Market Report

We did not see much action in the markets yesterday, as we are all waiting in anticipation for the US non-farm Payroll figures from the US. We did have the ECB increase interest rates by a quarter of a percent, and the Bank of England kept interest rates on hold. However, all this was priced into the markets and therefore did not effect the exchange rates.

The Non-farm payrolls are expected to be 125k, an improvement from the 92k from October. Any major deviations from the expected figure, or a revised figure for October will effect the market.

The University of Michigan consumer sentiment is expected to be lower in December.

At 11 today we see German Industrial production, which is expected to retain the bullish outlook. This along with the comments from the ECB president Trichet, who hinted at further hike rates in the new year, would indicate strong growth in the EU.

Be prepared for 13:30, anything can happen today.

Have a good weekend.

DE

Today sees the Bank of England announce their monthly decision on interest rates, with no change expected. Sterling fell against the dollar yesterday, after two respective reports showed factory output unexpectedly dropped in October and sales at U.K retailers rose at the slowest pace in nine months in November. Gordon Brown yesterday raised his forecast for growth in the U.K. to 2.75 per cent, up from 2 and 2.5 per cent, with activity by futures traders indicating an expectation of a further interest rate rise in the first quarter of 2007.

The European Central Bank is set to increase interest rates for the sixth time in a year today to 3.5 per cent. Further rate increases are also anticipated by many market commentators in quarter one of 2007. The interest rate rise follows the euro's rally to a 21 month high against the dollar as the bank concentrates on the wage risk, which has added pressure on inflation from faster economic growth, higher oil prices and planned German tax increases.

The yen appreciated yesterday, as the market increased bets that the Bank of Japan will raise interest rates next month. Over the past month, the Yen has appreciated by 2.5% against the dollar, as the BOJ officials signalled that the economy can weather higher borrowing costs.

Elsewhere, South Africa's rand advanced as the central bank began it's meeting which is largely expected to result in a fourth interest rate rise in six months being announced.

MA

Sterling fell from last week's 14-year high against the dollar on Tuesday and slipped versus the euro as investors took profits on the pound's stellar rally over the past few weeks. A higher-than-expected U.S. services sector index and a downbeat survey on UK retail sales prompted the drop in sterling, which has been one of the best performing currencies against the dollar this year.

The pound may gain for the first day versus the euro this week before a report expected to show manufacturing output rose in October, adding to speculation the Bank of England will keep raising interest rates into 2007. Manufacturing output, which makes up 15 percent of the U.K. economy, has risen in four of the past five months before October. The report from the Office for National Statistics is due at 9:30 a.m. The pound may also be buoyed ahead of new budget estimates from Chancellor of the Exchequer Gordon Brown, who will deliver the forecasts in his semi-annual statement to Parliament starting at 12:30 p.m.

South Africa's rand may advance before the central bank began its meeting that will probably result in the fourth rise in interest rates in six months. The South African Reserve Bank will raise its lending rate 50-basis points from a three-year high of 8.5 percent at the end of its two-day meeting tomorrow, according to economists polled in a Bloomberg News survey. Higher rates may help the rand extend its 0.6 percent gain in the past seven days.

The Australian dollar halted a two-day decline after a government report showed a faster annual economic growth rate than economists forecast. The report also caused bonds to fall, increasing the premium the nation's debt holds over U.S. Treasuries to near the highest in 17 months. The currency declined the previous two days as economists lowered their forecasts for growth.

LR

Sterling eased against the dollar yesterday, pausing for breath as the U.S. currency tried to claw back a little of last week's hefty losses which saw the pound hit 14-year highs. Main data released today in the US is the Non Manufacturing supply data after the fall below the 50.0 expansion line in the Manufacturing data last week caused a significant sell off in the USD.

Today in the in the UK we have already seen the BRC Retail Sales monitor for November showed annual growth in total sales fell to 0.5%, from a revised 1.9% in October. But the detail of the report suggests the outlook for the retail sector is less gloomy than the headline numbers imply. The report confirms the retailers' adage that it's not good weather or bad weather that affects sales, but the wrong sort of weather. With November overall being unseasonably warm, sales were hit across a range of sectors, from winter clothing and footwear to DIY (home insulation) and household goods (duvets). Perhaps a more telling sign of the underlying state of household demand was continued strong sales of flat-screen TVs. On top of that, even the BRC refused to be downbeat about the prospects for Christmas, with Kevin Hawkins, head of the BRC, commenting that "it would be unwise to jump to any conclusions about how Christmas will turn out".

The CIPS Report on Services for November is released at 9:30. The October survey showed a pick-up in the rates of growth of new business, outstanding business, and business expectations. Given that, we think the business activity balance will have posted a small rise.

With the Euro zone Last night, ECB President Trichet drew attention to the September G7 statement, saying that "excess volatility and disorderly movements of exchange rates are undesirable for economic growth". 10am we get the October retail sales report, which we look to show a fall of 0.1% m/m,

In Australia they released there current account deficit and Government spending. Current accounts came in at $A12.084bn and a bit larger than the $A11.0bn deficit market. Government spending showed that it has add 0.2 points to the Aussie GDP both pieces of data had little impact on the rate where as the Net exports were the main focus for the market and were shown to have added 0.4ppts to real GDP in Q3. Net exports have made their first positive contribution to GDP growth in 5 years. At 11.30 this evening we see RBA release there interest rate decision which we expect to remain unchanged.

DH

Sterling moved extremely close to the $2 level on Friday after the pound hit a 14-year high against a battered dollar, as rumours floated around that the FED may cut interest rates to try and save the ailing Greenback.

Weaker than expected UK factory activity data knocked sterling briefly away from the peaks on Friday, prompting a bout of profit-taking from this week's hefty buying, but the pound rallied sharply in the wake of weaker than expected U.S. manufacturing activity data.

One of the main events this week is the ECB rate decision on Thursday. The Bank is expected to hike rates 25bp to 3.5%. The move has been well flagged and hence market attention will focus on Trichet's press conference (16.35 EU) and any indication as to the prospect of more rate hikes

The Australian data released today all came out on the soft side of market consensus, which saw the Aussie dollar sell off and Australian bills rally. The weakening data out of Australia make us more confident in our view that the RBA is done hiking rates.

Data this week focus on US Nov payrolls, watch out for sub-consensus German October IP also Friday.

Have a good day!!!

DH

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