remained fairly stable. ECB member
Liebscher yesterday warned that the fight against inflation cannot be considered ‘job done’ and that the
ECB won’t be opposed to a restrictive policy should the time come.
German data is expected to come in stronger than last month which should underpin the Euro somewhat.

General News:

• A sharp downturn in the Nikkei sparked a fierce carry reversal yesterday pushing the yen value higher
against the majors. In a move which caught markets by surprise the yen gained heavily on the pound
and this morning looks to have opened strongly following another tough session for the Nikkei.
• Aussie business confidence picked up overnight according to data pushing the dollar higher especially
against a beleaguered pound.
• Oil traded range-bound yesterday with little to drive the market. US inventories are expected to fall
tomorrow so oil may remain above $59 in anticipation. This morning Texas gold trades $59.26.

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